FOCUS: Forex Liberalization Gradual moves towards deregulation

in the country depict “a cycling back and forth-between control and decontrol policies throughout four decades,” depending on the balance of payments (BoP) position, international reserves, and behavior of the exchange rate.

CONTROLS

In the fifties, the CB imposed a comprehensive system of exchange and trade controls to address the increasing BoP gap arising from growing import requirements for reconstruction and rehabilitation following the end of the Second World War. In that decade, forex controls were relaxed twice, each time for a different reason.

The first liberalization in 1951 was intended to ease inflationary pressures due to import bottlenecks triggered by the Korean War. The second liberalization in 1954 was aimed at spurring economic development.

In the sixties, a gradual decontrol program was put in place designed to dismantle restrictions on forex in four stages.

Under the program, a higher proportion of forex transactions was allowed in a free market where the exchange rate was administratively set (initially at P3.20 as against the official rate of P2 to $1) but later subjected to market forces.

Starting in 1965, there was full decontrol of the forex-system and the exchange rate was made uniform with the first major devaluation from P2 to P3.90 to $1.

Liberalization in this period lasted for only three years since the exchange rate was fixed, leading to problems in maintaining reserves sufficient to finance growing import requirements and to support exchange rate stability.

CB forex policy in the seventies was aimed maximizing dollar receipts from abroad, attracting foreign investments and enlarging the scope for forex transactions in the banking system.

In February 1970, the CB adopted the floating exchange rate system. Throughout