Deregulation,

this decade, the CB issued various circulars which restricted the imports of certain types of commodities, regulated remittances of invisibles, and controlled capital movements.

MORE CHALLENGES

The eighties brought additional challenges to the CB. Adverse external developments such as the second oil crunch and the heightened protectionism in developed economies prompted the CB to continue implementing exchange controls. These restrictions were intensified during the forex crisis in 1983 when the country declared a moratorium on debt payments.

These regulations had by then become barriers to foreign investment. Restrictive forex laws, including constraints on interbank trading, further resulted in an inefficient mechanism for allocating dollars.

Forex control directed the surrender of the proceeds from exports of good and services, including remittances from overseas workers to authorized agent banks (AABs). Further, they allowed only certain forms of foreign investment income such as interest and dividend payments to be remitted abroad.

LIMITED TRADING

Interbank trading was limited to thirty minutes daily on the floor of the Foreign Exchange Trading Center of the Bankers’ Association of the Philippines (BAP), where transactions where normally subjected to moral suasion by the CB.

As a result, forex transactions operated on three market fronts — the interbank market, customer market, and the parallel market.

Transactions in the interbank declined to under 3% of the country’s total forex transactions. Commercial banks individually had the tendency to match their sources and uses of foreign currency instead of specializing as either buyers or sellers of foreign exchange.

The customer market made up most of the formal sector, consisting of the activity between commercial banks and their clients engaged in officially authorized transactions. The parallel market, on the other hand, developed to accommodate a host of transactions which were not legally allowed through official channels.

Official policy during the Aquino government in the second half of the 1980s was aimed at promoting the growth of exports and foreign investments. However, an important element of this objective — the free flow of foreign exchange — was sorely lacking.

TIME FOR EASE

But with the gradual buildup of international reserves, a BOP surplus, coupled with the notable improvement in the economy, financial authorities believed the time ripe to open up the market.

Relaxation of forex controls is usually made in conjunction with the liberalization of foreign investments, based on the Latin American experience.

In Colombia, for example, the foreign investment law was liberalized in January 1991. Between January and June of the same year, exchange control laws were revised.

In Venezuela, exchange control and foreign investment laws were liberalized within a period of 10 months. In the case of the Philippines, Congress passed the Foreign Investments Act (FIA) in November last year. One month after, government began to liberalize forex trade transactions.

In the ASEAN region, the Philippines is considered a late bloomer in the area of deregulation. Other member- countries, like Indonesia, Hong Kong and Singapore unchained forex controls way ahead and have since experienced phenomenal growth rates.

“It would have been silly if the Philippines did not liberalize. It would seem to be the odd man out in the group,” comments Cyril Rocke, senior vice- president of Mercator Finance Corp., a joint venture between Zuellig Corp. and Credit Lyonnais.

COMPARISONS

A comparison of the countries in the ASEAN region shows Philippine deregulation as one of the most comprehensive, comparable to that of Hong Kong, Singapore, and Indonesia, and slightly better than that of South Korea and Thailand.

Hong Kong and Singapore are totally free market economies while South Korea, Malaysia, Indonesia, and Thailand still have partial restrictions on some forex transactions.

Malaysia still requires the surrender of export proceeds to the banking system even as Indonesia and Thailand have recently liberalized this aspect. However, in Thailand, exports valued at more than 500,000 baht are still required to be surrendered or deposited in a foreign currency account.

Both Malaysia and Indonesia do not control receipts from invisibles while Thailand requires the surrender of service proceeds within 15 days and three days from the date of receipt.

Payments for invisibles such as trade- related service fees, educational expenses and travel may be made freely in Malaysia, Thailand, and Indonesia. In Thailand, regulations on remittances abroad of emigrants’ assets and dependent’s allowances still exist.

There are no restrictions on the amount of foreign currency which may be brought into Indonesia, Malaysia, and Thailand while, the export of local currency notes is completely allowed in Malaysia. The amount of local currency which may be exported out of their countries are subject to limitations in Indonesia and Thailand.

The liberalization of the foreign exchange markets in these Asian economies has been accompanied by a domestic restructuring of the public sector. Thus, their market liberalization was a success because the public sectors placed their houses in order. Otherwise it would not make to open the financial markets.