By AMADO P. MACASAET

THE Bangko Sentral has been using two potent weapons to keep inflation at bay. One is the issuance through the banking system of its "special depository assets" sold in one-year maturities at market rates.

The intention is to get back or siphon off the excess pesos - in reality new money - printed and circulated every time huge remittances of overseas workers and foreign direct investments come in.

When the Bangko Sentral buys dollars from the Philippine dealing system, new money also flows into the stream.

Unchecked, the increase in supply of new money has the effect, not just tendency, to push up prices or raise the inflation rate.

The price push becomes evident in a situation where more money chases fewer goods, resulting basically from low domestic productivity but made up for by massive imports largely encouraged by law tariff rates.

The situation would have been remarkably different if the demand push had been the result of higher employment that gives consumers more disposable incomes.

The tariff rates on consumer goods have been communized at 5 percent as dictated to every member of the World Trade Organization including the Philippines.

It is said that there was a time when money supply went up by as much as 20 percent.

This happens when OFWs and foreign investors send in direct remittances.

The sale of "special depository assets" slowed down the growth to slightly more than 6 percent a year. That means that an estimated P400 billion in new money was taken out of the market.

The reduction contributed to the slowdown of the inflation rate which has remained at single-digit levels.

In other words, the SDA is an effective instrument to siphon off excess liquidity. It is a substitute for the Jobo bills issued in the last years of Ferdinand Marcos when the late Jose B. Fernandez Jr. was governor of the Central Bank.

He issued the bills to be able to get back practically all the dollars in the stream by making investments in his bills more attractive than speculating on the peso. There was a time when the annual rate of the Jobo bills was as high as 45 percent.

The Jobo bills had a different purpose. They were issued to curb speculative attacks on the reserves.

On the other hand, the Bangko Sentral continues to sell SDAs through the banking system not to check speculation on the currency (because there is none) but principally to deter the inflation rate.

The other weapon against inflation is an anomaly and does not involve siphoning excess liquidity.

It is a mere question of arithmetic and removing from the "consumer price index" (CPI) two items which are traditionally the largest contributors to the inflation rate.

One item in what the BSP calls "core inflation" is food. The average income group spends an estimated 50 percent of wages on food.

Remove food from the CPI in computing inflation and very definitely the growth rate will slow down.

Since the BSP has also removed fuel from the CPI, the inflation rate is even more effectively checked.

That is why, in spite of rising prices of good and nearly all consumer goods, the BSP regularly reports what it describes as a manageable inflation rate.

As far as the removal of food and fuel from the CPI is concerned, the inflation rate is an anomaly. It is a hoax foisted on us by the BSP.

But there is wisdom in the BSP buying dollars as an effort to balance liquidity with inflation. After all, there is the SDA to check the inflation rate that normally follows the purchase of dollars by the BSP.

Keeping in mind that the peso derives its strength principally from the weak dollar and unusually heavy inflows from overseas workers, monetary authorities know that the situation cannot last much longer.

The other reason the peso is strong is the lack of demand for dollars for the importation of capital assets.

In the event that the dollar recovers its strength and the economy perks up, the peso will steadily lose its strength.

It is clearly in anticipation of these possibilities that the BSP buys dollars whenever it feels the peso is getting too strong too fast.

The BSP wants to arm itself with dollars should demand for them get higher than it has been in the last few years.

When the foreign exchange reserves get smaller as a function of heavy importation, sadly of consumption goods and not capital assets, in the face of rising political instability, there could ensue speculative demand.

The dollars that the BSP buys is a weapon to meet this demand, not dampen it. Capital flight is a monster that threatens the economy.

There has been none so far in spite of political instability precisely because everyone knows that the dollar is weak. Therefore the peso is strong.

The timidity of business to import more capital assets contributes to the rise in foreign exchange reserves that in turn helps maintain the strength of the peso.

What should bother monetary and fiscal authorities is the rising demand for dollars to import consumption goods.

The appetite for consumption goods is fueled by OFW money. Since domestic production is inadequate, the demand has to be met by importation which, sadly for the local producers, is encouraged by the communization of tariff at a low level of 5 percent.

The demand push for consumption goods should cause a rise in the inflation rate. But it is checked by the BSP by removing food and fuel from the consumer price index.

Thus, the single digit level is artificial. It is actually much higher than the BSP represents it to be.