Monetary Policy and Central Banking
developed, one of these being the gift exchange barter.
Chapter 1: Money and its Evolution
The concept of trade has been around as early as the
beginning of humanity and its civilizations. Through the
development of systems of trading came the concept of
money. Ever since monetary systems were put in place,
money had become a central and essential part of
humanity’s attempt at organized living. Money has been
a key aspect in how the world has been shaped from
the earliest civilizations to the current state of nations.
With all the developments it has undergone, money
continues to affect the major facets of living: the
government and politics, religion, the economy,
technology, culture, family life, up until the personal life
of each human being. Earning money has become a
priority and a necessity for one to be able to live ideally,
and spending this money is just as important to
maintain an effective monetary policy system.
But where did the concept of money come from?
Scholars from early civilizations often questioned how
money became as important as it is, how its existence
became such a vital part of our world’s history. One of
these scholars, the father of modern economics Adam
Smith, explains that humans are naturally inclined to do
trade.
In his 1776 book called The Wealth of Nations, he notes
that humans have “a propensity to truck, barter, and
exchange” which is a skill that, according to him, cannot
be observed in any other race of animals. Smith explains
that the concept of money was invented in order to put
a more efficient system in place to replace the earliest
known trading system: the barter.
The Barter System
Barter is a trading concept that works between two
people in possession of something that the other is
interested in. This concept of trading has existed long
before civilizations even formed. This should not come
as a surprise, as this human behavior is also observed in
symbiotic relationships between other species,
rendering it innate and natural. Primitive societies were
able to barter items specific to what their communities
produce, which depends highly on their home
environment. Popular goods that were traded using the
barter system are cattle and grain.
The barter system also took different forms as it
This is also called the silent barter as it happens without
the two parties having to communicate. What they do is
they leave a particular amount of produce in an agreed
spot for the other party to find. If and when the other
party likes the commodities left in the agreed spot, they
would then leave their own items in the same spot
considering it is of the same worth and value. Should
the items left be deemed less of value by the other
party, it would be left in the same place until it is
increased in worth. The silent barter, in spite of its
flaws, was considered as an effective, less aggressive
form of bargaining.
Primitive Forms of Payment
From the system of barter came the need for a system
of money. The early people needed something that
would be easily used in their everyday transactions
without losing much of their own produce.
The most widely used form of primitive payment is the
cowrie. The cowrie is an ovoid mollusc shell that could
be found in the shallow regions of the Indian and Pacific
Oceans, with its richest origins being the Maldives.
Cowries were proven to be the convenient choice –
durable, easy to clean, difficult to imitate, and easy to
count – that it was used from 1600 BC in China up until
the mid-1920s in Africa. The use of cowries was so
prominent in China that their written language for
“money” is the pictograph of a cowrie.
Another ancient form of payment used widely is the
sperm whale’s tooth or the tambua. Used mainly by
tribes in the Fiji islands, the tambua was used as a
ceremonial tradition especially in welcoming royalty
into the islands.
The Yap Islanders in the Pacific used carved stones as
their mode of payment. These large carved stones
known as feisymbolized a family’s wealth and was often
used as gifts, payments for houses and canoes,
arranging marriages, and even in exchange of a permit
to fish in a village’s waters. The Yap Islanders quarry
these stones and shape them into discs with center
holes, and was still in use by the mid-1960s.
In the Americas, early colonists found it difficult at first
to establish a general form of payment until 1715. Back
then, the Indians in the Americas used strings of white
beads called wampumpeag, from the Indian word for
string of beads peag and the Indian word for white
wampum. This was later shortened into just being
called the wampum. The wampum is produced out of
clam shells and other similar shells found in the river
shores of America and Canada. Wampums, as their
names connote, are generally white, but there were
also rare black or blueblack wampums utilized as
higherpriced wampums. Wampums faded into history
around the nineteenth century.
The Birth of Metal Coins
Before coins came into existence in the trading system,
the primitive man first discovered the value of metals.
At the end of the Stone Age, imitations of cowries were
manufactured in China using bronze and copper and
were considered of high value when its use spread to
other nations. The use of metals as money also became
widespread, as in the case of West Africa where metal
anklets, bracelets, and necklaces called manilla were
used for payments, with its circulation stopping in 1949.
A century after the use of metallic cowries, the very first
coins were minted in Ephesus of Ionia, now western
Turkey, by the Greeks during the 650 BC. These coins
made of electrum (55% gold and 45% silver) spread in
the entirety of Greece with the emblems of each city
stamped on coins produced in their hometowns.
Another century after, the king of Lydia, Croesus,
becomes the first king to mint coins using pure gold and
pure silver, with sides showing the bust of a lion and a
bull. By the end of the 6th century, neighboring nations
and empires have already adopted the coins system.
In Athens, coins were inscribed with an owl on one side
and were also called “owls of Minerva”, Minerva being
the Roman name for Athena, the mythic guardian of
Athens. Roman coins, on the other hand, were minted
in the temple of Juno Moneta, whose name is the origin
of the term “money”.
Late into the 3rd century BC, the use of metals to mint
coins was introduced by Emperor Shi Huangdi in China.
These coins were mould using bronze as they have done
with the cowrie dummies, but this time in the shape of
a round coin with a square hole in the middle. This coin
design would then become an icon in the eastern
monetary system.
Another famous coin minted in 1252 is the fiorino d’oro,
or the golden florin from Florence. This coin became
Europe’s most widely accepted coin, which then
equipped the city of Florence for international trade
more than any other country, and later on equipped
them for banking.
The Emergence of Paper Money and the Concept of
Banking
The earliest form of banking was recorded in Egypt and
Mesopotamia in the 18th century BC, where gold was
considered of high value and needed to be kept in
temples for safe-keeping. Mesopotamian civilizations
believed in the sacredness of temples, which was
enough to deter thieves from stealing the gold reserves.
However, these gold were kept idle in temples for a
long time when it could have been circulated in the
trading community. The concept of banking was first
observed during Hammurabi’s rule in Babylon, where
records of loans, deposit forms and receipts, and
monetary contracts were found written on stone
tablets, hundreds of thousands of which have been
discovered by modern archeologists. These simple
banking operations existed a century before the
existence of coins.
By the 12th and 13th centuries, European countries
have discovered Christianity and have gone on Crusades
in other countries to spread their beliefs. This resulted
not only in the conversion of people into their religion
but also in an increased trading system with other
regions. These Crusades grew the influence and wealth
of European countries such as Italy, where the cities of
Venice, Genoa, and Florence were flourishing in trade.
Mostly, they traded with Asian natives for silk and
spices, and these numerous trades meant merchants
would sometimes need to borrow enough money to
keep producing their items until they earn it back. With
the widespread use of the metal coins and the ever-
developing system of trade within nations, the need for
a money-changing and coin regulation became urgent.
This urgency was answered when two families from the
city of Florence, the Bardis and the Peruzzis, offered
financial and banking services by the early 14th century.
They handled the collection and transfer of money in
trades and also introduced the concept of cheques,
where they provided merchants with bills of exchange.
It was not long until Florence became the home of the
most famous bankers in history. Cosimo de Medici, a
banker from the 15th century, had built multiple
branches of his multinational bank across Europe and
later on became the ruler of Florence. His family’s
business commissioned works of art made during the
Renaissance by famous artists like Botticelli and
Michelangelo, which then opened the doors for
Florence to be the classically beautiful city it is today.
In spite of these banking and trade developments,
Europe was still behind when it comes to establishing a
more convenient monetary system. When Marco Polo
travelled to China in the 1290s, he discovered that the
Chinese had been utilizing paper money for years in the
form of authenticated, government-issued paper notes
known as Chao. Kublai Khan, then ruler of China,
introduced this to the nation and commanded them to
recognize this paper as money, and anyone who
attempts to counterfeit these paper noted will be
sentence to death. This meant that Kublai Khan held the
sole power over China’s growing economy as the only
one who can produce the paper money.
Marco Polo then reported this in his book The Travels of
Marco Polo as he returned to Venice. This then shifted
Europe’s monetary system into also using paper money
in the form of bills of exchange. This made trade more
convenient for the whole of Europe, as merchants and
buyers would only need to present a piece of paper,
which could then be given to banks in exchange for its
equivalent in coins. As time passed by, these bank notes
were used by the Europeans to trade, and later on
became recognized as actual money.
As bank notes became more prominent in Europe,
Johan Pamstruch built the Stockholm Banco, a private
bank linked with the state. Palmstruch started issuing
credit notes that can then be exchanged for the
equivalent number of coins. These notes were printed
on paper and had eight signatures on them. Later on,
people trusted these credit notes enough to exchange it
with one another. However, the Stockholm Banco fell
into decimation when the bank issued more credit
notes than the bank’s coin reserve.
Another attempt at the circulation of paper money in
Europe was made by John Law decades after
Palmstruch’s downfall. Law founded the Banque
Generale in Paris and issued bank notes in 1719. This
did not last long due to a government decree released
in May 1970 cutting the value of paper money in half.
The First Central Bank
National or central banks are those that are established
and built in partnership with the state. When the state
started issuing bank notes through the national banks,
confidence in the paper money came back. The first
known central bank is the Bank of Sweden. It was
founded in 1668 and is the world’s oldest bank still in
business.
It was followed shortly after in 1694 when King Louis
XIV of France clashed with King William III of England,
prompting a war between the two nations. King William
III needed more than enough funds in order to fight
France, but the taxes being imposed were not enough.
He was then given aid by a Scotsman named William
Paterson along with some rich businessmen from
London. Together, they built the Bank of England to
lend the government some money. Although it was a
privately owned bank, it had transactions with the
national government that were to be paid through the
people’s taxes. The Bank of England developed through
the years, and it officially became a national bank in
1946.
In the other side of the world, a financial crisis was
brewing and the Panic of 1907 was happening in New
York, United States. Banks failed to operate fully and
had to declare bankruptcy. This crisis was solved when a
rich banker, J.P. Morgan, pledged his own money to
help the nation’s banking system up to its feet. This
crisis urged the US government to create the National
Monetary Commission to provide a more established
currency and credit plan to avoid bigger financial crisis
in the future. The commission then created the Federal
Reserve System which consequently created the Federal
Reserve Banks for each Federal Reserve District.
Modern Trade and Money
During the early days of the 20th century, computer
technology has been on the rise. Banks in the United
States has begun relying on electronic forms for
transactions between the central bank and commercial
banks. It was in 1946 when the first credit card, Charg-
It, was introduced. John Biggins, owner of the Flatbush
National Bank of Brooklyn, invented the Charg-It, which
allows cardholders to purchase items or services by
borrowing credit from the bank and paying it in the
form of a debt. However, Charg-It was only accepted in
several establishments in the United States.
In 1950, another card of the same context was made:
the Diner Club Card. This card was exclusively used in
restaurants, and was invented by Frank McNamara and
Ralph Schneider. The Diners Club was the first
successful credit card, and garnered over 500,000
members in just five years. Years later, other companies
started releasing their own credit card programs, such
as American Express and Visa.
When the 21st century started, banks across the world
have shifted into the digital world, putting their
databases and records online. The rise of the internet
and mobile phones also gave way to electronic
transactions.
Payment of commodities were made easier by mobile
phone applications such as Apple Pay.
In 2008, a new currency type was invented: the Bitcoin.
This currency invented by someone under the
pseudonym on Satoshi Nakamoto existed in the digital
world as electronic money. There were no central banks
that would regulate the use of this cryptocurrency, but
these Bitcoins can be exchanged for products and
services and even for real, actual money. Bitcoins
reached its peak in 2017 when one bitcoin was priced at
more than $13,000, with an all-time high of $19,783.06.
However, this did not last long as the cryptocurrency
market crashed in 2018. With all the bitcoin hype came
the hacking and online theft, which led to the bitcoin
depreciating in just a span of one year. In January of
2019, the bitcoin was priced at $3,747, a significant
decrease from its peak.
The History of Money in the Philippines
Even before the Spanish colonization, ancient Filipino
locals have established bartering relations with
neighboring communities from China, Java, Borneo,
Thailand, and other Southeast Asian lands. Like other
civilizations, the Philippine history of money started
with the barter system.
As a region that is naturally rich in gold, the Philippines
had its own version of cowries: the Piloncitos. These are
ancient barter rings made of pure gold, and were used
as personal adornment and as jewelry. Piloncitos rings
had a flat base with an inscription of the letter “M” or
“MA” in Javanese script. The early Filipinos used the
piloncitos rings from the 11th to the 14th century in
trading with China and other neighboring countries.
Primitive Filipinos were also able to produce their own
coins called the barrillas, where the modern concept of
barya or loose change is taken from. Unfortunately, the
use of barrillas was banned by the Spanish government.
When the Spaniards came, they brought with them the
cobs or macuquinas, silver coins minted from Mexico
and Spain. These coins contained an inscription of a
cross on one side and the royal coat-ofarms of Spain on
the other. Later on, the Spaniards also brought the
Spanish dos munos coins to the Philippines, which had
an inscribed crowned globe in both sides. These globes
symbolizes the power Spain has seized in both the old
and new world, thus the name dos mundos. When the
revolution against the Spanish colonization sparked in
the Central and South America, silver coins tampered
with revolutionary slogans were mixed with coins being
brought to the country. To prevent the Filipinos from
knowing about the rebellion in the Americas, the
Spaniards counter-stamped the rebellious inscriptions
on the coins.
It was also during the Spanish regime when the first
paper money was circulated in the Philippines. Through
the first bank established in the country, the El Banco
Espanol Filipino de Isabel II, the paper money called
pesos Fuertes was introduced.
Once the revolution started in the Philippines, a new
constitution was put into place: the Malolos
Constitution. This gave the first president of the
Philippines, General Emilio Aguinaldo, the power to
produce currencies. Coppers were mould into centavo
coins, and revolutionary banknotes were printed and
produced in denominations of 1, 5, and 10 pesos. These
banknotes were signed by Pedro Patern, Mariano
Limjap, and Telesforo Chuidian. However, when
Aguinaldo surrendered to the American regime, these
banknotes were stopped in circulation and was
considered to be illegal by the Americans.
The new colonizers brought with them modern banking,
modern currency, and the credit card system. As these
were established in the Philippine setting, the country’s
reputation and wealth rose and was considered as one
of the most prosperous nations. The American
monetary system adopted into the Philippines was still
based on gold, putting the Philippine Peso almost at par
with the American dollar at 2:1.
In 1903, the US Congress mandated the Coinage Act for
the country, which paved the way for Filipinos to have
their own denominations in the Philippine Peso
currency. From 0.50 cents to 1 peso, the coins were
minted and given its Filipino identity by bearing the
designs of Filipino artist Melecio Figueroa. In 1912, the
El Banco Espanol Filipino de Isabel II was officially
renamed to the Bank of the Philippine Islands. This
switch also marked the change from Spanish to English
in all coins and notes inscriptions. In 1918, silver
certificates were officially replaced with treasury
certificates, and a one-peso note was ordered to be
printed.
However, changes in the monetary system did not stop
with the American colonization. When the Japanese
occupation started in 1942, American banknotes were
easily replaced with war notes from the Japanese, and
often came in big denominations. With the revolution
still ongoing, guerrilla notes or resistance currencies
were also produced by the Filipinos.
When the World War II ended and the Philippines was
officially a country on its own, old American treasury
certificates stamped with the word “Victory” were used
as currency as the country got back to its feet. When
the Central Bank was built in 1949, money that was put
into circulation still came from foreign countries – paper
notes were printed by Thomas de la Rue & Co., Ltd. in
England, while coins were imported from the United
States Bureau of Mint.
The Filipino coins and paper money we know of did not
come into existence until the sixties. A decade later, a
new series of money was produced called the Ang
Bagong Lipunan series. In 1983, a new coin design
based on the country’s flora and fauna was released.
Years later, another new set of money was issued, this
time with the logo of the BSP.
Chapter 2: Money in the Nation’s Economy
When it comes to defining what money is, humans
often associate it with income, wealth, and even quality
of life. In general, money is defined as anything that is
commonly accepted in payment for goods or services or
as repayment for debts.
Money can either be in the form of a) currency, or the
paper money and coins authorized by the government
to be in circulation; or b) deposits, or money that is kept
in the bank. A larger portion of money in the world are
in the form of deposits, kept in bank reserves and can
be converted into currency form anytime.
Aside from its usual and general definitions, money is
also often defined according to its function or the
service it provides.
Money as a Medium of Exchange
The first and most essential function of money is as a
medium of exchange. As per its general definition, it is
used to facilitate transactions and pay for goods and
services. Before the use of money came into existence,
the first people used barter in order to acquire the
commodities they needed. There came a time when the
barter system turned inconvenient, as barter required
everyone to have a commodity they can offer in
exchange of what they need from the other party.
Barter required people to have a double coincidence of
wants, or else no exchange will happen. While it was
effective and efficient at first, the double coincidence of
wants later became difficult to achieve.
This problem is precisely what money provided a
solution for. With money, parties do not have to offer
an equivalent good or service in order to acquire the
commodity they need. Money serves as a medium of
exchange that is accepted by all parties in exchange for
any good or service, as long as the other party has
enough money to buy such.
Money as a medium of exchange also promotes
economic efficiency by minimizing transaction cost.
Transaction cost is the cost of producing the goods and
services that would have been needed in trading for the
commodities one needs, and with money, this problem
is effectively minimized.
Money as a Store of Value
Before money can become a means of transacting and a
medium of exchange, it must be able to hold its value
for a period of time. The second function of money is as
a store of value, which is the use of money to preserve
its purchasing power from the time it is earned until it is
used for its first function.
The function of money as a store of value is not unique
to money in cash. It is also observed in other assets
such as in stocks, bonds, real estate, and even art.
However, when it comes to this function, money in cash
is not the best option as its value depreciates over time
depending on inflation, while all the other assets that
has store of value function appreciate in value the
longer it is preserved.
Nonetheless, money still has an edge over the other
assets: liquidity. Liquidity is the relative ease and speed
with which an asset can be converted and used as a
medium of exchange. Money in the form of cash is the
most liquid of all assets as it is the most basic medium
of exchange, therefore it does not need to be converted
into anything else to be used in transactions. It is also
readily accepted everywhere, and is the preferred
payment of all merchants. With money being a liquid
asset, it is easily transported and is available in any type
of denomination.
Money as a Unit of Account
The third and last function of money is money as a unit
of account. This refers to the use of money in
determining the price of goods and services, thus
measuring its value in the economy. As money provides
a common measure of value on commodities, both
sellers and buyers are able to make a wise decision
when it comes to transactions, such as in determining
how much of it they can supply or can purchase.
When the primitive people only had barter, the prices
they put on the goods and services they offer often
base on what these are and what the other party is
offering in exchange. With money and its use as a unit
of account, a comparison of prices is possible and also
reduces the information and exchange costs for both
parties.
Characteristics of Good Money
In order for money to perform the three functions
stated above, it should possess the following good
characteristics:
1. General Acceptability
Money that is accepted everywhere in the region it is
used means it is performing its function as a medium of
exchange very well. Good money is assigned with a legal
tender status and is recognized as a country’s main
form of payment by decree of law.
2. Portability
Good money is money that can be easily brought and
can be transported without hassle. The current paper
money and coins in use are portable as they can simply
be put in a wallet or coin purse, or sometimes even just
in the pocket.
3. Durability
In producing money, the durability of the material used
should be considered. It should be able to withstand
being passed from one person to another for a long,
long time and should not wear out quickly.
4. Divisibility
Transactions often involve giving change to the buyer,
and it should always be in the exact amount. Good
money should be divisible in a way that merchants can
provide an exact change, and this is possible through
having smaller banknotes and coins.
5. Scarcity
Too much and uncontrolled production of money
results to having fiat money, or money that has lost its
value due to having too much of it in circulation. Good
money is always limited in supply in order to encourage
the demand for it, making people spend it and earn it
back.
6. Stability
The value of good money should remain stable and
constant. As it is used as a unit of account to develop
standard pricing for goods and services, its value should
not be ever-changing and should remain as it is. Having
an unstable money would be confusing to the people,
and would just be like how it was during the barter age.
7. Uniqueness
Good money is unique and cannot be duplicated. Paper
money, being the easier kind to counterfeit, are each
given unique serial numbers and codes to prevent fake
money from circulating.
Managed Currency
One characteristic of good money is its general
acceptability, wherein the government mandates the
nation’s money as legal tender. This means that the
nation’s money – both in paper and in coins – are all
issued solely by the government and is circulated within
the nation’s economy.
The government institution that handles the creation
and circulation of money is the central bank. The central
bank is the monetary authority in a country, and
maintains influence and control over the purchasing
power and exchange rate of the nation’s currency.
Currency that is put under the regulation of the central
bank is called managed currency.
In a managed currency system, the purchasing power of
the nation’s currency is controlled and adjusted
according to the forces of supply and demand. Currency
management is often done to keep stability in the
markets. Central banks use monetary policies in
managing a nation’s currency, policies that fall into the
following categories:
1. Issuing currency and setting interest rates on loans
and bonds to control growth, employment, consumer
spending, and inflation;
2. Regulating member banks through setting a required
capital or reserve value and providing loans and services
for national banks and the government;
3. Behaving as an emergency lender to distressed
commercial banks and at times even for the
government by taking responsibility over government
debt;
4. Operating in the open market to buy and sell
securities such as other currencies. Currency
management also fall into different types.
Currencies can either be managed in a floating currency
exchange system, a clean float exchange system, or a
fixed currency exchange system.
1. Floating currency exchange system
In this system, the central bank bases its adjustments to
the price of the currency relative to other currencies
depending on the external foreign exchange market
forces. The floating system involved the forex, or the
global foreign exchange market. Based on the forex,
currency can either be exchanged for its spot price or
current marketplace cost, or it can be for a future
delivery. The best example of this is exchanging money
when traveling to another country. The amount of
money one can exchange for the foreign currency
depends at the spot price, which then depends on the
fluctuations in the global market.
2. Clean float exchange system
In a clean float or a pure exchange system, currency
prices change even without a central bank to manage
the changes. A clean float exchange system runs solely
by the forces of supply and demand in the global
market. Today, no country practices the clean float
exchange system as most currencies are managed by a
nation’s central bank.
3. Fixed currency exchange system
Fixed currency means that the central bank has put a
peg on how money would be priced. Pegs are picked in
relation to the commodity being priced, with the most
popular one being gold. Sometimes, fixed currency can
also depend on another currency in order to maintain
its value.
Chapter 3: Monetary Standards
Monetary standards used to refer to a particular weight
of either gold or silver that is used as the supreme form
of money that cannot be made equivalent to lesser
forms of money. As the concept of money progressed
and developed into what it is today, the definition of
monetary standards became that of institutions and
practices governing the supply of money in an economy
with a set of rules and policies. A monetary standard is a
system of currency that acts a stable medium of
exchange for domestic transactions and a means of
international payment for foreign obligations.
A country’s monetary standard is its principal method of
regulating the quantity and the exchange value of
standard money. When a country establishes its own
monetary standard, a set of rules governing the
creation of money and its circulation, and monitors
whether these rules are being strictly followed. With a
monetary standard comes an established standard
money or monetary unit recognized by the government
as the ultimate basic standard of value upon which all
other kinds of money are convertible. In the Philippines,
the standard monetary unit is the Peso.
Monetary standards have two types: commodity or
metallic standard and non-commodity or fiat standard.
Under these types are the following subtypes.

Commodity Standard
Commodity standard is a monetary system wherein the
purchasing power or value of the standard monetary
unit is equivalent to that of a designated quantity of a
particular commodity. Commodity standards are almost
always based on metals such as silver and gold and is
sometimes dubbed as full-bodied money because of
this.
Monometallic Standard
Monometallic standard, also called single standard, is a
monetary standard wherein only one metal is used for a
country’s standard money. This metal is then used as
payment for all transactions, and its market value is
constant. The monometallic standard is then divided
into gold and silver standards.
1. Silver Standard
In a silver monetary standard, the monetary unit is in
the form of silver coins. These coins are made with a
fixed weight. Silver has a tendency to fluctuate in value
more often than gold; hence, silver is less recognized
than gold when it comes to being a standard unit of
money.
2. Gold Standard
Gold is the most used metal in monetary standards. In a
gold monetary standard, the currency of the country is
formed solely in gold. This standard was widely
accepted around the world during the 19th century and
gradually stopped circulation in 1936. The gold
monetary standard can be further subdivided into gold
coin, gold bullion, and gold exchange standards. These
subtypes are also applicable to the silver standard.
a. Gold Coin Standard – In a gold coin monetary
standard, a country’s government authorizes the
conversion of gold bullions into gold coins, which are
then made freely obtainable to the citizens in exchange
for other forms of money. This way, the value of gold as
coin is made equivalent with its value as a metal. The
gold in this monetary standard can also be freely
imported and exported, which then allows the
automatic stabilization of the domestic value of gold
with its foreign value. In this type of standard, money
supply is dependent on the country’s gold reserves
Pros of the gold coin standard:
• It is universally accepted
• It is free and has unrestricted import-export
rules
• It ensures stable forex
• It needs no government intervention
Cons of the gold coin standard
• It is fair-weather standard, meaning it only
works smoothly when the country is at peace,
but it could easily crash and depreciate during
times of crisis.
b. The Gold Bullion Standard – In a gold bullion
monetary standard, the monetary unit of a country is in
the form of gold bars. In this standard, gold bars cannot
perform the function as a medium of exchange, but it
still maintains a measure of value. Minting of coins is
not allowed, but the government accepts tokens or
paper money in exchange of gold bullions. Like the first
gold standard, there is no restriction on importing and
exporting gold bullions. Gold bars have a set and fixed
price, and a minimum of one gold bar (400 ounces) can
be exchanged. Nonetheless, all other currencies can be
converted into these bars as long as the holder can
afford the equivalent price.
Pros of the gold bullion standard:
• As minting of gold coins is not allowed, no
precious metal will be wasted and minting costs
is eliminated.
• An equilibrium in the demand and supply of
money will be established.
• Only legitimate demands for gold are met, thus,
gold reserves are kept stable.
Cons of gold bullion standard:
• A minimum of one gold bar is what can be
redeemed, and anything less than that would
not be permitted.
• Bullions as monetary units fail to work during
times of economic crises.
• The government needs to have a hand in
regulating the bullion standard for it to function
properly.
c. Gold Exchange Standard – In a gold exchange
monetary standard, the monetary unit of the country is
established in terms of gold – not in gold coins or gold
bars, but in terms of gold weight and fineness. This
means that the local currency can be converted into
foreign gold drafts at fixed rates, which is then
convertible into foreign currency that can be redeemed
in gold coins or bars. In this standard, citizens use
tokens and paper money and redeem bills of exchange
payable in gold in a foreign country.
Gold exchange standard is subdivided further into
automatic and managed gold exchange standards. An
automatic gold exchange standard is established by a
country when it does not have a gold reserve and would
need to depend on the reserves of other countries. On
the other hand, a managed gold exchange standard is
adopted by a country that has a minimal amount of gold
reserve that can be built up further by partnering with
other countries.
Pros of the gold exchange standard:
• The needs of the trading industry can be easily
met as the domestic currency is not made in
gold.
• No wastage of metals happens.
• Any monetary unit can be used as the
circulating medium of exchange.
• Gold reserves kept in foreign countries earn
interest.
• This standard will be particularly helpful to less
developed countries who has little to no gold
reserves.
• The government can buy and sell foreign gold
drafts, and ultimately earn a profit.
Cons of the gold exchange standard:
• No checks and balances.
• The gold reserves kept in foreign countries
cannot be controlled by the country adopting
this standard.
• The same reserve is used by the depositing
country and the depository country, rendering
the reserves a failure in the case of an economic
crisis
Bimetallic Standard
Countries who uses both silver and gold as a basis for
their monetary unit is using the bimetallic commodity
monetary standard. In this standard, the issuer can buy
and sell either silver or gold at stated prices. Coins of
different metals – silver or gold – are used as the
monetary unit set at a fixed legal ratio of weights and
fineness. These two metallic coins operate as monetary
units simultaneously and are considered unlimited legal
tenders and can be converted into each other.
In the bimetallic standard, the legal ratio is observed.
The legal ratio is also called the coinage or mint ratio,
and refers to the ratio between the weight of the coins
in the mint that is set at a fixed point by the
government. The standard also observes the market
ratio, which is the ratio of the value of gold and silver as
they are bought and sold in the market.
The bimetallic standard provides a full-bodied currency
to the country that adopts it, providing gold for large
transactions and silver for smaller ones. Prices are also
kept stable, as one metal can always make up for
shortage of the other. Constant exchange rates can also
be observed as long as both metals are stable in terms
of each other. This would ensure a stable money supply
that would then meet the trade requirements of the
economy. The abundance in supply of both metals
makes money supply more elastic in this system.
Bank cash reserves in gold and silver coins are also
easier to maintain as these are considered unlimited
legal tender. Interest rates also decline as the supply of
the two metals is often generally higher than the
demand. This makes it possible for banks to extend
loans at cheap rates and encourage people to invest,
hence building a stronger economy.
Although the bimetallic standard has a lot of pros, it
also has its cons, first of which is that it functions under
Gresham’s law. Gresham’s law states that when there is
good and bad money in circulation, bad money tends to
drive the good one out of it. The concept of this law is
triggered whenever the market ratio of silver to gold
grows farther from the legal or mint ratio. When the
supply for silver becomes overabundant, making it
overvalued and cheaper, thus driving gold out of
circulation.
The bimetallic standard can only be effective when the
market rate and legal rate is equal and stable. However,
this is far from what happens when this standard is put
into practice. It also is a costly monetary standard as it
has to answer for costs in minting two types of metals
into coins, doubling expenses from monometallic
standards.
Non-Commodity
Standard Non-commodity standard is a monetary
standard wherein the face value of the money is much
higher than the value of the material used to make it.
This monetary standard is also called the fiat standard.
In a non-commodity monetary system, the fiat money is
considered as the standard unit of value and is legal
tender. Any other unit of money issued by the
government is redeemable in the standard fiat money.
Utopian Paper Standard or Pure Fiat Standard
The Utopian Paper monetary standard proposes the
adoption of standard money that is desired because of
what it can buy in goods and services and not because
of what material it was made out of. This monetary
standard is called utopian as it is more of a theory and
has not been used by any government.
Involuntary Paper Standard
During a national crisis that invokes a currency
dilemma, the government adopts an involuntary paper
monetary standard. In this standard, the government
are at an odds and can no longer produce their currency
in gold or silver. As a result, it is forced to use paper
money as an alternative.
Managed Currency Standard
The managed currency monetary standard espouses of
an inconvertible and irredeemable paper money that is
issued against no gold or silver reserves and is managed
by a Central Bank. The Central Bank keeps the prices on
a fair level by using trade and industrial conditions as
basis in increasing or decreasing the amount.
The government gives this paper money legal tender
power, which is the power given to money to settle all
obligations whether public or private. The managed
currency standard is the monetary system in use in the
Philippines since 1949.
In this monetary standard, the paper money is
inconvertible. No gold or silver reserves are maintained
to back up the money supply. Lastly, the Central Bank is
authorized to exercise control over the credit system,
such as controlling the quantity of money in circulation.
Chapter 4: The History of the Philippine Monetary
System
Before the Philippine money became what it is today, it
went through many forms and changes throughout the
country’s history. In fact, the Philippine currency, Peso,
reflects its colourful history through its name. Peso is
derived from the Spanish peso or pieces of eight.
Pre-Spanish Era
Before the Spaniards came and conquered the
Philippines, the precolonial Filipino tribes conducted
their businesses and trades as other neighboring
countries such as China, Java, Borneo, and Thailand did:
through the barter system. Chinese merchants traded
porcelain, silk, and some metalwork in exchange for the
Filipinos’ gold, pearls, beeswax, and medicinal plants.
However, like these other countries, barter began to
pose an inconvenience, which then prompted the early
tribes to find a medium of exchange.
As the Philippines was rich in gold, they shaped rings
out of the gold reserves to serve as a medium of
exchange. These gold barter rings were used between
the 8th and the 14th centuries. More gold ingots have
been discovered that date in this era, such as the
Piloncitos, or the small bead-like gold coins with flat
sides that are recognized as the earliest coinage in the
country.
Spanish Period
When Magellan’s expedition landed in the Philippine
shores in 1521, he brought with him the Spanish silver
peso. These silver cobs, also called macuquinas or hilis-
kalamay bore a cross on one side and the Spanish royal
coat-of-arms on the other, along with the seals of
Spanish rulers Charless II, Philip IV, and Philip V. A few
decades later after the reign of King Philip II, the
Mexican coins called cabo de bara de plata were widely
circulated.
During the reign of King Philip V, the first coin minted in
the Philippines was put into circulation. This was called
the barilla, from which the term barya came from. The
production of these copper coins was authorized by the
Royalty of Spain when there was a shortage of
fractional coins. The barillas were produced by the
Ayuntamiento or the municipality of Manila.
At the height of the galleon trade in 1732, the coin
Spanish dos mundos circulated not only in the
Philippines, but throughout the whole world. This coin
featured twin crowned globes representing the Spanish
rule over the Old and the New World. It is also called
the Mexican Pillar Dollar or the Columnarias due to the
two columns flanking the globes. The Columnarias were
machine-minted coins containing fine silver.
During the Spanish-English War of 1762, a shortage of
coins prompted a second coin to be allowed to be
locally minted in the Philippines. This was called the
colderillas. To make it easier to produce, it was still
made out of copper but made half the size of the
barillas. However, these were not in circulation for long
as it was quickly replaced by another version of the
barilla, this time bearing the bust of Carlos III. It also
bore the inscription “Ciudad de Manila 1776”.
Upon the death of King Ferdinand VII, his daughter
Queen Isabel II became the new ruler of Spain. Coins
called Isabelinas were circulated during her reign. In
1852, the first Filipino bank note was printed. It was
called pesos Fuertes and was issued by the El Banco
Espanol-Filipino de Isabel II, the country’s first bank.
Five years later, Queen Isabel II ordered the
establishment of the Manila Mint, which was then
allowed to mint silver coins with a lower production
cost via a royal decree.
It was in 1887 when the first Treasury certificates
bearing the official seal of the Philippine government
were issued. These bore the signature of Clem de
Santiago, the Insular Treasurer.
The 1896 Cry of Balintawak headed by Andres Bonifacio
signalled the start of the Philippine Revolutionary
period. Two years later, the Philippines was freed from
the Spanish reign, and the Philippine Republic was born
under the presidency of Gen. Emilio Aguinaldo.
Aguinaldo then had the vested authority to produce
currencies under the Malolos Constitution. This led to
two types of two-centavo copper coins to be minted in
the Malolos arsenal. Coins were also minted in Panay
and Tarlac. The second treasury certificates to be issued
in the Philippines were also printed in denominations of
1, 5, and 10 pesos. These revolutionary banknotes were
signed by Pedro Paterno, Mariano Limjap, and Telesforo
Chuidian.
These coins and banknotes, however, were short-lived
and were withdrawn from circulation upon the capture
of Gen. Aguinaldo in March 23, 1901. The revolutionary
peso ceased to be minted and was then considered
illegal.
American Regime
In 1898, the Philippines was put under official
colonization of the United States through the Treaty of
Paris. Several currencies were allowed to circulate then,
including the Mexican silver dollar of the Peso
containing eight Reals. The American Dollar was what
the Americans wanted to circulate, but the new
currency was rejected by the Filipinos who have grown
to be much accustomed with the Mexican silver. Hence,
the US Dollar was put into circulation for a short while
until the Third Treasury certificates were issued.
In 1901, an American banking expert named Charles
Connant recommended the gold exchange standard
when he visited the country. Based on his
recommendation the Philippine Coinage Act was passed
by the American Congress in 1903. This established a
unit of currency based on gold and pegged the
Philippine peso to the US Dollar at the ratio 2:1. In order
to maintain parity of the existing silver peso with the
theoretical gold peso, the Gold Standard Fund was
established. This meant that the Philippines was ready
to sell drafts from the fund to settle international
obligations, drafts that were then redeemable into
American dollars which are then convertible into gold
coins.
It was also during the American regime when the
Philippine National Bank was created. The bank was
established in response to the increase in the volume of
trade with the increased demand for Philippine
products. The Philippine National Bank was allowed to
issue Philippine banknotes to augment the insufficient
money supply. However, these notes were not legal
tender, although they were payable to the bearer and
the bearer was then promised the corresponding
equivalent in treasury certificates
Another change in Philippine banking was the renaming
of El Banco Espanol-Filipino de Isabel II to the Bank of
the Philippine Islands in 1912. This change paved the
way for the use of English instead of Spanish in all notes
and coins issued. In 1920, the Manila Mint was
reopened as the American government decided that it
would be more economical and convenient to mint
silver coins in the Philippines.
In 1933, the US government under US President
Franklin D. Roosevelt abandoned the gold standard and
proclaimed the gold embargo in US territories and
colonies. The Philippines, now a US Commonwealth,
then had to follow through and abandon the gold
standard, even if it meant that the gold drafts in
circulation are no longer redeemable to gold coins.
These were, however, exchangeable into US Dollars. In
1935, new types of coins were circulated, this time
bearing the coat of arms of the Philippine
Commonwealth, replacing the arms of the US territories
on the reverse of coins.
Japanese Occupation
When World War II sparked in 1942 and the Japanese
occupied the Philippines, the Philippine monetary
system was put into a crisis. The Japanese forces
brought with them a great amount of paper bills called
Japanese War Notes, fiat money that had no reserves
nor was it backed up by any government asset. People
were forced to accept these bills, later on dubbed as the
“mickey mouse money”, as there was no control in its
issuance. This later on posed a negative effect to the
Philippine currency as it experienced hyperinflation.
Aside from the mickey mouse bills circulated by the
Japanese, Filipino guerrillas in provinces and
municipalities chose to produce their own guerrilla
notes or resistance currencies. Using only crude inks
and materials, local banks and governments issued
these emergency circulating notes that were to be
redeemable in silver pesos after the war. However, Jose
P. Laurel’s puppet presidency declared the production
and possession of the guerrilla currency illegal, with
consequences of arrest and worse, execution. In spite of
this, the Philippine Commonwealth forces together with
the US military forces continued to produce Philippine
pesos.
When the Japanese occupation ended and the
Philippines was finally left on its own, all the fiat money
they issued were no longer recognized, and the only
legal tended left in circulation was the Philippine peso.
Philippine Managed Currency System
Now a free country, the Philippines took on a managed
currency system and established the Central Bank of the
Philippines to administer the banking and monetary
system of the country, under the Republic Act No. 265
creating the central bank, all powers related to the
printing and mintage of the Philippine currency
belonged to the central bank and the central bank only,
taking away the rights of banks in issuing currency, such
as the Bank of the Philippine Islands and the Philippine
National Bank.
Following the events of the Second World War, the
Filipinos used old treasury certificates overprinted with
the word “Victory”. The first official currencies issued by
the Central Bank were the English series notes printed
by the Thomas de la Ruse & Co., Ltd. In England and the
coins minted at the US Bureau of Mint. It was not until
the late 60’s when the Central Bank ordered the
changes of the coins and paper money in use, giving
birth to the Pilipino coin and paper money series. Coins
were given Filipino names instead of English
terminologies in 1967, followed by the paper money in
1969.
When Ferdinand Marcos declared the Martial Law in
effect in 1972, the Central Bank of the Philippines had
to adopt a Floating Rate or a managed float system. This
system had no fixed parity commitments versus the
dollar and allowed the peso to seek its own level in
relation to foreign currencies depending on the demand
and supply of each foreign currency. This triggered
inflation and exchange rates to be unstable, with the
Central Bank’s lack of independence from the
government and the government’s fiscal shortcomings.
In 1975, another currency series called the Ang Bagong
Lipunan was put into circulation and were printed in the
Security Printing Plant starting 1978. Just a few years, a
new coinage series was released: the Flora and Fauna
series.
In 1983, the Marcos administration suffered a
confidence crisis leading to investors backing out,
resulting to the dollar exchange rate shooting up from
₱11/$ to ₱20/$. The inflation it caused also doubled the
prices of goods and services.
The end of the Marcos administration and the end of
Martial Law signalled a new beginning for the
Philippines. Economic developments were flourishing in
the 90’s, paving the way to establishing a new central
bank. The Republic Act No 7653, the New Central Bank
Act, replaces the old Central Bank of the Philippines
with a new Bangko Sentral ng Pilipinas. The act
narrowed down and streamlined the specific objectives
of the Bangko Sentral, such as maintaining price
stability and enjoying fiscal and administrative
autonomy to keep it from government interference.
Various foreign exchange regulations were also put into
place.
The New Generation Currency
In December of 2010, the Bangko Sentral ng Pilipinas
released the new banknotes produced by the central
bank into circulation. The change was made according
to practice to help guard against counterfeits. Central
banks usually change currency designs every 10 years
on average to protect the integrity of the country’s
currency.
All six banknotes – 20, 50, 100, 200, 500, and 1000 –
were given a redesign, but their sizes were retained.
The BSP made the redesigns as user-friendly as possible,
retaining the overall colors of the old banknotes. In this
case, the 20 peso bill remained orange, the 50 peso bill
remained red, the 100 peso bill remained violet, 200
peso in green, 500 peso in yellow, and 1000 peso in
blue. They also added big digits of the denominational
value on both sides of the new bill.
All these redesigning concepts were studied and
proposed by the BSP’s Numismatic Committee, along
with the upgrades in the security features of the
country’s currency. The Monetary Board then approved
the concepts and submitted it to the President for a
final approval. For the New Generation banknotes, the
Numismatic Committee consulted with Filipino design
groups on what concepts to integrate on the new
designs, acquiring inspiration from national historical
events and culture.
The New Generation banknotes feature Filipinos such as
the heroes along with world heritage sites and iconic
natural wonders found in the Philippines. These
banknotes are also equipped with four levels of security
authentication, making it more complicated to be
counterfeited.
Level 1: Security features which can be easily
recognized by the public without use of special
instruments. These are the “look, feel, tilt” elements in
the notes such as watermarks, security thread, security
fibers, and others.
Level 2: Security features recognizable by professional
cash handlers/bank tellers with the use of magnifying
lens or ultraviolet light. Examples are fluoro-
phosphorescent features, security fibers, and
microprinting.
Level 3: The hidden or covert security features reserved
for the use of the Bangko Sentral.
Level 4: Forensic security features for the use of law
enforcers in testifying whether a banknote is genuine or
counterfeit. These are detectable at specialized
laboratories.
Recent Monetary Issues Since the 90’s, the Philippine
monetary system has been generally stable, but not
without a few issues here and there. Most of these
issues deal with misprints, fraud, and inflation.
• About 78 million 100-peso notes were printed in 2005
with the misspelled name of former president Gloria
Macapagal Arroyo. The notes were printed with
“Arrovo” instead of “Arroyo” and was only found out
when about 2 million of these notes have been out for
circulation.
• In August of 2006, the fact that the 1-peso coin has
the same size as a UAE dirham coin and a US quarter
became popular.
• In 2010, the New Generation Currency Series printed
scientific names in an incorrect manner, and were only
addressed in the 2017 revisions.
• A 100-peso banknote without the face of former
president Manuel Roxas went viral in 2017. The BSP said
that it was nothing but a rare misprint.
Chapter 5: Philippine Monetary Policy
When the Philippines established the Central Bank, it
also established its own monetary policy. The monetary
policy refers to the measures or actions taken by the
central bank to influence the general price level and the
level of liquidity in the economy. It encompasses all
actions made by the central bank in managing the
country’s money supply in the form of credit, cash,
checks, and money market mutual funds.
It is how the government controls the supply and
availability of money, the cost of money, and the rate of
interest. Monetary policy is one of the two ways a
country’s government can influence the economy, with
the other one being Fiscal Policy.
Monetary policy manages economic growth and
inflation by balancing liquidity. To further economic
growth, it increases liquidity. On the other hand, to
prevent inflation, it reduces liquidity. Monetary policies
work mostly around credit, including loans, mortgages,
and bond. Central banks use interest rates, reserve
requirements, and bond amounts that banks must hold
in influencing how much a bank can lend, and therefore
influencing the money supply in other forms.
Objectives of Monetary Policies
Generally, central banks have three monetary policy
objectives, with specific targets for each varying from
one country to another.
• Managing inflation
• Reducing unemployment
• Promoting moderate long-term interest rates
There are two settings or types of monetary policy that
are specific to meeting these objectives. The first one is
the contractionary monetary policy. This is used by
central banks to reduce inflation, wherein they reduce
the money supply by restricting the amount of money
banks can lend. This then leads to banks charging higher
interest rates and increase loan fees. This type of
monetary policy slows down growth as fewer
businesses and individuals borrow from banks.
The other type is the expansionary monetary policy. The
aim of this setting is to lower unemployment rates and
to avoid recession. This setting does the opposite: it
intends to increase the level of liquidity or money
supply by giving banks more money to lend out. With
the high supply of money, banks could lower their
interest rates and make loans cheaper. This then
attracts more businesses to borrow money for business
and operations expansion, along with individuals
looking to borrow money for personal development.
This setting increases demand and increases economic
growth; however, this also could result in a relatively
higher inflation path for the economy.
In the Philippines, the primary objective is promoting a
low and stable inflation conducive to a balanced and
sustainable economic growth.
Philippine Monetary Policy
As assigned by the Republic Act No. 265, the authority
to provide policy directions in the monetary, banking,
and credit systems of the Philippines is given to the
Bangko Sentral ng Plipinas. It exists to supervise
operations of banks and to regulate the non-bank
financial institutions, as well as to keep aggregate
demand from growing rapidly or growing too slowly.
Over the years, the primary objective of the monetary
policy set by the BSP is price and inflation stability,
leading the country to a balanced economic growth.
The first Philippine monetary framework from the
1980s followed a monetary aggregate targeting
approach in its monetary policy. This approach believed
that the relationship between money, output, and
inflation is stable and predictable, particularly that
changes in money supply is related to price changes or
inflation. With the money aggregate targeting
approach, the BSP is assumed to be able to determine
the level of liquidity necessary for the ideal inflation
level that would be consistent with the growth
objective. Under this monetary framework, the BSP
directly controls or targets the money supply, resulting
to it indirectly controlling inflation.
In June of 1995, the BSP adopted a modified monetary
framework, wherein the previous sole money aggregate
targeting is now complemented by inflation targeting
with an emphasis on price stability. These changes
included allowing base money levels to go beyond
targets as long as inflation rates are met and
establishing an operation to bring down the base
money level whenever an excess of one or more
percentage points in the inflation rate is observed.
Under this new framework, the BSP ensures that price
levels are stable even with occasional economic shocks.
It was in January of 2002 when the Bangko Sentral ng
Pilipinas formally adopted the inflation targeting
framework as its sole monetary policy. This allows the
central bank to focus on keeping the inflation rate on an
optimal stable and low level that would then allow the
country to grow its economy. The ideal inflation rate is
measured through the Consumer Price Index, as the
ultimate end goal of the monetary policy under the
inflation targeting framework is price stability.
Under the inflation targeting framework, the central
bank establishes an explicit inflation target and commits
to achieving it in a given time period. The central bank
then uses various instruments to achieve this target,
and in the event that they fail, it is obligated to provide
a public explanation and come up with measures on
how to meet the inflation target again.
The important features of the inflation targeting
approach are as follow, according to BSP:
• simple framework which can, therefore, be easily
understood by the public;
unless these are necessary to achieve the goals of price
stability.
• Central bank independence The central bank must be
able to conduct monetary policy without political
interference. It must be able to use whatever monetary
policy instrument is needed to achieve price stability.
The central bank should also have fiscal independence,
i.e., it must not be constrained by the need to finance
the fiscal deficit.
• Good forecasting ability
The central bank should have a good statistical model
for forecasting inflation.
• Transparency

The central bank should promote transparency by

• allows greater focus on the goal of price stability,
communicating clearly to the public its policy actions
which is the primary mandate of the BSP;
and the reasons behind them.
• forward-looking and recognizes that monetary policy
• Accountability
actions affect inflation with a lag;
There should be accountability on the part of the
• reflects a comprehensive approach to policy by taking
central bank should actual inflation deviate from the
into consideration the widest set of available
target.
information about the economy;
• Sound financial system
• promotes transparency in the conduct of monetary
policy through the announcement of targets and the The financial system should be fundamentally sound to
reporting of measures that the BSP will adopt to attain make monetary policy more effective in influencing
these targets, as well as the outcomes of its policy output and prices. The financial system acts as the
decisions; intermediary by which the BSP influences the supply of
money and credit in the economy.
• increases the accountability of monetary authorities
to the inflation objective since the announced inflation Interest Rate Corridor System
target serves as a yardstick for the performance of the
In June 3, 2016, the Bangko Sentral shifted to a new
BSP, and thus helps build its credibility; and
monetary operation in order to improve the
• does not depend on the assumption of a stable transmission of monetary policy. This new operation is
relationship between money, output and prices, and the interest rate corridor system.
can still be implemented even when there are shocks
that could weaken the relationship. This approach is
deemed successful if it adheres to the following
preconditions set by the BSP:

• Firm commitment to price stability The primary

objective of the central bank is to maintain price
stability that is conducive to a balanced and sustainable
economic growth. As such, the central bank should not
be bound by multiple objectives such as financing the
government’s deficit, keeping the exchange rate at a The interest rate corridor system is a system for guiding
given level, or other policy agenda of the government short-term market interest rates towards the central
bank target. It consists of a rate at which the central
bank lends to banks and a rate at which it takes
deposits from them. In a standard corridor, the lending
rate will be above the central bank target/policy rate
(thereby forming an upper bound for short-term market
rates), and the deposit rate will be below the central
bank rate, thereby forming the lower bound.
The IRC system is intended to help ensure that money
market interest rates move within a reasonably close
range around the BSP’s policy rate. The close
relationship between the policy rate and market
interest rates provides the fundamental basis for
monetary policy transmission. Through the IRC system,
the BSP is able to generate a more effective policy
signal as market rates closely track the policy target
rate.
Upon implementation of the IRC system, the use of a
narrow corridor combined with auction-type liquidity
operations will help the BSP to influence short-term
market interest rates to move closely with the BSP
policy rate, in the process strengthening the
transmission of changes in the monetary policy stance
to the rest of the economy.
Over time, the IRC is expected to aid in the further
development of Philippine capital markets by fostering
money market transactions and active liquidity
management by Philippine banks. Increased trading in
money markets will strengthen the price discovery
process in money markets, by providing participants
and monetary authorities alike with information on the
prevailing cost of and demand for liquidity in the
financial system. This, in turn, will promote the
establishment of more accurate interest rate
benchmarks that will help facilitate the effective and
efficient pricing of financial products in the domestic
market. The proposed reform in the monetary
operations framework is also in line with international
best practice in monetary policy operations.
The shift to the IRC system does not represent a change
in the BSP’s stance of monetary policy. The IRC reforms
are primarily operational in nature and are not intended
to materially affect prevailing monetary policy settings
upon implementation. In the initial stages, the TDF is
expected to have a rate between that of the RRP and
overnight deposit facility such that the weighted rate
for monetary operations will remain broadly the same.
Moreover, the interest rate at the floor of the corridor,
where the bulk of the BSP’s liquidity absorption with
the market currently takes place, is being kept steady at
the launch of the IRC system. At the same time, short-
term liquidity conditions are expected to remain
broadly unchanged as funds will continue to be
absorbed through monetary operations under the IRC
system. In conducting monetary operations, the BSP will
calibrate carefully the volume of the TDF offerings to
achieve a smooth transition to the new system.
Money market activity is expected to increase over time
as the scale of BSP active monetary operations, through
the TDF, expands in the course of IRC implementation.
The rise in TDF volumes and the resulting adjustment in
money market rates along with increased activity in the
money markets will in turn help support the price
discovery process and the establishment of more
accurate interest rate benchmarks, thus allowing the
yield curve to adjust appropriately.
The transition to the new monetary operations regime
is expected to be gradual. Money market rates are not
expected to rise significantly in the early phase of IRC
implementation, given the ample liquidity in the
financial system. Over time, however, as the scale of
BSP’s active monetary operations (i.e., auction volumes
in the TDF) increases, short-term money market rates
are expected to rise gradually, tracking the BSP
policy/target rate more closely. Interest rates in the
primary Tbill market over time are also expected to
gradually align with shortterm market rates.
The BSP believes that, in the long term, the interest rate
corridor system will support capital market
development by encouraging more interbank
transactions as well as facilitating price discovery and
providing benchmarks for short-term interest rates.
These developments in turn can also serve to improve
the overall market conditions for funding by the
corporate sector.
Money Supply Indicators
Central banks use money supply indicators to predict
future behaviour of prices and making plans according
to the current economic activity. These money supply
indicators are also used by economists for trend
forecasting for consumer price inflation. Using these
indicators, the government can decide on what action
they are to take to stimulate the economy or control an
economic crisis.
• M1: Narrow Money
Narrow money is money in circulation. This includes
cash circulating among the people, both in coins and
bills, peso demand deposits, tourist checks from non-
bank issuers, and other currency in check form. Narrow
money encompasses all funds readily available for
spending and is the base measurement of the money
supply.
• M2: Broad Money
Broad money encompasses all that M1 does, along with
peso savings deposits, time deposits, and mutual funds
balances.
• M3: Broad Money
Liabilities This indicator includes M2 money supply
along with money substitutes, i.e., promissory notes
and commercial papers.
• M4: Liquidity
Money Liquidity money includes all of M3 along with
transferable deposits, treasury bills, and deposits held
in foreign currency, which are all short-term and highly
liquid.
If the variety in the M1 and M2 stock is low, this means
that there is an excess amount of money held by
consumers themselves and not being put into
circulation that much.
Monetary Policy Instruments
In order for the BSP to make use of the money supply
indicators and achieve the inflation target, it utilizes a
variety of instruments to implement its monetary
stance.
• Open Market Operations
o This is the sale or purchase of government securities
by the Bangko Sentral to withdraw or inject liquidity
into the system. Open Market Operations consist of the
following:
 Repurchase and Reverse Repurchase
• This is carried out through the Repurchase Facility and
Reverse Purchase Facility of the Bangko Sentral ng
Pilipinas. In Purchase transactions, the Bangko Sentral
buys government securities with a dedication to sell it
back at a specified future date, and at a predetermined
interest rate. The BSP's payment increases reserve
balances and expands the monetary supply in the
Philippines. On the other hand, in Reverse Repurchase,
the government acts as the seller, and works to
decrease the liquidity of money. These transactions
usually have maturities ranging from overnight to one
month.
• With the implementation of the IRC system, the RRP
facility was transformed into an overnight facility and
offered using a fixed-rate and full-allotment method,
where individual bidders are awarded a portion of the
total offer depending on their bid size. Fixed-rate, full
allotment method will help ensure that the overnight
rate sits close to the BSP policy rate.
 Outright Transaction
• Unlike the repurchase or reverse repurchase, there is
no clear intent by the government to reverse the action
of their selling/buying of monetary securities. Thus, this
transaction creates a more permanent effect on our
monetary supply. “When the BSP buys securities, it pays
for them by directly crediting its counterparty's Demand
Deposit Account with the BSP.” The reverse is done
upon the selling of securities.
 Foreign Exchange Swaps
• This refers to the actual exchange of two currencies at
a specific date, at a rate agreed upon the deal date and
the reverse exchange of the currencies at a farther ate
in the future, also at an interest rate agreed on deal
date.
• Acceptance of Fixed-Term Deposits
o This method was introduced by the BSP in 1998 to
expand its liquidity management. In the Special
Deposits Account, or SDA, consists fixed terms deposits
by banks and institutions affiliated with the BSP. With
the adoption of the IRC system in 2016, the SDA facility
was replaced by the term deposit auction facility (TDF).
o The TDF is a key liquidity absorption facility used by
the BSP for liquidity management and used to withdraw
a large part of the structural liquidity from the financial
system to bring market rates closer to the BSP policy
rate.
• Standing Liquidity Facilities
o The BSP offers standing liquidity (lending and deposit)
windows that help counterparties adjust their liquidity
positions at the end of the day. These standing
overnight facilities are available on demand to qualified
counterparties during BSP business hours. The two
standing facilities that form the upper and lower bound
of the corridor are set at ± 50 basis points (bps) around
the target policy rate (the overnight RRP rate under the
new IRC structure).
o The standing overnight liquidity facilities are available
on demand to qualified counterparties. The overnight
lending facility (equivalent to RP in the old system) is, in
principle, not constrained in volume but, in practice,
depends mainly on the available collateral held by BSP
counterparties. Meanwhile, the overnight deposit
facility is, likewise, unlimited in volume to help absorb
any residual system liquidity and constrain market rates
from falling below the corridor.
• Term Deposit Facility
o The Term Deposit Facility is a key liquidity absorption
facility, commonly used by CBs for liquidity
management. The TDF is used to withdraw a large part
of the structural liquidity from the financial system to
bring market rates closer to the BSP policy rate.
o The BSP offers two tenors—seven days and 28 days—
in its term deposit. The possibility of offering longer
tenors can be considered in the future, depending on
the liquidity needs and preferences of the market. Pre-
termination is prohibited for the 7-day tenor but is
allowed for the 28-day tenor after a 7-day holding
period at the appropriate pre-termination rate. The TDF
auction will be operated using a variable-rate,
multipleprice tender (English auction) in order to bring
shortterm interest rates within a reasonably close range
to the policy rate.
• Rediscounting
o The BSP extends discounts, loans and advances to
banking institutions in order to influence the volume of
credit in the financial system. The rediscounting facility
allows a financial institution to borrow money from the
BSP using promissory notes and other loan papers of its
borrowers as collateral.
o The rediscounting facility has two categories namely,
Peso Rediscount Facility and Exporters Dollar and Yen
Rediscount Facility. The Peso Rediscount Facility
interest rates are based on the latest available BSP
overnight lending rate plus the applicable term premia
per Circular No. 964 dated 27 June 2017. The EDYRF
interest rates are based on the 90-day London
InterBank Offered Rate for the last working day of the
immediately preceding month plus 200 basis points plus
the applicable term premia for loan maturities
exceeding 90 days pursuant to Circular No. 807 dated
15 August 2013.
• Reserve Requirements
o In banking institutions, there are required amounts
that banks cannot lend out to people. They always need
to maintain a certain balance of money, which are
called "reserves". Once these reserve requirements are
changed and are varied, changes in the monetary
supply will be observed greatly.
o Reserve requirements refer to the percentage of bank
deposits and deposit substitute liabilities that banks
must set aside in deposits with the BSP which they
cannot lend out, or where available through
reserveeligible government securities. Changes in
reserve requirements have a significant effect on
money supply in the banking system, making them a
powerful means of liquidity management by the BSP.
o Reserve requirements are imposed on the peso
liabilities of universal/commercial banks, thrift banks,
rural banks and cooperative banks, and non-bank
financial institutions with quasi-banking functions.
Reservable liabilities include demand, savings, time
deposit and deposit substitutes (including long-term
non-negotiable tax-exempt certificates of time
deposits).
Fiscal Policy
In order to achieve certain goals, the government
utilizes the existing monetary policy together with a
fiscal policy. Fiscal policy are measures employed by
governments to stabilize the economy, specifically by
manipulating the levels and allocations of taxes and
government expenditures.
The government funds itself by putting tax systems in
place, mainly from personal and income tax collections.
It also gets revenue through fees and licenses,
privatization proceeds, and income from other
government operations and state-owned enterprises,
which are all non-tax revenues. To finance fiscal deficit
and debt, the Philippines relies on both domestic and
external sources.
Tax collections comprise the biggest percentage of
revenue collected. Its biggest contributor is the Bureau
of Internal Revenue, followed by the Bureau of
Customs. Tax effort as a percentage of GDP has
averaged at roughly 13% for the years 2001-2010.
On the other hand, income tax is a tax on a person's
income, wages, and profits arising from property,
practice of profession, conduct of trade or business or
any stipulated in the National Internal Revenue Code of
1997, less any deductions granted. Income tax in the
Philippines is a progressive tax, as people with higher
incomes pay more than people with lower incomes. In
2008, Republic Act No. 9504 (passed by then-President
Gloria Macapagal-Arroyo) exempted minimum wage
earners from paying income taxes.
In 2018, the Tax Reform for Acceleration and Inclusion
Act or the TRAIN law was implemented. This law
reduced tax rates, simplified the tax system, expanded
the VAT base, and put excise tax on sugar, automobiles,
and petroleum products.
Another tax system where the government sources
revenue is the Expanded Value Added Tax (E-VAT), a
form of sales tax that is imposed on the sale of goods
and services and on the import of goods into the
Philippines. It is a consumption tax and an indirect tax,
which can be passed on to the buyer. The current E-VAT
rate is 12% of transactions. Some items which are
subject to E-VAT include petroleum, natural gases,
indigenous fuels, coals, medical services, legal services,
electricity, non-basic commodities, clothing, non-food
agricultural products, domestic travel by air and sea.
The E-VAT has exemptions which include basic
commodities and socially sensitive products. Exemptible
from the E-VAT are:
1. Agricultural and marine products in their original
state (e.g. vegetables, meat, fish, fruits, eggs and rice),
including those which have undergone preservation
processes (e.g. freezing, drying, salting, broiling,
roasting, smoking or stripping);
2. Educational services rendered by both public and
private educational institutions;
3. Books, newspapers and magazines;
4. Lease of residential houses not exceeding ₱10,000
monthly;
5. Sale of low-cost house and lot not exceeding ₱2.5
million
6. Sales of persons and establishments earning not
more than ₱1.5 million annually.
Aside from taxes and the E-VAT, the government also
sources its revenues from collections made by the
Bureau of Customs. The BOC imposes tariffs and duties
on all items imported into the Philippines. The
government also funds itself through non-tax revenue,
such as income from the Bureau of Treasury. The
Bureau of Treasury manages the finances of the
government, by attempting to maximize revenue
collected and minimize spending. The bulk of non-tax
revenues comes from the BTr’s income. Under
Executive Order No.449, the BTr collects revenue by
issuing, servicing and redeeming government securities,
and by controlling the Securities Stabilization Fund
through the purchase and sale of government bills and
bonds.
Another source of non-tax revenue is privatization,
which is the transferring of ownership of a business,
enterprise, or agency from the public sector to that of a
private one or private non-profit organizations. Lastly,
there is the Philippine Amusement and Gaming
Corporation or PAGCOR. PAGCOR is a government-
owned corporation established in 1977 to incinerate
illegal casinos. PAGCOR is mandated to regulate and
license gambling, generate revenues for the Philippine
government through its own casinos and promote
tourism in the country.
Aside from these tax and non-tax revenue sources, the
government also uses other financing sources such as
the domestic and external sources.
External Sources of Financing are:
1. Program and Project Loans - the government offers
project loans to external bodies and uses the proceeds
to fund domestic projects like infrastructure,
agriculture, and other government projects.
2. Credit Facility Loans
3. Zero-coupon Treasury Bills
4. Global Bonds
5. Foreign Currencies
Domestic Sources of Financing are:
1. Treasury Bonds
2. Facility loans
3. Treasury Bills
4. Bond Exchanges
5. Promissory Notes
6. Term Deposits
Chapter 6: Central Banking Institutions
Central banks are essential in every country’s monetary
system. In order for the economy to function, central
banks are needed to manage and regulate the financial
operations of a nation.
Central banks were not even in existence until the
1900s. However, once these central banks were
established in the mid-1930s, more and more followed.
This rapid growth in the number of central banking
systems could be because of the increasing number of
independent nations needing their own monetary
systems, along with these countries abandoning the
international gold standard. With the development of
international relations and monetary affairs, a nation
needs a central bank to implement regulations and
supervision.
But what is Central Banking?
A central bank is a financial institution given privileged
control over the production and distribution of money
and credit for a nation or a group of nations. In modern
economies, the central bank is usually responsible for
the formulation of monetary policy and the regulation
of member banks.
Nature and Functions of Central Banks
Central banks are inherently non-market-based or even
anticompetitive institutions. Although some are
nationalized, many central banks are not government
agencies, and so are often touted as being politically
independent. However, even if a central bank is not
legally owned by the government, its privileges are
established and protected by law.
The critical feature of a central bank—distinguishing it
from other banks—is its legal monopoly status, which
gives it the privilege to issue bank notes and cash.
Private commercial banks are only permitted to issue
demand liabilities, such as checking deposits.
Central banking operations vary from country to
country, but they all have the same general duties and
functions:
• Issuing Currency
o Central banks control and manipulate the national
money supply: issuing currency and setting interest
rates on loans and bonds. Typically, central banks raise
interest rates to slow growth and avoid inflation; they
lower them to spur growth, industrial activity, and
consumer spending. In this way, they manage monetary
policy to guide the country's economy and achieve
economic goals, such as full employment.
o “The essence of central banking is discretionary
control of the monetary system.” In performing this
function, central banks exercise one of the prerogatives
and powers of the sovereign government. This means
that the power must be exercised primarily for the
achievement of national economic goals, and that a
central bank is a public service organization, placing the
national interest above any consideration of its own
profit or welfare.
• Regulating member banks
o Central banks regulate member banks through capital
requirements, reserve requirements (which dictate how
much banks can lend to customers, and how much cash
they must keep on hand), and deposit guarantees,
among other tools. They also provide loans and services
for a nation’s banks and its government and manage
foreign exchange reserves.
o In some countries a central bank, through its
subsidiaries, controls and monitors the banking sector.
Apart from refinancing, it also provides banks with family), and major European cities (multiple branches
services such as transfer of funds, bank notes and coins ran by the House of Rothschild). From these European
or foreign currency. Thus it is often described as the central banks stemmed the concept of central banking
"bank of banks". in other regions in the world. By the early part of the
20th century, central banks have been established in
• Acting as an emergency lender
Japan, Australia, Colombia, Mexico, Chile, Canada, India,
o A central bank also acts as an emergency lender, or a New Zealand, and eventually, the Philippines.
lender of last resort, to distressed commercial banks
Development of the Bangko Sentral ng Pilipinas
and other institutions, and sometimes even a
government. By purchasing government debt The notion of central banking in the Philippines was first
obligations, for example, the central bank provides a conceptualized by a group of Filipinos in 1933. They
politically attractive alternative to taxation when a came up with the idea of establishing a central bank
government needs to increase revenue. upon the passage of the Hare-Hawes Cutting bill, or the
bill detailing the Philippine independence.
History of Central Banks
Discussion on establishing a central bank in the
The first central banks that provided inspiration for the
Philippines continued on until the Commonwealth
modern central banking systems were mostly
period. Until then, the monetary system of the
established in Europe. The Bank of Amsterdam
Philippines was being regulated by the Department of
(Amsterdam Wisselbank), established in the Dutch
Finance and the National Treasury. When the Tydings-
Republic in 1609, was a forerunner to modern central
McDuffie Act was passed in 1939, it also established the
banks. The Wisselbank's innovations helped lay the
country’s first central bank. However, this move was
foundations for the birth and development of the
opposed and rejected by then US President Franklin D.
central banking system that now plays a vital role in the
Roosevelt.
world's economy. Along with a number of subsidiary
local banks, it performed many functions of a central Come 1946, after the Philippines was released from
banking system. The model of the Wisselbank as a state Japanese colonization, then president Manuel Roxas
bank was adapted throughout Europe. instructed then Finance Secretary Miguel Cuaderno Sr.
to draft a charter for a central bank. A year later and
In 1668, what is regarded as the world’s oldest central
based upon the findings of a committee headed by
bank was established by Johan Palmstruch. The Dutch-
Cuaderno, the Joint Philippine-American Finance
Latvian banker built the Sveriges Riksbank as Sweden’s
Commission, the establishment of a central bank was
central bank. However, it did not serve the function of
made into a priority. The findings stated that a shift
issuing currency until 1904.
from the dollar exchange standard to a managed
In the mid-1960s, when the money supply in England currency system was necessary to resolve the financial,
was short and low, Charles Montagu proposed the monetary, and fiscal problems of the country.
nation’s central banking system and established the
Roxas then created the Central Bank Council, a
Bank of England. The central bank was primarily
committee who then produced a draft of how the
established to fund William III’s government in the Nine
central bank in the Philippines would function. By June
Years’ War, and was able to raise the funds needed to
of 1948, Roxas’s successor Elpidio Quirino signed
rebuild the Navy by giving the bank exclusive possession
Republic Act No. 265, or the Central Bank Act of 1948.
of the government's balances, and was made to be the
Founding a central bank in the Philippines was just one
only limited-liability corporation allowed to issue
of the biggest marks of the country’s newfound national
banknotes.
sovereignty.
Other central banks were established earlier around
As with the ever-changing economy, revisions in the
Europe, mostly with the function of funding the wars,
central bank charter were needed to be made over the
like the Banque de France built by Napoleon and the
years. In November of 1972, changes to the charter
family-ran central banks in Germany (ran by the
were made in accordance with Presidential Decree No.
Oppenheim family), Switzerland (ran by the Hottinguer
72, which detailed the recommendations of the Joint
IMFCB Banking Survey Commission. The commission
recommended revisions in the Central Bank’s
objectives, policy-making structure, scope of authority,
and procedures for regulating financial institutions.
A year later, when the 1973 Constitution was
established, the National Assembly was mandated to
create an independent money authority. Through
Presidential Decree 1801, this authority was given to
the Central Bank of the Philippines.
In 1993, President Fidel V. Ramos signed the Republic
Act No. 7653, or the New Central Bank Act. This act
gave independence and fiscal autonomy as a money
authority to the central bank and renamed it into what
it is known today, the Bangko Sentral ng Pilipinas. In this
Act, the primary objective of the country’s central bank
– which was only implied in the old central bank
provision – was explicitly stated: price stability. The
New Central Bank Act took effect on July 3, 1993.
Central Banking in the Philippines: A Timeline
1900
Act No. 52 was passed by the First Philippine
Commission placing all banks under the Bureau of
Treasury. The Insular Treasurer was authorized to
supervise and examine banks and banking activities.
February 1929
The Bureau of Banking under the Department of
Finance took over the task of banking supervision.
1939
A bill establishing a central bank was drafted by
Secretary of Finance Manuel Roxas and approved by the
Philippine Legislature. However, the bill was returned
by the US government, without action, to the
Commonwealth Government.
1946
A joint Philippine-American Finance Commission was
created to study the Philippine currency and banking
system. The Commission recommended the reform of
the monetary system, the formation of a central bank
and the regulation of money and credit.
The charter of the Central Bank of Guatemala was
chosen as the model of the proposed central bank
charter.
August 1947
A Central Bank Council was formed to review the
Commission’s report and prepare the necessary
legislation for implementation.
February 1948
President Manuel Roxas submitted to Congress a bill
“Establishing the Central Bank of the Philippines,
defining its powers in the administration of the
monetary and banking system, amending pertinent
provisions of the Administrative Code with respect to
the currency and the Bureau of Banking, and for other
purposes.
15 June 1948
The bill was signed into law as Republic Act No. 265
(The Central Bank Act) by President Elpidio Quirino.
3 January 1949
The Central Bank of the Philippines (CBP) was
inaugurated and formally opened with Hon. Miguel
Cuaderno, Sr. as the first governor. The broad policy
objectives contained in RA No. 265 guided the CBP in
the implementation of its duties and responsibilities,
particularly in relation to the promotion of economic
development in addition to the maintenance of internal
and external monetary stability.
November 1972
RA No. 265 was amended by Presidential Decree No. 72
to make the CBP more responsive to changing economic
conditions.
PD No. 72 emphasized the maintenance of domestic
and international monetary stability as the primary
objective of the CBP. Moreover, the CBP’s authority was
expanded to include not only the supervision of the
banking system but also the regulation of the entire
financial system.
January 1981
Further amendments were made with the issuance of
PD No. 1771 to improve and strengthen the financial
system, among which was the increase in the
capitalization of the CBP from P10 million to P10 billion.
1986
Executive Order No. 16 amended the Monetary Board
membership to promote greater harmony and
coordination of government monetary and fiscal
policies.
14 February 2019
Republic Act No. 11211 was passed amending RA No.
7653. The charter amendments bolster the capability of
the BSP to safeguard price stability and financial system
stability.
The Bangko Sentral ng Pilipinas
Pursuant to the provisions of the 1987 Constitution and
the New Central Bank Act of 1993, the Bangko Sentral
ng Pilipinas was established on 3 July 1993. Because of
the New Central Bank Act, the BSP now enjoys the
power of being the country’s central money authority
along with fiscal and administrative autonomy from the
National Government. As mandated in the New Central
Bank Act, the BSP was created with a capital of Fifty
billion pesos.
The Bangko Sentral ng Pilipinas operates on the
following core values:
• Excellence – Consistently doing their best to master
their craft, continually improving our competencies, and
learning new things in pursuit of the organizational
goals, comparable to the best practices of other central
banks
• Patriotism – Selfless commitment to the service of the
Filipino people and the country
• Integrity – Performing mandate with sincerity,
honesty, and uprightness, worthy of respect and
emulation from others
• Solidarity – Performing with team spirit; acting and
thinking as one in the pursuit of common goals and
objectives
• Accountability – Taking full responsibility for one’s or
group’s actions
The Act also mandated the BSP with the following
responsibilities: provide policy directions in the areas of
money, banking, and credit; supervise the operations of
banks; exercise regulatory powers and other pertinent
laws over the operations of finance companies and non-
bank financial institutions performing quasi-banking
functions and institutions performing similar functions.
It is the responsibility of the BSP:
1. to provide policy directions in the areas of money,
banking, and credit;
2. to supervise the operations of the banks and to
exercise such regulatory and examination powers as
provided under Republic Act No. 11211 (The New
Central Bank Act, as amended) and other pertinent laws
over the quasi-banking operations of nonbank financial
institutions; and
3. to exercise regulatory and examination powers over
money service businesses, credit grating businesses,
and payment system operators.
The BSP was established to meet the primary objective
of maintaining price stability conducive to a balanced
and sustainable growth of the economy. It shall also:
1. promote and maintain monetary stability and the
convertibility of the peso;
2. promote financial stability and closely work with the
National Government, including, but not limited to, the
Department of Finance, the Securities and Exchange
Commission, the Insurance Commission, and the
Philippine Deposit Insurance Corporation;
3. oversee the payment and settlement systems in the
Philippines, including critical financial market
infrastructures, in order to promote sound and prudent
practices consistent with the maintenance of financial
stability; and
4. promote broad and convenient access to high quality
financial services and consider the interest of the
general public
Chapter 7: Central Banking Authority
The Monetary Board
The Bangko Sentral is governed by a Monetary Board
consisting of seven members appointed by the
President of the Philippines. Under the New Central
Bank Act, one of the government sector members of
the Monetary Board must also be a member of the
Cabinet designated by the President.
The New Central Bank Act also established certain
qualifications for the members of the Monetary Board,
along with prohibiting members from holding certain
positions with other governmental agencies and private
institutions that may give rise to conflicts of interest.
With the exception of the members of the Cabinet, the
Governor and the other members of the Monetary
Board serve terms of six years and may only be
removed for cause. No member of the Monetary Board
may be reappointed more than once.
The seven members of the Monetary Board are the
following:
• The Governor of the Bangko Sentral, who shall be the
Chairman of the Monetary Board.
o The Governor of the Bangko Sentral shall be head of a
department and his appointment shall be subject to
confirmation by the Commission on Appointments.
Whenever the Governor is unable to attend a meeting
of the Board, he shall designate a Deputy Governor to
act as his alternate, provided that in such event, the
Monetary Board shall designate one of its members as
acting Chairman.
• A member of the Cabinet to be designated by the
President of the Philippines.
o Whenever the designated Cabinet Member is unable
to attend a meeting of the Board, he shall designate an
Undersecretary in his Department to attend as his
alternate.
• Five (5) members who shall come from the private
sector
o All of whom shall serve full-time – provided, however,
that of the members first appointed under the
provisions of this subsection, three shall have a term of
six years, and the other two, three years.
Board Membership
In accordance with the New Central Bank Act, any
vacancy in the Monetary Board created by the death,
resignation, or removal of any member shall be filled by
the appointment of a new member to complete the
unexpired period of the term of the member
concerned.
The following are the qualification requirements of
board members:
• Must be natural-born citizens of the Philippines
• At least 35 years of age, with the exception of the
Governor who should be at least 40 years old
• Of good moral character
• Of unquestionable integrity
• Of known probity and patriotism
• With recognized competence in social and economic
disciplines
The members of the Monetary Board coming from the
private sector shall not hold any other public office or
public employment during their tenure. As such, they
are disqualified from being a director, officer,
employee, consultant, lawyer, agent or stockholder of
any bank, quasibank or any other institution which is
subject to supervision or examination by the Bangko
Sentral, in which case such member shall resign from,
and divest himself of any and all interests in such
institution before assumption of office as member of
the Monetary Board.
No person shall be a member of the Monetary Board if
he has been connected directly with any multilateral
banking or financial institution or has a substantial
interest in any private bank in the Philippines, within
one year prior to his appointment; likewise, no member
of the Monetary Board shall be employed in any such
institution within two years after the expiration of his
term except when he serves as an official
representative of the Philippine Government to such
institution
As they are appointed by the President, they can also be
removed from the board by the President. This could
happen in the event of any of the following:
• If the member is subsequently disqualified under the
qualification requirements;
• If he is physically or mentally incapacitated that he
cannot properly discharge his duties and responsibilities
and such incapacity has lasted for more than six
months;
• If the member is guilty of acts or operations which are
of fraudulent or illegal character or which are manifestly
opposed to the aims and interests of the Bangko
Sentral; or
• If the member no longer possesses the qualifications
required.
Powers of the Monetary Board
The Monetary Board has the following powers in
exercising its authority:
1. Issue rules and regulations it considers necessary for
the effective discharge of the responsibilities and
exercise of the powers vested upon the Monetary
Board and the Bangko Sentral;
2. Direct the management, operations, and
administration of the Bangko Sentral, reorganize its
personnel, and issue such rules and regulations as it
may deem necessary or convenient for this purpose.
The legal units of the Bangko Sentral shall be under the
exclusive supervision and control of the Monetary
Board;
3. Establish a human resource management system
which shall govern the selection, hiring, appointment,
transfer, promotion, or dismissal of all personnel. Such
system shall aim to establish professionalism and
excellence at all levels of the Bangko Sentral in
accordance with sound principles of management. A
compensation structure, based on job evaluation
studies and wage surveys subject to the Board's
approval, shall be instituted as an integral component
of the Bangko Sentral's human resource development
program. On the recommendation of the Governor,
appoint, fix the remunerations and other emoluments,
and remove personnel of the Bangko Sentral, subject to
pertinent civil service laws: Provided, That the
Monetary Board shall have exclusive and final authority
to promote, transfer, assign, or reassign personnel of
the Bangko Sentral and these personnel actions are
deemed made in the interest of the service and not
disciplinary, provided, further, that the Monetary Board
may delegate such authority to the Governor under
such guidelines as it may determine;
4. Adopt an annual budget for and authorize such
expenditures by the Bangko Sentral in the interest of
the effective administration and operations of the
Bangko Sentral in accordance with applicable laws and
regulations; and
5. Indemnify its members and other officials of the
Bangko Sentral, including personnel of the departments
performing supervision and examination functions
against all costs and expenses reasonably incurred by
such persons in connection with any civil or criminal
action, suit or proceedings to which he may be, or is,
made a party by reason of the performance of his
functions or duties, unless he is finally adjudged in such
action or proceeding to be liable for negligence or
misconduct.
The Governor and its Powers
As mandated by the New Central Bank Act, the
Governor shall be the chief executive officer of the
Bangko Sentral.
The Governor’s powers and duties are as follows:
• Prepare the agenda for the meetings of the Monetary
Board and to submit for the consideration of the Board
the policies and measures that he believes to be
necessary to carry out the purposes and provisions of
said Act;
• Execute and administer the policies and measures
approved by the Monetary Board;
• Direct and supervise the operations and internal
administration of the Bangko Sentral. The Governor
may delegate certain of his administrative
responsibilities to other officers or may assign specific
tasks or responsibilities to any fulltime member of the
Monetary Board without additional remuneration or
allowance whenever he may deem fit or subject to such
rules and regulations as the Monetary Board may
prescribe;
• Appoint and fix the remunerations and other
emoluments of personnel below the rank of a
department head in accordance with the position and
compensation plans approved by the Monetary Board,
as well as to impose disciplinary measures upon
personnel of the Bangko Sentral, provided that the
removal of personnel shall be with the approval of the
Monetary Board;
• Render opinions, decisions, or rulings, which shall be
final and executory until reversed or modified by the
Monetary Board, on matters regarding application or
enforcement of laws pertaining to institutions
supervised by the Bangko Sentral and laws pertaining to
quasi-banks, as well as regulations, policies or
instructions issued by the Monetary Board, and the
implementation thereof; and
• Exercise such other powers as may be vested in him
by the Monetary Board. As the principal representative
of the Bangko Sentral and the Monetary Board, the
Governor is also empowered to do the following duties:
• Represent the Monetary Board and the Bangko
Sentral in all dealings with other offices, agencies and
instrumentalities of the Government, and all other
persons or entities, public or private, whether domestic,
foreign or international;

• Sign contracts entered into by the Bangko Sentral,

notes and securities issued by the Bangko Sentral, all
reports, balance sheets, profit and loss statements,
correspondence, and other documents of the Bangko
Sentral;

• Represent the Bangko Sentral, either personally or

through counsel, including private counsel, as may be
authorized by the Monetary Board, in any legal
proceedings, action or specialized legal studies; and

• Delegate his power to represent the Bangko Sentral,

to other officers upon his own responsibility: Provided,
however, That in order to preserve the integrity and the
prestige of his office, the Governor of the Bangko
Sentral may choose not to participate in preliminary
discussions with any multilateral banking or financial
institution on any negotiations for the Government • Financial Supervision Sector (FSS)
within or outside the Philippines. During the
o mainly responsible for the regulation of banks and
negotiations, he may instead be represented by a
other BSP-supervised financial institutions, as well as
permanent negotiator.
the oversight and supervision of financial technology
In case of emergencies where time is insufficient to call and payment systems
a meeting of the Monetary Board, the Governor of the
• Monetary and Economics Sector (MES)
Bangko Sentral, with the concurrence of two other
members of the Monetary Board, may decide any o mainly responsible for the operations/activities
matter or take any action within the authority of the related to monetary policy formulation,
Board. The Governor shall submit a report to the implementation, and assessment
President and Congress within seventy-two hours after
• Currency Management Sector (CMS)
the action has been taken. At the soonest possible time,
the Governor shall call a meeting of the Monetary o mainly responsible for the forecasting, production,
Board to submit his action for ratification. distribution, and retirement of Philippine currency, and
The Governor of the Bangko Sentral, with the approval the production of security documents, commemorative
of the Monetary Board, shall appoint not more than medals, and medallions
three Deputy Governors who shall perform duties as • Corporate Services Sector (CSS)
may be assigned to them by the Governor and the
Board. In the absence of the Governor, a Deputy o mainly responsible for the effective management of
Governor designated by the Governor shall act as chief corporate strategy and communications, as well as the
executive of the Bangko Sentral and shall exercise the BSP’s human, financial, technological, and physical
powers and perform the duties of the Governor. resources to support the BSP’s core functions

Whenever the Governor is unable to attend meetings of Domestic Monetary Stabilization

government boards or councils in which he is an ex
officio member pursuant to provisions of special laws, a
Deputy Governor as may be designated by the
Governor shall be vested with authority to participate
and exercise the right to vote in such meetings.
The Monetary Board manages any expansion or
contraction in monetary aggregates which is prejudicial
to the attainment or maintenance of price stability.
Whenever abnormal movements in the monetary
aggregates, in credit, or in prices endanger the stability
of the Philippine economy or its important sectors, the
Monetary Board shall act with the necessary action
from the following:
• take such remedial measures as are appropriate and
within the powers granted to the Monetary Board and
the Bangko Sentral; and
• submit to the President of the Philippines and the
Congress, and make public, a detailed report which shall
include, as a minimum, a description and analysis of:
o the causes of the rise or fall of the monetary
aggregates, of credit or of prices;
o the extent to which the changes in the monetary
aggregates, in credit, or in prices have been reflected in
changes in the level of domestic output, employment,
wages and economic activity in general, and the nature
and significance of any such changes; and
o the measures which the Monetary Board has taken
and the other monetary, fiscal or administrative
measures which it recommends to be adopted.
Whenever the monetary aggregates, or the level of
credit, increases or decreases by more than fifteen
percent or the cost of living index increases by more
than ten percent in relation to the level existing at the
end of the corresponding month of the preceding year,
or even though any of these quantitative guidelines
have not been reached when in its judgement the
circumstances so warrant, the Monetary Board shall
submit the reports mentioned and shall state therein
whether, in the opinion of the Board, said changes in
the monetary aggregates, credit or cost of living
represent a threat to the stability of the Philippine
economy or of important sectors thereof.
The Monetary Board shall then continue to submit
periodic reports to the President of the Philippines and
to Congress until it considers that the monetary, credit
or price disturbances have disappeared or have been
adequately controlled.
International Monetary Stabilization
The Bangko Sentral shall also exercise its powers to
preserve the international value of the peso and to
maintain its convertibility into other freely convertible
currencies primarily for, although not necessarily
limited to, current payments for foreign trade and
invisibles.
In order to maintain the international stability and
convertibility of the Philippine peso, the Bangko Sentral
maintains international reserves adequate to meet any
foreseeable net demands on the Bangko Sentral for
foreign currencies. In judging the adequacy of the
international reserves, the Monetary Board is guided by
the prospective receipts and payments of foreign
exchange by the Philippines. The Board gives special
attention to the volume and maturity of the Bangko
Sentral's own liabilities in foreign currencies, to the
volume and maturity of the foreign exchange assets and
liabilities of other banks operating in the Philippines
and, insofar as they are known or can be estimated, the
volume and maturity of the foreign exchange assets and
liabilities of all other persons and entities in the
Philippines.
The international reserves of the Bangko Sentral
includes gold and assets in foreign currencies, which can
be in the form of the following:
• documents and instruments customarily employed for
the international transfer of funds
• demand and time deposits in central banks, treasuries
and commercial banks abroad
• foreign government securities
• foreign notes and coins.
The Monetary Board commit to hold the foreign
exchange resources of the Bangko Sentral in freely
convertible currencies; moreover, the Board shall give
particular consideration to the prospects of continued
strength and convertibility of the currencies in which
the reserve is maintained, as well as to the anticipated
demands for such currencies. The Monetary Board shall
issue regulations determining the other qualifications
which foreign exchange assets must meet in order to be
included in the international reserves of the Bangko
Sentral.
The Bangko Sentral shall be free to convert any of the
assets in its international reserves into other assets.
Whenever the international reserve of the Bangko
Sentral falls to a level which the Monetary Board
considers inadequate to meet the prospective net
demands on the Bangko Sentral for foreign currencies,
or whenever the international reserve appears to be in
imminent danger of falling to such a level, or whenever
the international reserve is falling as a result of
payments or remittances abroad which, in the opinion
of the Monetary Board, are contrary to the national
welfare, the Monetary Board undertakes the following
actions:
• take such remedial measures as are appropriate and
within the powers granted to the Monetary Board and
the Bangko Sentral under the provisions of this Act; and
• submit to the President of the Philippines and to
Congress a detailed report which shall include, as a
minimum, a description and analysis of:
o the nature and causes of the existing or imminent
decline;
o the remedial measures already taken or to be taken
by the Monetary Board;
o the monetary, fiscal or administrative measures
further proposed; and
o the character and extent of the cooperation required
from other government agencies for the successful
execution of the policies of the Monetary Board.
If the resultant actions fail to check the deterioration of
the reserve position of the Bangko Sentral, or if the
deterioration cannot be checked except by chronic
restrictions on exchange and trade transactions or by
sacrifice of the domestic objectives of a balanced and
sustainable growth of the economy, the Monetary
Board then proposes to the President, with appropriate
notice to Congress, such additional action as it deems
necessary to restore equilibrium in the international
balance of payments of the Philippines.
The Monetary Board then submits periodic reports to
the President and to Congress until the threat to the
international monetary stability of the Philippines has
disappeared.
Present Officers of the BSP
The Monetary Board of the BSP under the presidency of
Rodrigo Duterte is comprised of the following members:
• Carlos G. Dominguez III
• Felipe M. Medalla
• Juan De Zuniga, Jr.
• Peter B. Favila
• Antonio S. Abacan, Jr.
• V. Bruce J. Tolentino
The current governor of the BSP, on the other hand, is
Benjamin E. Diokno, Ph.D. Diokno served as Budget
Secretary from 2016 to 2019. On his third tour of duty
at the Department of Budget and Management (DBM),
he pursued an expansionary fiscal policy to finance
investments in human capital development and public
infrastructure. He has extensive experience in
implementing reforms at the public sector, having also
served as Budget Undersecretary from 1986 to 1991
and Budget Secretary from 1998 to 2001.
Diokno also served as Fiscal Adviser to the Philippine
Senate. He also served as Chairman and CEO of the
Philippine National Oil Company (PNOC) and Chairman
of the Local Water Utilities Administration. His policy
expertise and research contribution extend to various
areas of public economics, such as the structure and
scope of government, tax policies and reforms, public
expenditure management analysis, fiscal
decentralization, national budget and public debt
among other topics.
Some of the major policy reform contributions of
Diokno include: providing technical assistance to the
1986 Tax Reform Program to simplify the income tax
system and introduce the value-added tax, helping
design the 1991 Local Government Code of the
Philippines, initiating a What-You-See-Is-What-You-Get
policy to streamline the release of funds, sponsoring the
internationally-lauded Government Procurement
Reform Act to modernize, regulate, and standardize
government procurement activities in the Philippines.
He served as an adviser and consultant to various
multilateral agencies like the World Bank, Asian
Development Bank, European Commission, and USAID
for work in the Philippines, China and transitioning
economies like Vietnam, Cambodia, and Mongolia.
Chapter 8: Functions and Operations of the Bangko
Sentral
Central banks are government established agencies
responsible for regulating the nation’s monetary supply
and credit conditions along with monitoring commercial
banks and other non-banking financial institutions.
Below are the characteristics of a central bank:
• Note Issue
o The main feature of a central bank is the issue of
currency notes in the country. The Central bank controls
the volume of currency in the country in accordance
with requirements of business and the general public.
• Banker to The Government
o The Central bank is the banker to the government and
also acts as its fiscal agent. The government keeps its
balances with it free of interest. It receives and
disburses the payments on behalf of the government
and also makes advances to the government.
• Banker’s Bank
o The Central bank also acts as the banker to the
scheduled and other banks. It is the custodian of the
cash reserves of the commercial banks. Every schedule
bank is required to maintain not less than 5% of its total
demand and time liabilities with the Central bank.
Against these obligations, the scheduled banks are
entitled to loan and rediscount facilities from the bank.
This reserve with the central is considered as good as
liquid cash. The provision of reserve enables the central
bank to have control over the credit creation of the
commercial banks.
• Lender of Last Resort
o The Central bank is the lender of last resort. It
maintains a close relationship with the commercial
banks. It takes the responsibility of meeting directly or
indirectly, all reasonable demands for accommodation
from the commercial banks, and other credit
institutions under certain terms and conditions.
• Controller of Credit
o One of the important functions of Central bank is to
regulate and control the credit in the country according
to the varying economic situations. Bank rate policy and
open market operations are the direct methods of
central bank for controlling credit. It can decrease or
increase reserve ratio & control the advances policy of
commercial banks.
• Adviser to The Government
o It also acts an adviser to government on financial and
economic matters. It provides an expert opinion on
matters relating to economic development or to
monetary conditions of the country.
• Clearing House
o The Central bank acts as the clearing house for other
banks. Under this function the Central bank facilitates
the settlement of bills and cheques of other banks by
setting off demands of one against other and thus helps
the functioning of the banking system so smoothly
without actual cash transactions.
• Controller of Foreign Exchange
o The Central bank is responsible for the management
of foreign exchange & maintaining external value of
nation’s currency. Functions of the BSP as a Central
Bank As mandated by the New Central Bank Act, the
Bangko Sentral ng Pilipinas operates on the following
functions as related to its functions as the central
monetary authority:
• Liquidity Management
The BSP formulates and implements monetary policy
aimed at influencing money supply consistent with its
primary objective to maintain price stability.
• Currency issue
The BSP has the exclusive power to issue the national
currency. All notes and coins issued by the BSP are fully
guaranteed by the Government and are considered
legal tender for all private and public debts.
• Lender of last resort
The BSP extends discounts, loans and advances to
banking institutions for liquidity purposes.
• Financial Supervision
The BSP supervises banks and exercises regulatory
powers over non-bank institutions performing quasi-
banking functions.
• Management of foreign currency reserves
The BSP seeks to maintain sufficient international
reserves to meet any foreseeable net demands for
foreign currencies in order to preserve the international
stability and convertibility of the Philippine peso.
• Determination of exchange rate policy
The BSP determines the exchange rate policy of the
Philippines. Currently, the BSP adheres to a market-
oriented foreign exchange rate policy such that the role
of Bangko Sentral is principally to ensure orderly
conditions in the market.
• Other activities
The BSP functions as the banker, financial advisor and
official depository of the Government, its political
subdivisions and instrumentalities and government-
owned and -controlled corporations.
Operations and Activities of the BSP
The New Central Bank Act also details the following
operations to be performed by the BSP:
• Research and Statistics
o The Bangko Sentral shall prepare data and conduct
economic research for the guidance of the Monetary
Board in the formulation and implementation of its
policies. Such data shall include, among others,
forecasts of the balance of payments of the Philippines,
statistics on the monthly movement of the monetary
aggregates and of prices and other statistical series and
economic studies useful for the formulation and
analysis of monetary, banking, credit and exchange
policies.
• Authority to Obtain Data and Information
o The Bangko Sentral shall have the authority to require
from any person or entity, including government offices
and instrumentalities, or government-owned or -
controlled corporations, any data, for statistical and
policy development purposes in relation to the proper
discharge of its functions and responsibilities. This is
provided that disaggregated data gathered are subject
to prevailing confidentiality laws. The Bangko Sentral
through the Governor or in his absence, a duly
authorized representative shall have the power to issue
a subpoena for the production of the books and records
for the aforesaid purpose. Those who refuse the
subpoena without justifiable cause, or who refuse to
supply the Bangko Sentral with data required, will be
subject to punishment for contempt in accordance with
the provisions of the Rules of Court.
o The authority of the Bangko Sentral to require data
from banks shall continue to be exercised pursuant to
its supervisory powers.
o Another thing to note is that data on individuals and
firms, other than banks, gathered by the Bangko Sentral
shall not be made available to any person or entity
outside of the Bangko Sentral whether public or private
except under order of the court or under such
conditions as may be prescribed by the Monetary
Board. This is provided, however, that the collective
data on firms may be released to interested persons or
entities.
• Training of Technical Personnel
o The Bangko Sentral shall promote and sponsor the
training of technical personnel in the field of money and
banking. Toward this end, the Bangko Sentral is hereby
authorized to defray the costs of study, at home or
abroad, of qualified employees of the Bangko Sentral, of
promising university graduates or of any other qualified
persons who shall be determined by proper competitive
examinations. The Monetary Board shall prescribe rules
and regulations to govern the training program of the
Bangko Sentral.
• Supervision and Examination
o The Bangko Sentral shall have supervision over, and
conduct regular or special examinations of banking
institutions and quasi-banks, including their subsidiaries
and affiliates engaged in allied activities
• Bank Deposits and Investments
o Any director, officer or stockholder who, together
with his related interest, contracts a loan or any form of
financial accommodation from: (1) his bank; or (2) from
a bank (a) which is a subsidiary of a bank holding
company of which both his bank and the lending bank
are subsidiaries or (b) in which a controlling proportion
of the shares is owned by the same interest that owns a
controlling proportion of the shares of his bank, in
excess of five percent (5%) of the capital and surplus of
the bank, or in the maximum amount permitted by law,
whichever is lower, shall be required by the lending
bank to waive the secrecy of his deposits of whatever
nature in all banks in the Philippines. Any information
obtained from an examination of his deposits shall be
held strictly confidential and may be used by the
examiners only in connection with their supervisory and
examination responsibility or by the Bangko Sentral in
an appropriate legal action it has initiated involving the
deposit account.
• Examination and Fees
o The supervising and examining department head,
personally or by deputy, shall examine the operations of
every bank and quasi-bank. The institution concerned
shall afford to the head of the appropriate supervising
and examining departments and to his authorized
deputies full opportunity to examine its books and
records, cash and assets and general condition and
review its systems and procedures at any time during
business hours when requested to do so by the Bangko
Sentral.
• Appointment of Conservator
o Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the
Monetary Board finds that a bank or a quasi-bank is in a
state of continuing inability or unwillingness to maintain
a condition of liquidity deemed adequate to protect the
interest of depositors and creditors, the Monetary
Board may appoint a conservator with such powers as
the Monetary Board shall deem necessary to take
charge of the assets, liabilities, and the management
thereof, reorganize the management, collect all monies
and debts due said institution, and exercise all powers
necessary to restore its viability.
• Disposition of Banking Franchise
o The Bangko Sentral may, if public interest so requires,
award to an institution, upon such terms and conditions
as the Monetary Board may approve, the banking
franchise of a bank under liquidation to operate in the
area where said bank or its branches were previously
operating. This is provided that whatever proceeds may
be realized from such award shall be subject to the
appropriate exclusive disposition of the Monetary
Board.
Credit Policy
The rediscounts, discounts, loans and advances which
the Bangko Sentral is authorized to extend to banking
institutions are used to influence the volume of credit
consistent with the objective of price stability and
maintenance of financial stability.
The Bangko Sentral may normally and regularly carry on
the following credit operations with banking institutions
operating in the Philippines:
• Commercial credits
o The Bangko Sentral may rediscount, discount, buy and
sell bills, acceptances, promissory notes and other
credit instruments with maturities of not more than one
hundred eighty days from the date of their rediscount,
discount or acquisition by the Bangko Sentral and
resulting from transactions related to:
 the importation, exportation, purchase or sale of
readily saleable goods and products, or their
transportation within the Philippines; or
 the storing of non-perishable goods and products
which are duly insured and deposited, under conditions
assuring their preservation, in authorized bonded
warehouses or in other places approved by the
Monetary Board.
• Production credits
o The Bangko Sentral may rediscount, discount, buy and
sell bills, acceptances, promissory notes and other
credit instruments having maturities of not more than
three hundred sixty days from the date of their
rediscount, discount or acquisition by the Bangko
Sentral and resulting from transactions related to the
production or processing of agricultural, animal,
mineral, or industrial products.
o Documents or instruments acquired in accordance
with this subsection shall be secured by a pledge of the
respective crops or products. This is provided, however,
that the crops or products need not be pledged to
secure the documents if the original loan granted by the
Bangko Sentral is secured by a lien or mortgage on real
estate property seventy percent of the appraised value
of which equals or exceeds the amount of the loan
granted.
• Other credits
o These can be special credit instruments not otherwise
rediscountable under the immediately preceding
subsections and may be eligible for rediscounting in
accordance with rules and regulations which the Bangko
Sentral shall prescribe.
o Whenever necessary, the Bangko Sentral shall provide
funds from non-inflationary sources. This is provided,
however, that the Monetary Board shall prescribe
additional safeguards for disbursing these funds.
• Advances
o The Bangko Sentral may grant advances against the
following kinds of collaterals for fixed periods which
shall not exceed one hundred eighty (180) days:
 gold coins or bullion
 securities representing obligations of the Bangko
Sentral or of other domestic institutions of recognized
solvency
 commercial credits
 production credits, for periods which shall not exceed
three hundred sixty (360) days
 utilized portions of advances in current amount
covered by regular overdraft agreements related to
operations included under commercial and production
credits, and certified as to amount and liquidity by the
institution soliciting the advance
 negotiable treasury bills, certificates of indebtedness,
notes and other negotiable obligations of the
Government maturing within three years from the date
of the advance
 negotiable bonds issued by the Government of the
Philippines, by Philippine provincial, city or municipal
governments, or by any Philippine Government
instrumentality, and having maturities of not more than
ten years from the date of advance.
The Bangko Sentral may also extend loans and advances
to banking institutions for a period of not more than
seven days without any collateral for the purpose of
providing liquidity to the banking system in times of
need.
In periods of national and/or local emergency or of
imminent financial panic which directly threaten
monetary and financial stability, the Monetary Board
may, by a vote of at least five of its members, authorize
the Bangko Sentral to grant extraordinary loans or
advances to banking institutions. While such loans or
advances are outstanding, the debtor institution shall
not, except upon prior authorization by the Monetary
Board, expand the total volume of its loans or
investments.
The Monetary Board may, at its discretion, likewise
authorize the Bangko Sentral to grant emergency loans
or advances to banking institutions, even during normal
periods, for the purpose of assisting a bank in a
precarious financial condition or under serious financial
pressures brought by unforeseen events, or events
which, though foreseeable, could not be prevented by
the bank concerned. This is provided, however, that the
Monetary Board has ascertained that the bank is not
insolvent and has the assets defined hereunder to
secure the advances. Furthermore, it should have had a
concurrent vote of at least five members of the
Monetary Board obtained. The amount of any
emergency loan or advance shall not exceed the sum of
fifty percent of total deposits and deposit substitutes of
the banking institution, and shall be disbursed in two or
more tranches.
The Bangko Sentral then collects interest and other
appropriate charges on all loans and advances it
extends, the closure, receivership or liquidations of the
debtor-institution notwithstanding. The Monetary
Board then fixes the interest and rediscount rates to be
charged by the Bangko Sentral on its credit operations
in accordance with the character and term of the
operation, but after due consideration has been given
to the credit needs of the market, the composition of
the Bangko Sentral’s portfolio, and the general
requirements of the national monetary policy. Interest
and rediscount rates shall be applied to all banks of the
same category uniformly and without discrimination.
Documents rediscounted, discounted or accepted as
collateral by the Bangko Sentral must be withdrawn by
the borrowing institution on the dates of their
maturities, or upon liquidation of the obligations which
they represent or to which they relate whenever said
obligations have been liquidated prior to their dates of
maturity. Banks have the right at any time to withdraw
any documents which they have presented to the
Bangko Sentral as collateral, upon payment in full of the
corresponding debt to the Bangko Sentral, including
interest charges.
The BSP and International Institutions
One function of the BSP is to act as the “banker of the
government”, representing the government in
international monetary institutions. The Bangko Sentral
represents the government in all dealings, negotiations
and transactions with the International Monetary Fund
and carries such accounts as may result from Philippine
membership in, or operations with, the IMF. It may also
be authorized by the government to represent it in
dealings, negotiations or transactions with the
International Bank for Reconstruction and Development
and with other foreign or international financial
institutions or agencies. The President may, however,
designate any of his other financial advisors to jointly
represent the Government in such dealings,
negotiations or transactions.
The Security Plant Complex
The Security Plant Complex which is located in Quezon
City houses a banknote printing plant, a securities
printing plant, a mint and a gold refinery. The banknote
printing plant and the mint take care of producing
currency notes and coins, respectively. The Security
Plant Complex also houses the Currency Management
Sector, which is responsible for the production and
issuance of the Philippine currency.
The core products of the SPC are banknotes and coins.
It also produces refined gold and silver; judicial forms
and other security documents; commemorative medals;
and presidential medals and state decorations.
The SPC is under the Currency Management sector in
the BSP Organizational chart. Under the SPC are the
following:
• Banknotes and Securities Printing Department
o Performs the printing of banknotes, judicial forms,
and other security documents
• Banknotes and Securities Production Management
Department
o Handles various control and support functions in
relation to the printing of banknotes and other security
documents
• Mint and Refinery Operations Department
o Manages and performs the minting of coins and
commemorative medals, and the refinery of gold
purchased from local panners and miners
• Department of General Services
o Manages the procurement of supplies, equipment,
and services for the SPC, client affairs and information
programs, development/implementation of SPC
construction/renovation projects, and general
maintenance and upkeep of its facilities
• Financial Services Group
o Prepares financial statements and records financial
receipts/disbursements, and processes bills for
payment
Gold Reserve Management
Gold producers, small-scale miners and other
individuals may sell their gold at prevailing global
market rates at various gold buying stations such as the
Mint and Refinery Operations Department (MROD) in
Quezon City and the BSP offices in the cities of Baguio,
Naga, Davao and Zamboanga. Purchased gold in the
form of bars or discs are then refined at the MROD and
converted into London good delivery bars. Alternatively,
some of the gold may also be manufactured into semi-
finished material in the form of grains and sheets for re-
sale to local jewelers and industrial users. The BSP may
enter into a location swap transaction so that bars held
in the bullion vault may be mobilized and made readily
available for gold-related transactions in the
international market.
For a piece of gold to be accepted, it should pass the
following criteria:
• Physical Form o Should be in bar or disc (powder and
jewelry are not acceptable). o Should not contain
mercury or amalgam in any quantity. o Should be free
of slag and other foreign matter. o Should have no sign
of metallic segregation / layering or poured shortness. o
Should not be damp or wet.
• Maximum Dimensions o Bar: 16.5 cm long x 8 cm wide
x 4 cm thick o Disc: 10 cm diameter x 5 cm thick
• Weight o Maximum weight of bar or disc: @ 5
kilograms o Maximum weight per lot: @ 10 kilograms
• Minimum Preliminary Gold Assay – 30% Gold reserve
management is a challenging task. Although gold is a
relatively low-yielding investment in terms of interest, it
provides holders with other benefits such as security
and diversification. With the Philippines being a major
gold-producer, the BSP seeks to help in the
development of the gold mining industry and therefore
regards bullion as an essential part of its GIR.
The BSP holds gold for several reasons. First is for
security purposes as it is a real asset and it is no one’s
liability. Further, it is an attractive asset to hold during
times of uncertainty as it is considered a safehaven.
Another reason is for diversification as it has a low
correlation with other assets that the BSP manages. Still
another reason is that investors prefer to own gold
when inflation and inflation expectations are high as
this precious metal is considered a hedge against
accelerating prices. Finally, the BSP maintains a portion
of its reserves in the form of bullion since the
Philippines is a significant producer of gold.
The menu of gold reserves management products
available to the Bangko Sentral ng Pilipinas include:
• Spot trading
• Options
• Deposits
• Gold-backed loans
• Gold financial swaps
Gold can also be used as a financing vehicle, permitting
a central bank to reduce the cost of raising funds for the
country. In engaging in these various transactions, the
safety of the asset and confidentiality of the
transactions are of paramount importance. Hence, the
Bank has a strict counterparty selection process, limiting
dealings to top international banks. Counterparty credit
ratings, financial strength, performance and other
factors that determine corresponding exposure limits
are therefore considered very carefully.
Chapter 9: Regulations and Supervisions of Financial
Institutions
Supervision VS Regulation
Central banks have both supervisory and regulatory
powers – but what is the difference between the two?
Supervision aims to evaluate the overall safety and
soundness of a banking organization. It examines and
evaluates banking institutions, which is why routine
exams are held
On the other hand, regulation is all about ensuring that
banking and non-banking institutions are complying
with applicable laws. Regulation is setting rules and
guidelines, setting operational standards and rules for
financial institutions. Sometimes regulations are
restrictive, meaning they limit a bank’s activities. Other
times they are permissive, which means they allow
banks to conduct a given activity.
Supervision and Regulation by the BSP
The Bangko Sentral has supervision over the operations
of banks and exercises such regulatory powers as
provided in the New Central Bank Act and other
pertinent laws over the operations of finance
companies and non-bank financial institutions
performing quasi-banking functions.
The BSP monitors and compiles various indicators on
the Philippine banking system. The Philippine banking
system is composed of universal and commercial banks,
thrift banks, rural and cooperative banks.
• Universal and commercial banks represent the largest
single group, resource-wise, of financial institutions in
the country. They offer the widest variety of banking
services among financial institutions. In addition to the
function of an ordinary commercial bank, universal
banks are also authorized to engage in underwriting and
other functions of investment houses, and to invest in
equities of non-allied undertakings.
• The thrift banking system is composed of savings and
mortgage banks, private development banks, stock
savings and loan associations and microfinance thrift
banks. Thrift banks are engaged in accumulating savings
of depositors and investing them. They also provide
short-term working capital and medium- and long-term
financing to businesses engaged in agriculture, services,
industry and housing, and diversified financial and allied
services, and to their chosen markets and
constituencies, especially small- and medium-
enterprises and individuals.
• Rural and cooperative banks are the more popular
type of banks in the rural communities. Their role is to
promote and expand the rural economy in an orderly
and effective manner by providing the people in the
rural communities with basic financial services. Rural
and cooperative banks help farmers through the stages
of production, from buying seedlings to marketing of
their produce. Rural banks and cooperative banks are
differentiated from each other by ownership. While
rural banks are privately owned and managed,
cooperative banks are organized/owned by
cooperatives or federation of cooperatives.
• The BSP also regulates non banks with quasi-banking
functions. This group consists of institutions engaged in
the borrowing of funds from 20 or more lenders for the
borrower's own account through issuances,
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes of
relending or purchasing receivables and other
obligations.
The Bangko Sentral establishes a mechanism for issues
arising from bank examinations. It is independent and
reports directly to the Monetary Board, without
prejudice to the authority of the Bangko Sentral and its
Monetary Board to take enforcement and supervisory
actions against supervised entities.
BSP Examinations
A bank examination is an evaluation of the safety and
soundness of a bank. The primary focus is an
examination of the bank’s assets and liabilities, but the
exam also commonly includes a review of its adherence
to regulations and standards, its compliance with
various laws (such as truth-in-lending), and an
examination of its electronic data processing systems.
The department heads and the examiners of the
supervising and/or examining departments are
authorized to administer oaths to any director, officer,
or employee of any institution under their respective
supervision or subject to their examination, and to
compel the presentation of all books, documents,
papers or records necessary in their judgment to
ascertain the facts relative to the true condition of any
institution as well as the books and records of persons
and entities relative to or in connection with the
operations, activities or transactions of the institution
under examination, subject to the provision of existing
laws protecting or safeguarding the secrecy or
confidentiality of bank deposits as well as investments
of private persons, natural or juridical, in debt
instruments issued by the government.
The supervising and examining department head,
personally or by deputy, shall examine the operations of
every bank and quasi-bank, including their subsidiaries
and affiliates engaged in allied activities in accordance
with the guidelines set by the Monetary Board taking
into consideration sound and prudent practices. This is
provided that there shall be an interval of at least
twelve months between regular examinations, The
Monetary Board, by an affirmative vote of at least five
members, may authorize a special examination if the
circumstances warrant.
The institution concerned shall afford to the head of the
appropriate supervising and examining departments
and to his authorized deputies full opportunity to
examine its books and records, cash and assets and
general condition and review its systems and
procedures at any time during business hours when
requested to do so by the Bangko. None of the reports
and other papers relative to such examinations shall be
open to inspection by the public except insofar as such
publicity is incidental to the proceedings hereinafter
authorized or is necessary for the prosecution of
violations in connection with the business of such
institutions. Supervised institutions shall pay to the
Bangko Sentral, no later than May 31 of each year, an
annual supervision fee as may be prescribed by the
Monetary Board. In determining the amount of the
annual supervision fee, the Monetary Board shall
consider the costs of supervision.
Administrative Sanctions
Whenever a bank, quasi-bank, including their
subsidiaries and affiliates engaged in allied activities or
other entity which is subject to Bangko Sentral
supervision or whenever any person or entity willfully
violates pertinent banking laws being enforced or
implemented by the Bangko Sentral or any order,
instruction, rule or regulation issued by the Monetary
Board, the person or persons responsible for such
violation shall be punished by a fine of not less than
Fifty thousand pesos nor more than Two million pesos
or by imprisonment of not less than two years nor more
than ten years, or both, at the discretion of the court.
The imposition of administrative sanctions shall be fair,
consistent and reasonable. Without prejudice to the
criminal sanctions against the culpable persons, the
Monetary Board may, at its discretion, impose upon any
bank, quasi-bank, including their subsidiaries and
affiliates engaged in allied activities, and/ or their
directors, officers or employees, for any willful violation
of its charter or bylaws, willful delay in the submission
of reports or publications thereof as required by law,
rules and regulations; any refusal to permit examination
into the affairs of the institution; any willful making of a
false or misleading statement to the Board or the
appropriate supervising and examining department or
its examiners; any willful failure or refusal to comply
with, or violation of, any banking law or any order,
instruction or regulation issued by the Monetary Board,
or any order, instruction or ruling by the Governor; or
any commission of irregularities, and/or conducting
business in an unsafe or unsound manner as may be
determined by the Monetary Board, the following
administrative sanctions, whenever applicable:
• fines in amounts as may be determined by the
Monetary Board to be appropriate, but in no case to
exceed One million pesos for each transactional
violation or One hundred thousand pesos per calendar
day for violations of a continuing nature, taking into
consideration the attendant circumstances, such as the
nature and gravity of the violation or irregularity and
the size of the institution. This is provided that in case
profit is gained or loss is avoided as a result of the
violation, a fine no more than three times the profit
gained or loss avoided may also be imposed;
• suspension of rediscounting privileges or access to
Bangko Sentral credit facilities;
• suspension of lending or foreign exchange operations
or authority to accept new deposits or make new
investments;
• suspension of interbank clearing privileges; and/or
• suspension or revocation of quasi-banking or other
special licenses.
The Monetary Board may, whenever warranted by
circumstances, preventively suspend any director,
officer or employee of the institution pending an
investigation. Should the case be not finally decided by
the Bangko Sentral within a period of one hundred
twenty days after the date of suspension, said director,
officer or employee shall be reinstated in his position.
When the delay in the disposition of the case is due to
the fault, negligence or petition of the director or
officer, the period of delay shall not be counted in
computing the period of suspension herein provided.
The above administrative sanctions need not be applied
in the order of their severity. Whether or not there is an
administrative proceeding, if the institution and/or the
directors, officers or employees concerned continue
with or otherwise persist in the commission of the
indicated practice or violation, the Monetary Board may
issue an order requiring the institution and/or the
directors, officers or employees concerned to cease and
desist from the indicated practice or violation, and may
further order that immediate action be taken to correct
the conditions resulting from such practice or violation.
The cease and desist order shall be immediately
effective upon service on the respondents.
The respondents shall be afforded an opportunity to
defend their action in a hearing before the Monetary
Board or any committee chaired by any Monetary
Board member created for the purpose, upon request
made by the respondents within five days from their
receipt of the order. If no such hearing is requested
within said period, the order shall be final. If a hearing is
conducted, all issues shall be determined on the basis of
records, after which the Monetary Board may either
reconsider or make final its order. The Governor is
authorized, at his discretion, to impose upon banks and
quasi-banksfines not in excess of One hundred
thousand pesos for each transactional violation or
Thirty thousand pesos per calendar day for violations of
a continuing nature, the imposition of which shall be
final and executory until reversed, modified or lifted by
the Monetary Board on appeal.
Chapter 10: The Role of the IMF in Central Banking
The International Monetary Fund (IMF) is an
organization of 189 countries, working to foster global
monetary cooperation, secure financial stability,
facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty
around the world. Created in 1945, the IMF is governed
by and accountable to the 189 countries that make up
its near-global membership.
The IMF's primary purpose is to ensure the stability of
the international monetary system—the system of
exchange rates and international payments that enables
countries (and their citizens) to transact with each
other. The Fund's mandate was updated in 2012 to
include all macroeconomic and financial sector issues
that bear on global stability.
Organizational Structure of the IMF
The IMF has evolved along with the global economy
throughout its 75- year history, allowing the
organization to retain a central role within the
international financial architecture. Unlike the General
Assembly of the United Nations, where each country
has one vote, decision making at the IMF was designed
to reflect the relative positions of its member countries
in the global economy. The IMF continues to undertake
reforms to ensure that its governance structure
adequately reflects fundamental changes taking place in
the world economy, including the larger role that
emerging market and developing economies now play
in the global economy.
The Board of Governors is the highest decision-making
body of the IMF. It consists of one governor and one
alternate governor for each member country. The
governor is appointed by the member country and is
usually the minister of finance or the head of the
central bank.
While the Board of Governors has delegated most of its
powers to the IMF’s Executive Board, it retains the right
to, among other things, approve quota increases,
special drawing right allocations, the admittance of new
members, compulsory withdrawal of members, and
amendments to the Articles of Agreement and By-Laws.
The Board of Governors also elects Executive Directors
and is the ultimate arbiter on issues related to the
interpretation of the IMF’s Articles of Agreement.
Voting by the Board of Governors may take place either
by holding a meeting or remotely (through the use of
courier services, electronic mail, facsimile, or the IMF’s
secure online voting system). Decisions are made by a
majority of votes cast, unless otherwise specified in the
Articles of Agreement.
The Board of Governors is advised by two ministerial
committees, the International Monetary and Financial
Committee (IMFC) and the Development Committee.
• International Monetary and Financial Committee
o The IMFC has 24 members, drawn from the pool of
189 governors, and represents all member countries. Its
structure mirrors that of the Executive Board and its 24
constituencies. The IMFC meets twice a year, during the
IMF–World Bank Spring and Annual Meetings, to
discuss the management of the international monetary
and financial system, proposals by the Executive Board
to amend the Articles of Agreement, or any other
matters of common concern affecting the global
economy. The Committee issues a communiqué
summarizing its views following each meeting,
providing guidance for the IMF’s work program. The
IMFC operates by consensus and does not conduct
formal votes.
• Development Committee
o The Development Committee is a joint committee,
tasked with advising the Boards of Governors of the IMF
and the World Bank on issues related to economic
development in emerging market and developing
countries. The committee has 25 members (usually
ministers of finance or development). It represents the
full membership of the IMF and the World Bank and
mainly serves as a forum for building intergovernmental
consensus on critical development issues.
The IMF’s 24-member Executive Board conducts the
daily business of the IMF and exercises the powers
delegated to it by the Board of Governors, as well as
those powers conferred on it by the Articles of
Agreement.
The Board discusses all aspects of the Fund’s work, from
the IMF staff's annual health checks of member
countries' economies to policy issues relevant to the
global economy. The Board normally makes decisions
based on consensus, but sometimes formal votes are
taken. The votes of each member equal the sum of its
basic votes (equally distributed among all members)
and quota-based votes. Therefore, a member’s quota
determines its voting power. Following most formal
meetings, the Board summarizes its views in a
document known as a Summing Up. Informal meetings
may also be held to discuss complex policy issues at a
preliminary stage.
The IMF’s Managing Director is both chairman of the
IMF’s Executive Board and head of IMF staff. The
Managing Director is appointed by the Executive Board
for a renewable term of five years and is assisted by a
First Deputy Managing Director and three Deputy
Managing Directors. The IMF’s Governors and Executive
Directors may nominate nationals of any of the Fund’s
member countries for the position of Managing
Director. Although the Executive Board may select a
Managing Director by a majority of votes cast, the
Board has in the past made such appointments by
consensus.
Quotas
Resources for IMF loans to its members on non-
concessional terms are provided by member countries,
primarily through their payment of quotas. Multilateral
and bilateral borrowing serve as a second and third line
of defense, respectively, by providing a temporary
supplement to quota resources. These borrowed
resources played a critical role in enabling the IMF to
support its member countries during the global
economic crisis.
Quotas are the IMF’s main source of financing. Each
member of the IMF is assigned a quota, based broadly
on its relative position in the world economy. The IMF is
a quota-based institution. Quotas are the building
blocks of the IMF’s financial and governance structure.
An individual member country’s quota broadly reflects
its relative position in the world economy. Quotas are
denominated in Special Drawing Rights (SDRs), the
IMF’s unit of account.
The SDR was created as a supplementary international
reserve asset in the context of the Bretton Woods fixed
exchange rate system. The collapse of Bretton Woods
system in 1973 and the shift of major currencies to
floating exchange rate regimes lessened the reliance on
the SDR as a global reserve asset. Nonetheless, SDR
allocations can play a role in providing liquidity and
supplementing member countries’ official reserves, as
was the case with the 2009 allocations totaling SDR
182.6 billion to IMF members amid the global financial
crisis.
The SDR serves as the unit of account of the IMF and
some other international organizations.
The SDR is neither a currency nor a claim on the IMF.
Rather, it is a potential claim on the freely usable
currencies of IMF members. SDRs can be exchanged for
these currencies.
Quotas play the following roles:
• Resource Contributions
o Quotas determine the maximum amount of financial
resources a member is obliged to provide to the IMF.
• Voting Power
o Quotas are a key determinant of the voting power in
IMF decisions. Votes comprise one vote per SDR100,000
of quota plus basic votes (same for all members).
• Access to Financing
o The maximum amount of financing a member can
obtain from the IMF under normal access is based on its
quota.
• SDR Allocations
o Quotas determine a member’s share in a general
allocation of SDRs.
The IMF's Board of Governors conducts general quota
reviews at regular intervals (no more than five years).
Any changes in quotas must be approved by an 85
percent majority of the total voting power, and a
member’s own quota cannot be changed without its
consent. Two main issues addressed in a general quota
review are the size of an overall quota increase and the
distribution of the increase among the members.
IMF Facilities
Extended Credit Facility (ECF)
The Extended Credit Facility (ECF) provides financial
assistance to countries with protracted balance of
payments problems. The ECF was created under the
Poverty Reduction and Growth Trust (PRGT) as part of a
broader reform to make the Fund’s financial support
more flexible and better tailored to the diverse needs of
low-income countries (LICs), including in times of crisis.
The ECF is the Fund’s main tool for providing medium-
term support to LICs.
The ECF supports countries’ economic programs aimed
at moving toward a stable and sustainable
macroeconomic position consistent with strong and
durable poverty reduction and growth. The ECF may
also help catalyze additional foreign aid.
The ECF is available to all PRGT-eligible member
countries that face a protracted balance of payments
problem, i.e. when the resolution of the underlying
macroeconomic imbalances would be expected to
extend over the medium or longer term.
Under the ECF, member countries agree to implement a
set of policies that will help them make progress toward
a stable and sustainable macroeconomic position over
the medium term. These commitments, including
specific conditions, are described in the country’s letter
of intent.
Assistance under an ECF arrangement is provided for an
initial duration from three to up to four years, with an
overall maximum duration of five years. Following the
expiration, cancellation, or termination of an ECF
arrangement, additional ECF arrangements may be
approved.
Access to ECF financing is determined on a case-by-case
basis, taking into account the country’s balance of
payments need, the strength of its economic program
and capacity to repay the Fund, the amount of
outstanding Fund credit and the member’s record of
past use of Fund credit, and is guided by access norms.
Total access to concessional financing under the PRGT is
limited to 75 percent of quota per year, and total
outstanding concessional credit to 225 percent of
quota. These limits can be exceeded in exceptional
circumstances. Access may be augmented during an
arrangement if needed.
Financing under the ECF carries a zero interest rate at
least through end-2018, with a grace period of 5½
years, and a final maturity of 10 years. On October 3,
2016, the Executive Board approved a modification of
the mechanism governing interest rate setting of PRGT
facilities and PRGT interest rates will remain at zero for
as long as and whenever global market rates are very
low. The Fund reviews the level of interest rates for
concessional facilities under the PRGT every two years.
Standby Credit Facility (SCF)
The Standby Credit Facility (SCF) provides financial
assistance to lowincome countries (LICs) with short-
term balance of payments needs. The SCF was created
under the Poverty Reduction and Growth Trust (PRGT)
as part of a broader reform to make the Fund’s financial
support more flexible and better tailored to the diverse
needs of LICs, including in times of shocks or crisis.
The SCF supports LICs that have reached broadly
sustainable macroeconomic positions, but may
experience episodic, short-term financing and
adjustment needs, including those caused by shocks.
The SCF supports countries’ economic programs aimed
at restoring a stable and sustainable macroeconomic
position consistent with strong and durable growth and
poverty reduction. It also provides policy support and
may help catalyze foreign aid. The SCF replaced the
Exogenous Shocks Facility-High Access Component (ESF-
HAC) effective January 2010.
The SCF is available to PRGT-eligible member countries
facing an immediate or potential balance of payments
need, where the country’s financing and adjustment
needs are normally expected to be resolved within two
years, thus establishing a sustainable macroeconomic
position.
An SCF arrangement can range from 12–24 months. As
the SCF is intended to address episodic short-term
needs, its use is limited to two and a half out of any five
years. Subject to these limits, an SCF arrangement may
be extended or cancelled, and consecutive
arrangements may be approved.
Access to SCF financing is determined on a case-by-case
basis, taking into account the country’s balance of
payments need, the strength of its economic program
and capacity to repay the Fund, the amount of
outstanding Fund credit and the member’s record of
past use of Fund credit, and is guided by access norms.
Subject to the applicable access limits, the amount
approved at the start of the arrangement may be
augmented during an arrangement if needed. Total
access to concessional financing under the PRGT is
limited to 75 percent of quota per year, and 225
percent of quota in total. These limits can be exceeded
in exceptional circumstances. For precautionary use,
the annual limit at approval is 56.25 percent of quota
and the average annual limit at approval (over the
arrangement) is 37.5 percent of quota.
A member country with a potential but not immediate
balance of payments need can treat access under the
SCF as precautionary, in which case no disbursements
will be made. However, countries retain and
accumulate the rights to request disbursements under
the arrangement if a financing need were to arise at a
later stage. SCF arrangements treated as precautionary
do not count toward the two and a half out of any five
years’ time limit on the use of the SCF referred to
above.
Extended Fund Facility (EFF)
When a country faces serious medium-term balance of
payments problems because of structural weaknesses
that require time to address, the IMF can assist with the
adjustment process under an Extended Fund Facility
(EFF). Compared to assistance provided under the
Stand-by Arrangement, assistance under an extended
arrangement features longer program engagement—to
help countries implement medium-term structural
reforms—and a longer repayment period.
The EFF was established to provide assistance to
countries experiencing serious payments imbalances
because of structural impediments or characterized by
slow growth and an inherently weak balance of
payments position. The EFF provides assistance in
support of comprehensive programs that include
policies of the scope and character required to correct
structural imbalances over an extended period.
Given that structural reforms to correct deep-rooted
weaknesses often take time to implement and bear
fruit, the engagement under an EFF and its repayment
period are longer than most Fund arrangements.
Extended arrangements would normally be approved
for periods not exceeding three years, with a maximum
extension of up to one year where appropriate.
However, a maximum duration of up to four years at
approval is also allowed, predicated on, inter alia, the
existence of a balance of payments need beyond the
three-year period—the prolonged nature of the
adjustment required to restore macroeconomic
stability—and the presence of adequate assurances
about the member’s ability and willingness to
implement deep and sustained structural reforms.
There is also a longer repayment period of between
4½–10 years, with repayments in twelve equal
semiannual installments. In contrast, the Stand-by
Arrangement (SBA) is of shorter duration, with a
repayment period of 3¼–5 years.
As with the SBA, the size of borrowing under the EFF is
guided by a country’s financing needs, capacity to
repay, and track record with use of IMF resources.
• Normal access. Borrowing under the EFF is subject to
the normal limit of up to 145 percent of a country’s IMF
quota annually and a cumulative limit over the life of
the program of 435 percent of quota, net of scheduled
repayments.
• Exceptional access. The Fund may lend amounts
above these normal access limits on a case-by-case
basis in exceptional circumstances provided that the
country satisfies a predetermined set of criteria.
In addition, EFFs generally are not formulated on a
precautionary basis in anticipation of a future balance
of payments problem.
Rapid Credit Facility (RCF)
The Rapid Credit Facility (RCF) provides rapid
concessional financial assistance with limited
conditionality to low-income countries (LICs) facing an
urgent balance of payments need. The RCF was created
under the Poverty Reduction and Growth Trust (PRGT)
as part of a broader reform to make the Fund’s financial
support more flexible and better tailored to the diverse
needs of LICs, including in times of crisis. The RCF places
emphasis on the country’s poverty reduction and
growth objectives.
The RCF provides low-access, rapid, and concessional
financial assistance to LICs facing an urgent balance of
payments need, without ex post conditionality. It can
provide support in a wide variety of circumstances,
including shocks, natural disasters, and emergencies
resulting from fragility. The RCF also provides policy
support and may help catalyze foreign aid.
The RCF is available to PRGT-eligible members that face
an urgent balance of payments need, where a full-
fledged economic program is either not necessary (for
instance because of the transitory and limited nature of
the shock) or not feasible (for instance because of
capacity constraints or domestic fragilities).
Financial assistance under the RCF is provided as an
outright loan disbursement. While RCF financing takes
the form of a one-off disbursement, there is scope for
repeat use. A repeat use of the RCF is possible within
any three-year period if the balance of payments need
is caused primarily by an exogenous shock or the
country has established a track record of adequate
macroeconomic policies. However, no more than two
disbursements may be made in any twelve-month
period. Repeat use of the RCF may facilitate eventual
transition to an ECF arrangement.
Access to RCF financing is determined on a case-by-case
basis, taking into account the country’s balance of
payments need, the strength of its macroeconomic
policies, capacity to repay the Fund, the amount of
outstanding Fund credit, and the member’s record of
past use of Fund credit. Under the RCF, access is
normally limited to 18.75 percent of quota per year and
75 percent of quota on a cumulative basis, although
augmented access limits apply under the RCF’s shocks
window (37.5 percent of quota per year and 75 percent
on a cumulative basis). The RCF also has a higher annual
access limit of 60 percent of quota which is available
where a member faces urgent balance of payments
needs arising from a large natural disaster (that is, a
natural disaster that causes damage of at least 20
percent of the member’s GDP).
Fund support under the RCF is provided without ex post
program based conditionality or reviews. Economic
policies supported under the RCF should aim at
addressing the underlying balance of payments
difficulties in support of the country's poverty reduction
and growth objectives. Financing under the RCF carries
a zero interest rate, has a grace period of 5½ years, and
a final maturity of 10 years.
Poverty Reduction and Growth Facility (PRGF)
In September of 1999, the IMF established the Poverty
Reduction and Growth Facility (PRGF) to make the
objectives of poverty reduction and growth more
central to lending operations in its poorest member
countries. Reviews of the PRGF by IMF staff in 2002 and
by the Independent Evaluation Office (IEO) of the IMF in
2004 confirmed that the design of the programs
supported by PRGF lending has become more
accommodating to higher public expenditure, in
particular propoor spending.
Building on this progress and in response to a 2007 IEO
report on the IMF and Aid to Sub-Saharan Africa, the
IMF in 2007 adopted principles to promote the full use
of external aid while maintaining macroeconomic and
debt sustainability. A review of PRGF program design by
the Executive Board in September 2005 found that
while macroeconomic outcomes in low-income
countries had improved markedly in recent years, per
capita income remains low. The review noted in
particular, the importance of broad economic
institutions for sustained growth and stability, and the
need to manage carefully increased aid flows.
The principles of broad public participation and country
ownership are central to the PRGF. Discussions on the
policies underlying PRGFsupported programs are more
open than in the case of other Fund arrangements,
since they are based on the nationally-owned PRSP.
With increased national ownership, PRGF conditionality
has become more parsimonious, focused on the Fund’s
core areas of expertise, and limited to measures that
have a direct and critical impact on the program’s
macroeconomic objectives.
PRGF-supported programs reflect closely each country’s
poverty reduction and growth priorities and, as long as
macroeconomic stability is maintained, seek to respond
flexibly to changes in country circumstances and pro-
poor priorities. Key policy measures and structural
reforms aimed at poverty reduction and growth are
identified and prioritized during the PRSP process, and if
feasible, their budgetary costs are assessed.
PRGF-supported programs focus on strengthening
governance, in order to assist countries’ efforts to
design targeted and well-prioritized spending. Of
particular importance are measures to improve public
resource management, transparency, and
accountability. PRGF supported programs also give
particular attention to the poverty and social impacts of
key macroeconomic policy measures.
When appropriate, the IMF draws on World Bank
expertise in designing PRGF-supported programs, and
the staffs of the Fund and Bank cooperate closely on
conditionality. The Bank staff takes the lead in advising
the authorities in the design of poverty reduction
strategies in areas such as poverty assessments,
monitoring, structural and sectoral issues, social issues,
and costing priority poverty-reducing spending.
Concessional lending under the PRGF is administered by
the IMF through the PRGF-ESF and PRGF-HIPC Trusts.
The PRGF-ESF Trust borrows resources from central
banks, governments, and official institutions generally
at market-related interest rates, and lends them on a
passthrough basis to PRGF-eligible countries. The
difference between the market-related interest rate
paid to PRGF-ESF Trust lenders and the rate of interest
of 0.5 percent per year paid by the borrowing members
is financed by contributions from bilateral donors and
the IMF’s own resources.
Exogenous Shocks Facility – High Access Component
(ESF-HAC)
The Exogenous Shocks Facility-High Access Component
(ESF-HAC), which was established in 2008, has provided
concessional financing to Poverty Reduction and
Growth Trust (PRGT)-eligible countries facing balance of
payments needs caused by sudden and exogenous
shocks. As part of a broader reform to make the Fund’s
financial support more flexible and better tailored to
the diverse needs of LICs, the ESF-HAC has been
superseded by the Standby Credit Facility (SCF), which
became effective in January 2010. Credit outstanding
from ESF-HAC arrangements amounts to SDR 245.3
million as of end-February 2018, and ESF-HAC terms will
continue to apply to these balances.
Access was determined on a case-by-case basis. The
ESF-HAC provided access up to 75 percent of quota for
each arrangement in normal circumstances. Resources
were provided in phased disbursements based on
reviews, and programs were one-to-two years in length.
The country’s economic program under the ESF focused
on adjustment to the underlying shock, with less
emphasis on the broad structural adjustment that often
characterizes other IMF-supported programs.
The ESF could be used concurrently with the Policy
Support Instrument (PSI).
ESF loans carry a zero annual interest rate until end-
2018, with repayments made semiannually, beginning
5½ years and ending 10 years after the disbursement.
On October 3, 2016, the Executive Board decided to
waive interest rate charges on outstanding balances
under the Exogenous Shocks Facility until the next
review of the interest rate mechanism. The Fund
reviews the level of interest rates for concessional
facilities every two years with the next review expected
to take place by end-2018.
IMF Conditionality
When a country borrows from the IMF, its government
agrees to adjust its economic policies to overcome the
problems that led it to seek financial aid. These policy
adjustments are conditions for IMF loans and serve to
ensure that the country will be able to repay the IMF.
This system of conditionality is designed to promote
national ownership of strong and effective policies.
Conditionality covers the design of IMF-supported
programs—that is, macroeconomic and structural
policies—and the specific tools used to monitor
progress toward goals outlined by the country in
cooperation with the IMF. Conditionality helps
countries solve balance-ofpayments problems without
resorting to measures that are harmful to national or
international prosperity. At the same time, the
measures are meant to safeguard IMF resources by
ensuring that the country’s balance of payments will be
strong enough to permit it to repay the loan.
The member country has primary responsibility for
selecting, designing, and implementing policies to make
the IMF-supported program successful. The program is
described in a letter of intent, which often has a
memorandum of economic and financial policies
attached. The program’s objectives and policies depend
on a country’s circumstances. But the overarching goal
is always to restore or maintain balance-of-payments
viability and macroeconomic stability while setting the
stage for sustained, high-quality growth and, in
lowincome countries, reducing poverty.
Most IMF financing is paid out in installments and linked
to demonstrable policy actions. This is intended to
ensure progress in program implementation and reduce
risks to IMF resources. Program reviews provide a
framework for the IMF Executive Board to assess
whether the program is on track and whether
modifications are necessary. Periodic reviews combine
an assessment of whether program conditions have
been met with a look ahead at whether the program
needs to be adjusted in light of new developments.
Policy commitments can come in different forms:
• Prior actions
o These are steps a country agrees to take before the
IMF approves financing or completes a review. They
ensure that a program will have the necessary
foundation for success.
• Quantitative performance criteria (QPCs)
o Specific, measurable conditions for IMF lending that
always relate to macroeconomic variables under the
control of the authorities. Such variables include
monetary and credit aggregates, international reserves,
fiscal balances, and external borrowing.
• Indicative targets (ITs)
o In addition to QPCs, ITs may be set for quantitative
indicators to assess progress in meeting a program’s
objectives. Sometimes ITs are set instead of QPCs
because of uncertainty about economic trends. As
uncertainty is reduced, these targets may become
QPCs, with appropriate modifications.
• Structural benchmarks (SBs)
o These are reform measures that often are
nonquantifiable but are critical for achieving program
goals and are intended as markers to assess program
implementation.
If a country misses a QPC condition, the IMF Executive
Board may approve a waiver if it is satisfied that the
program will still succeed. This may be because the
deviation was minor or temporary or because national
authorities are taking corrective actions. Missed
structural benchmarks and indicative targets do not
require waivers but are assessed in the context of
overall program performance. The IMF’s publicly
available database for the Monitoring of Fund
Arrangements covers all aspects of program
conditionality.
Chapter 11: Central Banking for Socio-Economic
Development
The Promotion of Human Dignity
Development is primarily concerned with the
promotion of human dignity. This is the priceless gift of
God to man. Without human dignity, man is no better
than an animal.
The United States declares that:
1. The aim of development should be the constant
improvement of the well-being of the peoples on the
basis of their full participation in the process of
development and a fair distribution of its benefits.
2. Each country has the right and responsibility to
choose its means and goals of development such as the
implementation of progressive economic and social
reforms.
3. All the countries have the duty and, individually and
collectively, to cooperate in removing the obstacles that
hinder the mobilization and utilization of resources.
As the UNESCO Director-General has stated: "The social
reality of development is something much more than
material well-being. Human Dignity is at least as
important a part of it as happiness, and that dignity is
meaningless except in relation to those values which
make life worth living and of which culture is both
custodian and the critic, the repository and the
originator."
Deprivation of the Rural Poor
The roots of poverty are the rural areas. The poorest of
the poor are found in such places. Hoping against hope,
they go to the cities for possible better life. This influx of
rural poor to the urban centers has created slums and
squalor. Not a few of the live under the bridges and
along river banks.
In urban societies of the world, the poorest of the poor
called "boat people" of Agriculture. They have no lands
of their own. They live in their small boats. They also
use their boats as the principal source of their
livelihood.
Urbanization is a symbol of economic growth. However
this is only for developed countries. Extreme rural
poverty has forced the people of the villages to move
into the cities in the hope of improving their economic
conditions.
The Job of BSP
As the central monetary authority, the Bangko Sentral
ng Pilipinas does not only control the volume of the
money but also the allocation of available credit
facilities.
The main focus of the economic recovery is on the
development of agriculture and country side.
The Bangko Sentral extends loans either from domestic
or foreign sources - to the government for its various
socio-economic programs and projects.
Rural Development Programs and Urban Housing
Projects
Here in the city, most poor families live in rooms and
apartments which are unfit for human habitation.
Because of the law of supply and demand, rentals for
bed spaces rooms and apartments have greatly
escalated. Those who cannot afford to pay put up their
shanties along river banks, railroads and seashores.
Others erected their makeshift houses in vacant public
lots. The poorest groups sleep in Rizal Park, under the
bridges and in underpass.
Our urban development program - which is primarily a
housing program - is largely funded by the World Bank.
Nevertheless, the Bangko Sentral can also participate in
the housing program for the poor by extending soft
loans for housing projects through the government and
the banking system.
The urban poor can avail of such housing credit facilities
to be able to own their houses and lots on very easy
installment scheme. Below are a few possible concepts
on how to approach the housing issues for the urban
poor:
• Housing is seen as a whole process of development
embracing all the needs important to man, his
community and the place he lives in;
• Majority of the housing programs must be for the
poor since they have the largest need for decent shelter
and deserve government assistance;
• The residents must actively participate in
improvement of their communities;
• Housing benefits, designs, and costs are planned
according to the ability to pay of residents;
• Investments must be recovered either directly from
beneficiaries or indirectly from other sources to sustain
the efforts of the government to provide shelter to the
urban poor;
• Housing is the concern of everybody, thus every
sector of society must contribute to the solution of the
housing problem;
• All agencies of the government, both local and
national, must participate in the total housing program;
and
• Private resources, must be mobilized to satisfy the
housing need.
On the other hand, rural development is primarily
concerned with optimum utilization resources - human,
economic, social, and physical - in a given area through
a systematic manner based on self-reliance.
Many of our major rural development program and
projects have been funded by the United States, Japan,
Australia, and other rich countries. These include roads,
bridges, irrigation, electrification, water supply,
communication, health and school facilities.
The World Bank and the Asian Development Bank have
granted substantial loans for our rural development
which is the main focus of their development assistance
program.
The Social Responsibility of Central Banking
The main function of central banking is the
management of money. The proper management of
money can lead to price stability, more jobs and better
economic growth. With the vast resources and powers
of the central bank of any country, it can greatly
influence the direction of the financial system towards
the attainment of major economic goals.

A central bank must not only pursue price stability and

economic growth if these do not touch the lives of the
poor masses. Price stability is useless if most of the
people are jobless. Economic growth is meaningless if
the fruits of development do not seep down to the level
of the poorest of the poor.

Credit is the key factor in accelerating rural

development. It provides funds for productive projects
that can create products, jobs and incomes for the rural
poor.

According to Dr. Ernest Feder, the credit system of the

less developed countries has not been designed for the
poor.

Senator Alberto Romulo also said that before bankers

that banks funnel their resources which are generated
from rural savings to urban projects which do not
benefit the poor.

Social Contract of Rosseau

Each institution - individual, social, political and

economic - depends on one another. Such
interdependence requires unity and cooperation which
are vital to the growth of whole.

Central banking must help blaze the path towards the

attainment of social justice. This is the only way for man
to lie with human dignity.

The central bank of any country has the social

responsibility to help themselves. It should actively
participate in eliminating or reducing poverty,
ignorance, disease and injustice.

Economic abundance and modern technology become

meaningful only if these touch the lives of the poorest
of the poor. So, it can be said that there is social justice.
This is the only way for man to live with human dignity.