Bold FX reforms to support a flexible and market-determined exchange rate
The Bangko Sentral ng Pilipinas (BSP) recognizes that a flexible exchange rate is an integral part of its policy toolkit to maintain monetary stability and to ensure the sustainability of the balance of payments. Towards this end, the BSP undertakes foreign exchange reforms to deepen the foreign exchange market to support a flexible and market-determined exchange rate. These reforms have three core elements: liberalizing the foreign exchange administrative requirements in the banking system; strengthening oversight over the non-bank parallel market; and working closely with market participants and industry associations for clearer governance arrangements that promote fair market conduct and price transparency.
The BSP continuously reviews the foreign exchange regulatory framework to keep it attuned with prevailing market conditions and responsive to the needs of a dynamic and expanding economy. Since 2007, the BSP has undertaken various liberalization measures to streamline documentary requirements, thereby reducing the cost of doing business. At the same time, reportorial, registration and monitoring remain in place to allow the BSP to continue to capture data for analysis of developments, policy review and crafting of appropriate measures and to address or mitigate the impact of large and volatile foreign exchange flows on key macroeconomic variables.
A study conducted to assess the impact of the foreign exchange liberalization reforms on the Philippine economy showed that liberalization measures have: (a) helped mobilize foreign exchange resources to finance the requirements of the domestic economy; (b) facilitated trade in goods and services, as well as nontrade transactions; (c) improved inflows of foreign portfolio investments; and (d) contributed to the steady rise in gross international reserves.
The study recognized the importance of the BSP’s vigilance in complementing the easing of foreign exchange rules with prudential regulations and market surveillance to promote and sustain investor confidence and market discipline, considering macroeconomic risks.
Further liberalization of the foreign exchange regulatory framework and the streamlining of procedures and requirements are expected to open up the economy and promote greater ease in the use of the FX resources of the banking system for legitimate needs.
Over the medium term, the BSP shall enhance governance mechanisms to improve transparency, market conduct and price discovery towards a more organized foreign exchange market. The BSP will continue engaging stakeholders in drafting policy reforms to ensure that the evolving market needs are accordingly addressed.