Central Bank defends plan

Central Bank Governor Perng Fai-nan (彭淮南) yesterday denied media reports that a Cabinet proposal would have allowed NT$10 billion of the nation's NT$6.91 trillion (US$202.83 billion) foreign exchange reserves to be loaned out to directly finance local investments.

Perng told The Liberty Times -- a sister newspaper of the Taipei Times -- in an exclusive interview that Premier Yu Shyi-kun did not "instruct the central bank to make use of the nation's foreign exchange reserves for direct loans to businesses."

Perng said that though the media reports are inaccurate, it is true that "the Cabinet is mulling measures to allocate budget items so as to subsidize importers with low-interest-rate foreign-currency loans, which can be used for equipment purchases from overseas, while at the same time trying to lower the nation's foreign reserves."

Minister Without Portfolio Hu Sheng-cheng (胡勝正) yesterday confirmed to the Taipei Times that the Cabinet will not proceed with plans for measures to "loan out foreign exchange reserves, which are taxpayers' money, not the central government's, for local businesses."

Hu said that the Cabinet's plan aims to "stimulate local investment while attempting to reduce the nation's growing foreign exchange," dismissing criticism that the government is ignorant of the consequences of expansionary monetary policies.

Hu also said that he and Minister Without Portfolio Tsai Ching-yen (蔡清彥) have been appointed by the premier to come up with a concrete plan in two months.

Defending the government's policy, Chen Po-chih (陳博志), chairman of the Taiwan Thinktank (台灣智庫), said that all governments are entitled to sell foreign exchange funds to local banks so as to refinance local banks' loans that are denominated in US dollars. The practice has been in existence for years in Taiwan, even during the KMT's rule, he added.

To legitimize the Cabinet's plan to subsidize certain importers with low-interest-rate foreign-currency loans, Chen said, the central bank deposits a portion of the nation's foreign exchange reserves in foreign accounts, which allow the bank to enjoy higher interest incomes.

If compensated by the government for the shortfall in interest income, the central bank should be empowered to refinance certain local low-interest-rate loans to businesses, he added.

"Such expansionary fiscal policies can effectively boost local investment, while the central bank suffers no interest losses," Chen said.

Both Hu and Chen responded to criticism by several opposition lawmakers and industrialists, arguing that the critics jumped to conclusions without grasping the plan's details.