The Bangko Sentral ng Pilipinas (BSP) has begun to closely monitor government financial institutions (GFIs) money placements with the BSP, hoping it would explain why domestic liquidity remains on the high side.

Sources said BSP Governor Amando M. Tetangco Jr. is worried over the high level of money supply when liquidity should have been channeled to pump priming, especially if these are GFI funds.

The same source said the BSP is looking at the reverse repurchase or RRPs and special deposit accounts or SDAs of Land Bank of the Philippines and Development Bank of the Philippines to find some answers. Both government banks accept the deposits of other agencies and local government units.

BSP officials seem to be speculating that the funds are temporarily deposited with the GFIs because spending these cash is too difficult due to the low absorptive capacity of government agencies, according to sources.

BSP statistics show that as of July 31, placements in its SDA facility is higher at P668.746 billion compared to June while funds parked in RRPs totaled P198.413 billion in the same period but lower than June’s P274.86 billion.

Land Bank had funds worth P52.8 billion due from the central bank as of end-June including placements in the RRP and SDA facilities. DBP had P22.41 billion due from the BSP. As of the end of the first quarter, Land Bank had P51.65 billion due from the BSP while DBP had P11.54 billion.

Maintaining RRPs and SDAs entail a huge interest costs on the BSP. In 2008, the BSP reported interest payments of P65 billion from its RRP and SDA facilities. This is higher than what was reported in 2007 of P53 billion.

The BSP conducts open market operations primarily RRPs and SDAs – by borrowing funds from the banks through the sale of its domestic security holdings with a commitment to repurchase the same at some future time and at an agreed future price. These policy instruments are used to influence banks holdings of excess reserves, and thus control the level of liquidity in the market.

SDA placements with the BSP in 2008 amounted to P402 billion from P385 billion in 2007 while funds parked in RRPs totaled P252 billion from P295 billion of the previous year.

The BSP’s open market operations involve the BSP publicly buying or selling government securities from banks and financial institutions in order to expand or contract the supply of money.

When the BSP buys securities, it pays for them by directly crediting its counter-party’s demand deposit account that is being maintained with the BSP. In the meantime a hike in interest rates or the reserve requirement encourage banks to place their monies at the BSP.