Control of the Money Market and Withholding Tax on Money Market Operations

November 24, 1975

LETTER OF INSTRUCTIONS NO. 340

 

The present restrictive credit situation in the economy has made the money market a very attractive venture for many of our people. The 36% return on investment is not easy to achieve on ordinary business activity these days except the money market. The CBCI operations of Central Bank may have drained our banks of loanable funds for industry and commerce. Even companies and individuals who have surpluses do not deposit their funds in banks or re-invest in new businesses as the money market gives the highest and quickest return on investment to date. Besides, it is tax free as there are no records of the transaction for the government to know the interests paid to the money placers who are usually people with hidden wealth or bank directors who borrow money from another bank by arrangement among banks.

To correct the present situation and return the money supply where it is needed the most, I hereby order that the following policies be implemented:

1) The BIR Code be amended to impose a withholding tax on all transactions in the money market.

1-a. The lenders should be registered as in the stock exchange. The Secretary of Finance will prepare the corresponding amendments.

2) The Central Bank should impose Ceilings on operations of lending by finance companies based on their equity or capital like the banks.

3) The Central Bank should intervene and put money in the money market when the rate of interest increases more than five percent (5%) of standard lending rates of commercial banks. cd i

It is essential to continue our industrialization and commercial activities in order that the economy may not stand still. The present attractiveness of the money market has siphoned money supply away from industry and the agricultural areas. Investments are being postponed for profits rather than implemented for social benefits and the economy as a whole.

November 24, 1975 casia