BSP Pushes Reserve Buffer Creation

MANILA, Philippines - Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo is pushing for the creation of a reserve buffer fund for losses arising from exchange rate fluctuations.

Guinigundo explained: "It is important to emphasize that the BSP fulfills a very unique role of helping stabilize the economy especially during periods of external shocks (and) particularly just like now, there's so much risk aversion so people are pulling out their money from advance economies and going into emerging markets including the Philippines, and so this leads to the issue of capital flows."

In its balancing act of trying to keep capital flows from influencing the peso to appreciate too much which has inflationary pressures, the BSP has had to put up reserves to avoid incurring huge foreign exchange-related losses.

"(With surges) in capital flows, it is important that we guard against the over strengthening or excessive appreciation of the peso against the US dollar for competitiveness considerations," Guingundo stressed. "In the course of our participation in the foreign exchange market, we become long in dollars and then when/if the peso appreciates, we lose."

The central bank referred to the reserves buffer as a "rainy day" provision which he said is necessary "considering the significant risks and exposures that are inherent to central banking functions."

This provision is not new to the world of central banking. The government of Korea extends budgetary assistance when Bank of Korea's reserves reach insufficient levels and that the state also absorbs losses and then provides additional budget. The European Central Bank also provides monetary income to the European System of Central Banks if needed.

The BSP cited other countries such as the US, Switzerland, Chile, Mexico, Germany, Netherlands, United Kingdom, Japan and Mexico which have varying policies and provisions which will assist their respective central banks in maintaining or boosting reserve buffers and restock surplus funds for contingency reserves.

The setting of reserves to deal with losses stemming from foreign exchange fluctuations is a sore subject between the BSP and the Commission on Audit (CoA).

The BSP has again and again disputed CoA's claims that it is under-declaring its profits and losses. The issue debated was the distribution of the BSP net income relative to the provisions of both Republic Act No. 7656 or the "Dividends Law" and its own New Central Act or Republic Act 7653 as a special law establishing the BSP as an "independent and accountable body".

BSP argued that it has authority to maintain reserves and to deduct the necessary reserves when calculating its net profits. It cites sections 43, 44 and 132b of the BSP charter as basis for these exclusions.

Unlike other government owned and controlled corporations, the BSP is the only government corporation that remits 75 percent of its net earnings to the National Government as dividends while the remaining 25 percent was residual surplus reserves.

"Some of those incomes are unrealized but because of this kind of computation, realized or unrealized, we have to remit to the NG. But supposed the following year BSP incur significant losses from foreign exchange fluctuations ... what happens to the loss? It's only the BSP that shoulders all the loss," said Guinigundo.

Last year, the BSP posted unaudited net losses of P33.69 billion while foreign exchange losses reached P36.22 billion.

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