Relaxed forex rules seen driving growth

RELAXING foreign exchange (forex) regulations has facilitated the movement of forex resources to fund domestic economic needs, potentially stimulating the country’s growth, a Bangko Sentral ng Pilipinas (BSP) study found.

A recent discussion paper highlighted the notable impact of easing forex regulations on real gross domestic product growth, particularly through increased net portfolio flows and activity in the Philippine stock market.

These findings suggest that relaxing forex rules has facilitated the mobilization of forex resources to support domestic economic needs, leading to a significant contribution to the opening of the country’s current and capital accounts.

The central bank explained that the capital account in a country’s balance of payments involves various financial movements, such as foreign direct investment, portfolio flows (like investing in stocks) and bank borrowing, where residents of one country acquire assets in another.

These flows can be regulated by restricting transactions through official channels.

Liberalizing the capital account is expected to increase a country’s financial ties with the global economy by boosting both inflows and outflows of capital.

“Liberalizing the capital account allows for more efficient allocation of capital from capital-abundant developed countries, where return to capital is low, to capital-scarce developing countries, where return to capital is high,” the BSP said.

The central bank explained that if the world interest rate is lower than that of a developing country and there are no frictions, capital moves from developed to developing nations to benefit from the interest rate difference.