Professional Documents
Culture Documents
The First Central Bank In 1950, another card of the same context was made:
the Diner Club Card. This card was exclusively used in
National or central banks are those that are established
restaurants, and was invented by Frank McNamara and
and built in partnership with the state. When the state
Ralph Schneider. The Diners Club was the first barya or loose change is taken from. Unfortunately, the
successful credit card, and garnered over 500,000 use of barrillas was banned by the Spanish government.
members in just five years. Years later, other companies
When the Spaniards came, they brought with them the
started releasing their own credit card programs, such
cobs or macuquinas, silver coins minted from Mexico
as American Express and Visa.
and Spain. These coins contained an inscription of a
When the 21st century started, banks across the world cross on one side and the royal coat-ofarms of Spain on
have shifted into the digital world, putting their the other. Later on, the Spaniards also brought the
databases and records online. The rise of the internet Spanish dos munos coins to the Philippines, which had
and mobile phones also gave way to electronic an inscribed crowned globe in both sides. These globes
transactions. symbolizes the power Spain has seized in both the old
and new world, thus the name dos mundos. When the
Payment of commodities were made easier by mobile
revolution against the Spanish colonization sparked in
phone applications such as Apple Pay.
the Central and South America, silver coins tampered
In 2008, a new currency type was invented: the Bitcoin. with revolutionary slogans were mixed with coins being
This currency invented by someone under the brought to the country. To prevent the Filipinos from
pseudonym on Satoshi Nakamoto existed in the digital knowing about the rebellion in the Americas, the
world as electronic money. There were no central banks Spaniards counter-stamped the rebellious inscriptions
that would regulate the use of this cryptocurrency, but on the coins.
these Bitcoins can be exchanged for products and
It was also during the Spanish regime when the first
services and even for real, actual money. Bitcoins
paper money was circulated in the Philippines. Through
reached its peak in 2017 when one bitcoin was priced at
the first bank established in the country, the El Banco
more than $13,000, with an all-time high of $19,783.06.
Espanol Filipino de Isabel II, the paper money called
However, this did not last long as the cryptocurrency
pesos Fuertes was introduced.
market crashed in 2018. With all the bitcoin hype came
the hacking and online theft, which led to the bitcoin Once the revolution started in the Philippines, a new
depreciating in just a span of one year. In January of constitution was put into place: the Malolos
2019, the bitcoin was priced at $3,747, a significant Constitution. This gave the first president of the
decrease from its peak. Philippines, General Emilio Aguinaldo, the power to
produce currencies. Coppers were mould into centavo
The History of Money in the Philippines
coins, and revolutionary banknotes were printed and
Even before the Spanish colonization, ancient Filipino produced in denominations of 1, 5, and 10 pesos. These
locals have established bartering relations with banknotes were signed by Pedro Patern, Mariano
neighboring communities from China, Java, Borneo, Limjap, and Telesforo Chuidian. However, when
Thailand, and other Southeast Asian lands. Like other Aguinaldo surrendered to the American regime, these
civilizations, the Philippine history of money started banknotes were stopped in circulation and was
with the barter system. considered to be illegal by the Americans.
As a region that is naturally rich in gold, the Philippines The new colonizers brought with them modern banking,
had its own version of cowries: the Piloncitos. These are modern currency, and the credit card system. As these
ancient barter rings made of pure gold, and were used were established in the Philippine setting, the country’s
as personal adornment and as jewelry. Piloncitos rings reputation and wealth rose and was considered as one
had a flat base with an inscription of the letter “M” or of the most prosperous nations. The American
“MA” in Javanese script. The early Filipinos used the monetary system adopted into the Philippines was still
piloncitos rings from the 11th to the 14th century in based on gold, putting the Philippine Peso almost at par
trading with China and other neighboring countries. with the American dollar at 2:1.
Primitive Filipinos were also able to produce their own In 1903, the US Congress mandated the Coinage Act for
coins called the barrillas, where the modern concept of 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 Aside from its usual and general definitions, money is
minted and given its Filipino identity by bearing the also often defined according to its function or the
designs of Filipino artist Melecio Figueroa. In 1912, the service it provides.
El Banco Espanol Filipino de Isabel II was officially
Money as a Medium of Exchange
renamed to the Bank of the Philippine Islands. This
switch also marked the change from Spanish to English The first and most essential function of money is as a
in all coins and notes inscriptions. In 1918, silver medium of exchange. As per its general definition, it is
certificates were officially replaced with treasury used to facilitate transactions and pay for goods and
certificates, and a one-peso note was ordered to be services. Before the use of money came into existence,
printed. the first people used barter in order to acquire the
commodities they needed. There came a time when the
However, changes in the monetary system did not stop
barter system turned inconvenient, as barter required
with the American colonization. When the Japanese
everyone to have a commodity they can offer in
occupation started in 1942, American banknotes were
exchange of what they need from the other party.
easily replaced with war notes from the Japanese, and
Barter required people to have a double coincidence of
often came in big denominations. With the revolution
wants, or else no exchange will happen. While it was
still ongoing, guerrilla notes or resistance currencies
effective and efficient at first, the double coincidence of
were also produced by the Filipinos.
wants later became difficult to achieve.
When the World War II ended and the Philippines was
This problem is precisely what money provided a
officially a country on its own, old American treasury
solution for. With money, parties do not have to offer
certificates stamped with the word “Victory” were used
an equivalent good or service in order to acquire the
as currency as the country got back to its feet. When
commodity they need. Money serves as a medium of
the Central Bank was built in 1949, money that was put
exchange that is accepted by all parties in exchange for
into circulation still came from foreign countries – paper
any good or service, as long as the other party has
notes were printed by Thomas de la Rue & Co., Ltd. in
enough money to buy such.
England, while coins were imported from the United
States Bureau of Mint. Money as a medium of exchange also promotes
economic efficiency by minimizing transaction cost.
The Filipino coins and paper money we know of did not
Transaction cost is the cost of producing the goods and
come into existence until the sixties. A decade later, a
services that would have been needed in trading for the
new series of money was produced called the Ang
commodities one needs, and with money, this problem
Bagong Lipunan series. In 1983, a new coin design
is effectively minimized.
based on the country’s flora and fauna was released.
Years later, another new set of money was issued, this Money as a Store of Value
time with the logo of the BSP.
Before money can become a means of transacting and a
Chapter 2: Money in the Nation’s Economy medium of exchange, it must be able to hold its value
for a period of time. The second function of money is as
When it comes to defining what money is, humans
a store of value, which is the use of money to preserve
often associate it with income, wealth, and even quality
its purchasing power from the time it is earned until it is
of life. In general, money is defined as anything that is
used for its first function.
commonly accepted in payment for goods or services or
as repayment for debts. The function of money as a store of value is not unique
to money in cash. It is also observed in other assets
Money can either be in the form of a) currency, or the
such as in stocks, bonds, real estate, and even art.
paper money and coins authorized by the government
However, when it comes to this function, money in cash
to be in circulation; or b) deposits, or money that is kept
is not the best option as its value depreciates over time
in the bank. A larger portion of money in the world are
depending on inflation, while all the other assets that
in the form of deposits, kept in bank reserves and can
has store of value function appreciate in value the
be converted into currency form anytime.
longer it is preserved.
Nonetheless, money still has an edge over the other 3. Durability
assets: liquidity. Liquidity is the relative ease and speed
In producing money, the durability of the material used
with which an asset can be converted and used as a
should be considered. It should be able to withstand
medium of exchange. Money in the form of cash is the
being passed from one person to another for a long,
most liquid of all assets as it is the most basic medium
long time and should not wear out quickly.
of exchange, therefore it does not need to be converted
into anything else to be used in transactions. It is also 4. Divisibility
readily accepted everywhere, and is the preferred
payment of all merchants. With money being a liquid Transactions often involve giving change to the buyer,
asset, it is easily transported and is available in any type and it should always be in the exact amount. Good
of denomination. money should be divisible in a way that merchants can
provide an exact change, and this is possible through
Money as a Unit of Account having smaller banknotes and coins.
The third and last function of money is money as a unit 5. Scarcity
of account. This refers to the use of money in
determining the price of goods and services, thus Too much and uncontrolled production of money
measuring its value in the economy. As money provides results to having fiat money, or money that has lost its
a common measure of value on commodities, both value due to having too much of it in circulation. Good
sellers and buyers are able to make a wise decision money is always limited in supply in order to encourage
when it comes to transactions, such as in determining the demand for it, making people spend it and earn it
how much of it they can supply or can purchase. back.
When the primitive people only had barter, the prices 6. Stability
they put on the goods and services they offer often The value of good money should remain stable and
base on what these are and what the other party is constant. As it is used as a unit of account to develop
offering in exchange. With money and its use as a unit standard pricing for goods and services, its value should
of account, a comparison of prices is possible and also not be ever-changing and should remain as it is. Having
reduces the information and exchange costs for both an unstable money would be confusing to the people,
parties. and would just be like how it was during the barter age.
Characteristics of Good Money 7. Uniqueness
In order for money to perform the three functions Good money is unique and cannot be duplicated. Paper
stated above, it should possess the following good money, being the easier kind to counterfeit, are each
characteristics: given unique serial numbers and codes to prevent fake
1. General Acceptability money from circulating.
In a managed currency system, the purchasing power of 3. Fixed currency exchange system
the nation’s currency is controlled and adjusted
Fixed currency means that the central bank has put a
according to the forces of supply and demand. Currency
peg on how money would be priced. Pegs are picked in
management is often done to keep stability in the
relation to the commodity being priced, with the most
markets. Central banks use monetary policies in
popular one being gold. Sometimes, fixed currency can
managing a nation’s currency, policies that fall into the
also depend on another currency in order to maintain
following categories:
its value.
1. Issuing currency and setting interest rates on loans
Chapter 3: Monetary Standards
and bonds to control growth, employment, consumer
spending, and inflation; Monetary standards used to refer to a particular weight
of either gold or silver that is used as the supreme form
2. Regulating member banks through setting a required
of money that cannot be made equivalent to lesser
capital or reserve value and providing loans and services
forms of money. As the concept of money progressed
for national banks and the government;
and developed into what it is today, the definition of
3. Behaving as an emergency lender to distressed monetary standards became that of institutions and
commercial banks and at times even for the practices governing the supply of money in an economy
government by taking responsibility over government with a set of rules and policies. A monetary standard is a
debt; system of currency that acts a stable medium of
exchange for domestic transactions and a means of
4. Operating in the open market to buy and sell
international payment for foreign obligations.
securities such as other currencies. Currency
management also fall into different types. A country’s monetary standard is its principal method of
regulating the quantity and the exchange value of
Currencies can either be managed in a floating currency
standard money. When a country establishes its own
exchange system, a clean float exchange system, or a
monetary standard, a set of rules governing the
fixed currency exchange system.
creation of money and its circulation, and monitors
1. Floating currency exchange system whether these rules are being strictly followed. With a
monetary standard comes an established standard
In this system, the central bank bases its adjustments to money or monetary unit recognized by the government
the price of the currency relative to other currencies as the ultimate basic standard of value upon which all
depending on the external foreign exchange market other kinds of money are convertible. In the Philippines,
forces. The floating system involved the forex, or the the standard monetary unit is the Peso.
global foreign exchange market. Based on the forex,
currency can either be exchanged for its spot price or Monetary standards have two types: commodity or
current marketplace cost, or it can be for a future metallic standard and non-commodity or fiat standard.
delivery. The best example of this is exchanging money Under these types are the following subtypes.
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.
a. Gold Coin Standard – In a gold coin monetary • A minimum of one gold bar is what can be
standard, a country’s government authorizes the redeemed, and anything less than that would
conversion of gold bullions into gold coins, which are not be permitted.
then made freely obtainable to the citizens in exchange • Bullions as monetary units fail to work during
for other forms of money. This way, the value of gold as times of economic crises.
coin is made equivalent with its value as a metal. The • The government needs to have a hand in
gold in this monetary standard can also be freely regulating the bullion standard for it to function
imported and exported, which then allows the properly.
automatic stabilization of the domestic value of gold
c. Gold Exchange Standard – In a gold exchange
with its foreign value. In this type of standard, money
monetary standard, the monetary unit of the country is
supply is dependent on the country’s gold reserves
established in terms of gold – not in gold coins or gold
Pros of the gold coin standard: bars, but in terms of gold weight and fineness. This
means that the local currency can be converted into
• It is universally accepted
foreign gold drafts at fixed rates, which is then units simultaneously and are considered unlimited legal
convertible into foreign currency that can be redeemed tenders and can be converted into each other.
in gold coins or bars. In this standard, citizens use
In the bimetallic standard, the legal ratio is observed.
tokens and paper money and redeem bills of exchange
The legal ratio is also called the coinage or mint ratio,
payable in gold in a foreign country.
and refers to the ratio between the weight of the coins
Gold exchange standard is subdivided further into in the mint that is set at a fixed point by the
automatic and managed gold exchange standards. An government. The standard also observes the market
automatic gold exchange standard is established by a ratio, which is the ratio of the value of gold and silver as
country when it does not have a gold reserve and would they are bought and sold in the market.
need to depend on the reserves of other countries. On
The bimetallic standard provides a full-bodied currency
the other hand, a managed gold exchange standard is
to the country that adopts it, providing gold for large
adopted by a country that has a minimal amount of gold
transactions and silver for smaller ones. Prices are also
reserve that can be built up further by partnering with
kept stable, as one metal can always make up for
other countries.
shortage of the other. Constant exchange rates can also
Pros of the gold exchange standard: be observed as long as both metals are stable in terms
of each other. This would ensure a stable money supply
• The needs of the trading industry can be easily
that would then meet the trade requirements of the
met as the domestic currency is not made in
economy. The abundance in supply of both metals
gold.
makes money supply more elastic in this system.
• No wastage of metals happens.
• Any monetary unit can be used as the Bank cash reserves in gold and silver coins are also
circulating medium of exchange. easier to maintain as these are considered unlimited
• Gold reserves kept in foreign countries earn legal tender. Interest rates also decline as the supply of
interest. the two metals is often generally higher than the
• This standard will be particularly helpful to less demand. This makes it possible for banks to extend
developed countries who has little to no gold loans at cheap rates and encourage people to invest,
reserves. hence building a stronger economy.
• The government can buy and sell foreign gold Although the bimetallic standard has a lot of pros, it
drafts, and ultimately earn a profit. also has its cons, first of which is that it functions under
Cons of the gold exchange standard: Gresham’s law. Gresham’s law states that when there is
good and bad money in circulation, bad money tends to
• No checks and balances. drive the good one out of it. The concept of this law is
• The gold reserves kept in foreign countries triggered whenever the market ratio of silver to gold
cannot be controlled by the country adopting grows farther from the legal or mint ratio. When the
this standard. supply for silver becomes overabundant, making it
• The same reserve is used by the depositing overvalued and cheaper, thus driving gold out of
country and the depository country, rendering circulation.
the reserves a failure in the case of an economic
crisis The bimetallic standard can only be effective when the
market rate and legal rate is equal and stable. However,
Bimetallic Standard this is far from what happens when this standard is put
into practice. It also is a costly monetary standard as it
Countries who uses both silver and gold as a basis for
has to answer for costs in minting two types of metals
their monetary unit is using the bimetallic commodity
into coins, doubling expenses from monometallic
monetary standard. In this standard, the issuer can buy
standards.
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
Non-Commodity Chapter 4: The History of the Philippine Monetary
System
Standard Non-commodity standard is a monetary
standard wherein the face value of the money is much Before the Philippine money became what it is today, it
higher than the value of the material used to make it. went through many forms and changes throughout the
This monetary standard is also called the fiat standard. country’s history. In fact, the Philippine currency, Peso,
reflects its colourful history through its name. Peso is
In a non-commodity monetary system, the fiat money is
derived from the Spanish peso or pieces of eight.
considered as the standard unit of value and is legal
tender. Any other unit of money issued by the Pre-Spanish Era
government is redeemable in the standard fiat money.
Before the Spaniards came and conquered the
Utopian Paper Standard or Pure Fiat Standard Philippines, the pre colonial Filipino tribes conducted
their businesses and trades as other neighboring
The Utopian Paper monetary standard proposes the
countries such as China, Java, Borneo, and Thailand did:
adoption of standard money that is desired because of
through the barter system. Chinese merchants traded
what it can buy in goods and services and not because
porcelain, silk, and some metalwork in exchange for the
of what material it was made out of. This monetary
Filipinos’ gold, pearls, beeswax, and medicinal plants.
standard is called utopian as it is more of a theory and
However, like these other countries, barter began to
has not been used by any government.
pose an inconvenience, which then prompted the early
Involuntary Paper Standard tribes to find a medium of exchange.
During a national crisis that invokes a currency As the Philippines was rich in gold, they shaped rings
dilemma, the government adopts an involuntary paper out of the gold reserves to serve as a medium of
monetary standard. In this standard, the government exchange. These gold barter rings were used between
are at an odds and can no longer produce their currency the 8th and the 14th centuries. More gold ingots have
in gold or silver. As a result, it is forced to use paper been discovered that date in this era, such as the
money as an alternative. Piloncitos, or the small bead-like gold coins with flat
sides that are recognized as the earliest coinage in the
Managed Currency Standard country.
The managed currency monetary standard espouses of Spanish Period
an inconvertible and irredeemable paper money that is
issued against no gold or silver reserves and is managed When Magellan’s expedition landed in the Philippine
by a Central Bank. The Central Bank keeps the prices on shores in 1521, he brought with him the Spanish silver
a fair level by using trade and industrial conditions as peso. These silver cobs, also called macuquinas or hilis-
basis in increasing or decreasing the amount. kalamay bore a cross on one side and the Spanish royal
coat-of-arms on the other, along with the seals of
The government gives this paper money legal tender Spanish rulers Charless II, Philip IV, and Philip V. A few
power, which is the power given to money to settle all decades later after the reign of King Philip II, the
obligations whether public or private. The managed Mexican coins called cabo de bara de plata were widely
currency standard is the monetary system in use in the circulated.
Philippines since 1949.
During the reign of King Philip V, the first coin minted in
In this monetary standard, the paper money is the Philippines was put into circulation. This was called
inconvertible. No gold or silver reserves are maintained the barilla, from which the term barya came from. The
to back up the money supply. Lastly, the Central Bank is production of these copper coins was authorized by the
authorized to exercise control over the credit system, Royalty of Spain when there was a shortage of
such as controlling the quantity of money in circulation. fractional coins. The barillas were produced by the
Ayuntamiento or the municipality of Manila.
In December of 2010, the Bangko Sentral ng Pilipinas Level 4: Forensic security features for the use of law
released the new banknotes produced by the central enforcers in testifying whether a banknote is genuine or
bank into circulation. The change was made according counterfeit. These are detectable at specialized
to practice to help guard against counterfeits. Central laboratories.
banks usually change currency designs every 10 years
Recent Monetary Issues Since the 90’s, the Philippine
on average to protect the integrity of the country’s
monetary system has been generally stable, but not
currency.
without a few issues here and there. Most of these
All six banknotes – 20, 50, 100, 200, 500, and 1000 – issues deal with misprints, fraud, and inflation.
were given a redesign, but their sizes were retained.
• About 78 million 100-peso notes were printed in 2005
The BSP made the redesigns as user-friendly as possible,
with the misspelled name of former president Gloria
retaining the overall colors of the old banknotes. In this
Macapagal Arroyo. The notes were printed with
case, the 20 peso bill remained orange, the 50 peso bill
“Arrovo” instead of “Arroyo” and was only found out
remained red, the 100 peso bill remained violet, 200
when about 2 million of these notes have been out for
peso in green, 500 peso in yellow, and 1000 peso in
circulation.
blue. They also added big digits of the denominational
value on both sides of the new bill. • In August of 2006, the fact that the 1-peso coin has
All these redesigning concepts were studied and the same size as a UAE dirham coin and a US quarter
proposed by the BSP’s Numismatic Committee, along became popular.
with the upgrades in the security features of the • In 2010, the New Generation Currency Series printed
country’s currency. The Monetary Board then approved scientific names in an incorrect manner, and were only
the concepts and submitted it to the President for a addressed in the 2017 revisions.
final approval. For the New Generation banknotes, the
Numismatic Committee consulted with Filipino design • A 100-peso banknote without the face of former
groups on what concepts to integrate on the new president Manuel Roxas went viral in 2017. The BSP said
designs, acquiring inspiration from national historical that it was nothing but a rare misprint.
events and culture. Chapter 5: Philippine Monetary Policy
The New Generation banknotes feature Filipinos such as When the Philippines established the Central Bank, it
the heroes along with world heritage sites and iconic also established its own monetary policy. The monetary
natural wonders found in the Philippines. These policy refers to the measures or actions taken by the
banknotes are also equipped with four levels of security central bank to influence the general price level and the
authentication, making it more complicated to be level of liquidity in the economy. It encompasses all
counterfeited. actions made by the central bank in managing the
Level 1: Security features which can be easily country’s money supply in the form of credit, cash,
recognized by the public without use of special checks, and money market mutual funds.
instruments. These are the “look, feel, tilt” elements in It is how the government controls the supply and
the notes such as watermarks, security thread, security availability of money, the cost of money, and the rate of
fibers, and others. interest. Monetary policy is one of the two ways a
Level 2: Security features recognizable by professional country’s government can influence the economy, with
cash handlers/bank tellers with the use of magnifying the other one being Fiscal Policy.
lens or ultraviolet light. Examples are fluoro- Monetary policy manages economic growth and
inflation by balancing liquidity. To further economic
growth, it increases liquidity. On the other hand, to operations of banks and to regulate the non-bank
prevent inflation, it reduces liquidity. Monetary policies financial institutions, as well as to keep aggregate
work mostly around credit, including loans, mortgages, demand from growing rapidly or growing too slowly.
and bond. Central banks use interest rates, reserve Over the years, the primary objective of the monetary
requirements, and bond amounts that banks must hold policy set by the BSP is price and inflation stability,
in influencing how much a bank can lend, and therefore leading the country to a balanced economic growth.
influencing the money supply in other forms.
The first Philippine monetary framework from the
Objectives of Monetary Policies 1980s followed a monetary aggregate targeting
approach in its monetary policy. This approach believed
Generally, central banks have three monetary policy
that the relationship between money, output, and
objectives, with specific targets for each varying from
inflation is stable and predictable, particularly that
one country to another.
changes in money supply is related to price changes or
• Managing inflation inflation. With the money aggregate targeting
approach, the BSP is assumed to be able to determine
• Reducing unemployment the level of liquidity necessary for the ideal inflation
• Promoting moderate long-term interest rates level that would be consistent with the growth
objective. Under this monetary framework, the BSP
There are two settings or types of monetary policy that directly controls or targets the money supply, resulting
are specific to meeting these objectives. The first one is to it indirectly controlling inflation.
the contractionary monetary policy. This is used by
central banks to reduce inflation, wherein they reduce In June of 1995, the BSP adopted a modified monetary
the money supply by restricting the amount of money framework, wherein the previous sole money aggregate
banks can lend. This then leads to banks charging higher targeting is now complemented by inflation targeting
interest rates and increase loan fees. This type of with an emphasis on price stability. These changes
monetary policy slows down growth as fewer included allowing base money levels to go beyond
businesses and individuals borrow from banks. targets as long as inflation rates are met and
establishing an operation to bring down the base
The other type is the expansionary monetary policy. The money level whenever an excess of one or more
aim of this setting is to lower unemployment rates and percentage points in the inflation rate is observed.
to avoid recession. This setting does the opposite: it Under this new framework, the BSP ensures that price
intends to increase the level of liquidity or money levels are stable even with occasional economic shocks.
supply by giving banks more money to lend out. With
the high supply of money, banks could lower their It was in January of 2002 when the Bangko Sentral ng
interest rates and make loans cheaper. This then Pilipinas formally adopted the inflation targeting
attracts more businesses to borrow money for business framework as its sole monetary policy. This allows the
and operations expansion, along with individuals central bank to focus on keeping the inflation rate on an
looking to borrow money for personal development. optimal stable and low level that would then allow the
This setting increases demand and increases economic country to grow its economy. The ideal inflation rate is
growth; however, this also could result in a relatively measured through the Consumer Price Index, as the
higher inflation path for the economy. ultimate end goal of the monetary policy under the
inflation targeting framework is price stability.
In the Philippines, the primary objective is promoting a
low and stable inflation conducive to a balanced and Under the inflation targeting framework, the central
sustainable economic growth. bank establishes an explicit inflation target and commits
to achieving it in a given time period. The central bank
Philippine Monetary Policy then uses various instruments to achieve this target,
and in the event that they fail, it is obligated to provide
As assigned by the Republic Act No. 265, the authority
a public explanation and come up with measures on
to provide policy directions in the monetary, banking,
how to meet the inflation target again.
and credit systems of the Philippines is given to the
Bangko Sentral ng Plipinas. It exists to supervise
The important features of the inflation targeting • Good forecasting ability
approach are as follow, according to BSP:
The central bank should have a good statistical model
• simple framework which can, therefore, be easily for forecasting inflation.
understood by the public;
• Transparency
• allows greater focus on the goal of price stability,
The central bank should promote transparency by
which is the primary mandate of the BSP;
communicating clearly to the public its policy actions
• forward-looking and recognizes that monetary policy and the reasons behind them.
actions affect inflation with a lag;
• Accountability
• reflects a comprehensive approach to policy by taking
There should be accountability on the part of the
into consideration the widest set of available
central bank should actual inflation deviate from the
information about the economy;
target.
• promotes transparency in the conduct of monetary
• Sound financial system
policy through the announcement of targets and the
reporting of measures that the BSP will adopt to attain The financial system should be fundamentally sound to
these targets, as well as the outcomes of its policy make monetary policy more effective in influencing
decisions; output and prices. The financial system acts as the
intermediary by which the BSP influences the supply of
• increases the accountability of monetary authorities
money and credit in the economy.
to the inflation objective since the announced inflation
target serves as a yardstick for the performance of the Interest Rate Corridor System
BSP, and thus helps build its credibility; and
In June 3, 2016, the Bangko Sentral shifted to a new
• does not depend on the assumption of a stable monetary operation in order to improve the
relationship between money, output and prices, and transmission of monetary policy. This new operation is
can still be implemented even when there are shocks the interest rate corridor system.
that could weaken the relationship. This approach is
deemed successful if it adheres to the following
preconditions set by the BSP:
The shift to the IRC system does not represent a change Money Supply Indicators
in the BSP’s stance of monetary policy. The IRC reforms
Central banks use money supply indicators to predict
are primarily operational in nature and are not intended
future behaviour of prices and making plans according
to materially affect prevailing monetary policy settings
to the current economic activity. These money supply
upon implementation. In the initial stages, the TDF is
indicators are also used by economists for trend
expected to have a rate between that of the RRP and
forecasting for consumer price inflation. Using these
overnight deposit facility such that the weighted rate
indicators, the government can decide on what action
for monetary operations will remain broadly the same.
they are to take to stimulate the economy or control an
Moreover, the interest rate at the floor of the corridor,
economic crisis.
where the bulk of the BSP’s liquidity absorption with
the market currently takes place, is being kept steady at • M1: Narrow Money
the launch of the IRC system. At the same time, short-
term liquidity conditions are expected to remain Narrow money is money in circulation. This includes
broadly unchanged as funds will continue to be cash circulating among the people, both in coins and
absorbed through monetary operations under the IRC bills, peso demand deposits, tourist checks from non-
system. In conducting monetary operations, the BSP will bank issuers, and other currency in check form. Narrow
calibrate carefully the volume of the TDF offerings to money encompasses all funds readily available for
achieve a smooth transition to the new system. spending and is the base measurement of the money
supply.
• M2: Broad Money offered using a fixed-rate and full-allotment method,
where individual bidders are awarded a portion of the
Broad money encompasses all that M1 does, along with
total offer depending on their bid size. Fixed-rate, full
peso savings deposits, time deposits, and mutual funds
allotment method will help ensure that the overnight
balances.
rate sits close to the BSP policy rate.
• M3: Broad Money
Outright Transaction
Liabilities This indicator includes M2 money supply
• Unlike the repurchase or reverse repurchase, there is
along with money substitutes, i.e., promissory notes
no clear intent by the government to reverse the action
and commercial papers.
of their selling/buying of monetary securities. Thus, this
• M4: Liquidity transaction creates a more permanent effect on our
monetary supply. “When the BSP buys securities, it pays
Money Liquidity money includes all of M3 along with for them by directly crediting its counterparty's Demand
transferable deposits, treasury bills, and deposits held Deposit Account with the BSP.” The reverse is done
in foreign currency, which are all short-term and highly upon the selling of securities.
liquid.
Foreign Exchange Swaps
If the variety in the M1 and M2 stock is low, this means
that there is an excess amount of money held by • This refers to the actual exchange of two currencies at
consumers themselves and not being put into a specific date, at a rate agreed upon the deal date and
circulation that much. the reverse exchange of the currencies at a farther ate
in the future, also at an interest rate agreed on deal
Monetary Policy Instruments
date.
In order for the BSP to make use of the money supply
• Acceptance of Fixed-Term Deposits
indicators and achieve the inflation target, it utilizes a
variety of instruments to implement its monetary o This method was introduced by the BSP in 1998 to
stance. expand its liquidity management. In the Special
Deposits Account, or SDA, consists fixed terms deposits
• Open Market Operations
by banks and institutions affiliated with the BSP. With
o This is the sale or purchase of government securities the adoption of the IRC system in 2016, the SDA facility
by the Bangko Sentral to withdraw or inject liquidity was replaced by the term deposit auction facility (TDF).
into the system. Open Market Operations consist of the o The TDF is a key liquidity absorption facility used by
following: the BSP for liquidity management and used to withdraw
a large part of the structural liquidity from the financial
Repurchase and Reverse Repurchase system to bring market rates closer to the BSP policy
• This is carried out through the Repurchase Facility and rate.
Reverse Purchase Facility of the Bangko Sentral ng • Standing Liquidity Facilities
Pilipinas. In Purchase transactions, the Bangko Sentral
buys government securities with a dedication to sell it o The BSP offers standing liquidity (lending and deposit)
back at a specified future date, and at a predetermined windows that help counterparties adjust their liquidity
interest rate. The BSP's payment increases reserve positions at the end of the day. These standing
balances and expands the monetary supply in the overnight facilities are available on demand to qualified
Philippines. On the other hand, in Reverse Repurchase, counterparties during BSP business hours. The two
the government acts as the seller, and works to standing facilities that form the upper and lower bound
decrease the liquidity of money. These transactions of the corridor are set at ± 50 basis points (bps) around
usually have maturities ranging from overnight to one the target policy rate (the overnight RRP rate under the
month. new IRC structure).
• With the implementation of the IRC system, the RRP o The standing overnight liquidity facilities are available
facility was transformed into an overnight facility and on demand to qualified counterparties. The overnight
lending facility (equivalent to RP in the old system) is, in • Reserve Requirements
principle, not constrained in volume but, in practice,
o In banking institutions, there are required amounts
depends mainly on the available collateral held by BSP
that banks cannot lend out to people. They always need
counterparties. Meanwhile, the overnight deposit
to maintain a certain balance of money, which are
facility is, likewise, unlimited in volume to help absorb
called "reserves". Once these reserve requirements are
any residual system liquidity and constrain market rates
changed and are varied, changes in the monetary
from falling below the corridor.
supply will be observed greatly.
• Term Deposit Facility
o Reserve requirements refer to the percentage of bank
o The Term Deposit Facility is a key liquidity absorption deposits and deposit substitute liabilities that banks
facility, commonly used by CBs for liquidity must set aside in deposits with the BSP which they
management. The TDF is used to withdraw a large part cannot lend out, or where available through
of the structural liquidity from the financial system to reserve eligible government securities. Changes in
bring market rates closer to the BSP policy rate. reserve requirements have a significant effect on
money supply in the banking system, making them a
o The BSP offers two tenors—seven days and 28 days—
powerful means of liquidity management by the BSP.
in its term deposit. The possibility of offering longer
tenors can be considered in the future, depending on o Reserve requirements are imposed on the peso
the liquidity needs and preferences of the market. Pre- liabilities of universal/commercial banks, thrift banks,
termination is prohibited for the 7-day tenor but is rural banks and cooperative banks, and non-bank
allowed for the 28-day tenor after a 7-day holding financial institutions with quasi-banking functions.
period at the appropriate pre-termination rate. The TDF Reservable liabilities include demand, savings, time
auction will be operated using a variable-rate, deposit and deposit substitutes (including long-term
multiple price tender (English auction) in order to bring non-negotiable tax-exempt certificates of time
short term interest rates within a reasonably close deposits).
range to the policy rate.
Fiscal Policy
• Rediscounting
In order to achieve certain goals, the government
o The BSP extends discounts, loans and advances to utilizes the existing monetary policy together with a
banking institutions in order to influence the volume of fiscal policy. Fiscal policy are measures employed by
credit in the financial system. The rediscounting facility governments to stabilize the economy, specifically by
allows a financial institution to borrow money from the manipulating the levels and allocations of taxes and
BSP using promissory notes and other loan papers of its government expenditures.
borrowers as collateral.
The government funds itself by putting tax systems in
o The rediscounting facility has two categories namely, place, mainly from personal and income tax collections.
Peso Rediscount Facility and Exporters Dollar and Yen It also gets revenue through fees and licenses,
Rediscount Facility. The Peso Rediscount Facility privatization proceeds, and income from other
interest rates are based on the latest available BSP government operations and state-owned enterprises,
overnight lending rate plus the applicable term premia which are all non-tax revenues. To finance fiscal deficit
per Circular No. 964 dated 27 June 2017. The EDYRF and debt, the Philippines relies on both domestic and
interest rates are based on the 90-day London external sources.
Inter Bank Offered Rate for the last working day of the
Tax collections comprise the biggest percentage of
immediately preceding month plus 200 basis points plus
revenue collected. Its biggest contributor is the Bureau
the applicable term premia for loan maturities
of Internal Revenue, followed by the Bureau of
exceeding 90 days pursuant to Circular No. 807 dated
Customs. Tax effort as a percentage of GDP has
15 August 2013.
averaged at roughly 13% for the years 2001-2010.
• At least 35 years of age, with the exception of the Powers of the Monetary Board
Governor who should be at least 40 years old The Monetary Board has the following powers in
• Of good moral character exercising its authority:
The Monetary Board of the BSP under the presidency of Chapter 8: Functions and Operations of the Bangko
Rodrigo Duterte is comprised of the following members: Sentral
• Carlos G. Dominguez III Central banks are government established agencies
• Felipe M. Medalla responsible for regulating the nation’s monetary supply
and credit conditions along with monitoring commercial
• Juan De Zuniga, Jr. banks and other non-banking financial institutions.
Below are the characteristics of a central bank:
• Peter B. Favila
o The main feature of a central bank is the issue of o The Central bank acts as the clearing house for other
currency notes in the country. The Central bank controls banks. Under this function the Central bank facilitates
the volume of currency in the country in accordance the settlement of bills and cheques of other banks by
with requirements of business and the general public. setting off demands of one against other and thus helps
the functioning of the banking system so smoothly
• Banker to The Government
without actual cash transactions.
o The Central bank is the banker to the government and
• Controller of Foreign Exchange
also acts as its fiscal agent. The government keeps its
balances with it free of interest. It receives and o The Central bank is responsible for the management
disburses the payments on behalf of the government of foreign exchange & maintaining external value of
and also makes advances to the government. nation’s currency. Functions of the BSP as a Central
Bank As mandated by the New Central Bank Act, the
• Banker’s Bank
Bangko Sentral ng Pilipinas operates on the following
o The Central bank also acts as the banker to the functions as related to its functions as the central
scheduled and other banks. It is the custodian of the monetary authority:
cash reserves of the commercial banks. Every schedule
• Liquidity Management
bank is required to maintain not less than 5% of its total
demand and time liabilities with the Central bank. The BSP formulates and implements monetary policy
Against these obligations, the scheduled banks are aimed at influencing money supply consistent with its
entitled to loan and rediscount facilities from the bank. primary objective to maintain price stability.
This reserve with the central is considered as good as
• Currency issue
liquid cash. The provision of reserve enables the central
bank to have control over the credit creation of the The BSP has the exclusive power to issue the national
commercial banks. currency. All notes and coins issued by the BSP are fully
guaranteed by the Government and are considered
• Lender of Last Resort
legal tender for all private and public debts.
o The Central bank is the lender of last resort. It
• Lender of last resort
maintains a close relationship with the commercial
banks. It takes the responsibility of meeting directly or The BSP extends discounts, loans and advances to
indirectly, all reasonable demands for accommodation banking institutions for liquidity purposes.
from the commercial banks, and other credit
institutions under certain terms and conditions. • Financial Supervision
o The Bangko Sentral shall have the authority to require o Any director, officer or stockholder who, together
from any person or entity, including government offices with his related interest, contracts a loan or any form of
and instrumentalities, or government-owned or - financial accommodation from: (1) his bank; or (2) from
controlled corporations, any data, for statistical and a bank (a) which is a subsidiary of a bank holding
policy development purposes in relation to the proper company of which both his bank and the lending bank
discharge of its functions and responsibilities. This is are subsidiaries or (b) in which a controlling proportion
provided that disaggregated data gathered are subject of the shares is owned by the same interest that owns a
to prevailing confidentiality laws. The Bangko Sentral controlling proportion of the shares of his bank, in
through the Governor or in his absence, a duly excess of five percent (5%) of the capital and surplus of
authorized representative shall have the power to issue the bank, or in the maximum amount permitted by law,
a subpoena for the production of the books and records whichever is lower, shall be required by the lending
for the aforesaid purpose. Those who refuse the bank to waive the secrecy of his deposits of whatever
subpoena without justifiable cause, or who refuse to nature in all banks in the Philippines. Any information
supply the Bangko Sentral with data required, will be obtained from an examination of his deposits shall be
subject to punishment for contempt in accordance with held strictly confidential and may be used by the
the provisions of the Rules of Court. examiners only in connection with their supervisory and
examination responsibility or by the Bangko Sentral in
o The authority of the Bangko Sentral to require data an appropriate legal action it has initiated involving the
from banks shall continue to be exercised pursuant to deposit account.
its supervisory powers.
• Examination and Fees
o Another thing to note is that data on individuals and
firms, other than banks, gathered by the Bangko Sentral o The supervising and examining department head,
shall not be made available to any person or entity personally or by deputy, shall examine the operations of
every bank and quasi-bank. The institution concerned hundred eighty days from the date of their rediscount,
shall afford to the head of the appropriate supervising discount or acquisition by the Bangko Sentral and
and examining departments and to his authorized resulting from transactions related to:
deputies full opportunity to examine its books and
the importation, exportation, purchase or sale of
records, cash and assets and general condition and
readily saleable goods and products, or their
review its systems and procedures at any time during
transportation within the Philippines; or
business hours when requested to do so by the Bangko
Sentral. the storing of non-perishable goods and products
which are duly insured and deposited, under conditions
• Appointment of Conservator
assuring their preservation, in authorized bonded
o Whenever, on the basis of a report submitted by the warehouses or in other places approved by the
appropriate supervising or examining department, the Monetary Board.
Monetary Board finds that a bank or a quasi-bank is in a
state of continuing inability or unwillingness to maintain • Production credits
a condition of liquidity deemed adequate to protect the o The Bangko Sentral may rediscount, discount, buy and
interest of depositors and creditors, the Monetary sell bills, acceptances, promissory notes and other
Board may appoint a conservator with such powers as credit instruments having maturities of not more than
the Monetary Board shall deem necessary to take three hundred sixty days from the date of their
charge of the assets, liabilities, and the management rediscount, discount or acquisition by the Bangko
thereof, reorganize the management, collect all monies Sentral and resulting from transactions related to the
and debts due said institution, and exercise all powers production or processing of agricultural, animal,
necessary to restore its viability. mineral, or industrial products.
• Disposition of Banking Franchise o Documents or instruments acquired in accordance
with this subsection shall be secured by a pledge of the
o The Bangko Sentral may, if public interest so requires,
respective crops or products. This is provided, however,
award to an institution, upon such terms and conditions
that the crops or products need not be pledged to
as the Monetary Board may approve, the banking
secure the documents if the original loan granted by the
franchise of a bank under liquidation to operate in the
Bangko Sentral is secured by a lien or mortgage on real
area where said bank or its branches were previously
estate property seventy percent of the appraised value
operating. This is provided that whatever proceeds may
of which equals or exceeds the amount of the loan
be realized from such award shall be subject to the
granted.
appropriate exclusive disposition of the Monetary
Board. • Other credits
Credit Policy o These can be special credit instruments not otherwise
The rediscounts, discounts, loans and advances which rediscountable under the immediately preceding
the Bangko Sentral is authorized to extend to banking subsections and may be eligible for rediscounting in
institutions are used to influence the volume of credit accordance with rules and regulations which the Bangko
consistent with the objective of price stability and Sentral shall prescribe.
maintenance of financial stability. o Whenever necessary, the Bangko Sentral shall provide
The Bangko Sentral may normally and regularly carry on funds from non-inflationary sources. This is provided,
the following credit operations with banking institutions however, that the Monetary Board shall prescribe
operating in the Philippines: additional safeguards for disbursing these funds.
o The Bangko Sentral may rediscount, discount, buy and o The Bangko Sentral may grant advances against the
sell bills, acceptances, promissory notes and other following kinds of collaterals for fixed periods which
credit instruments with maturities of not more than one shall not exceed one hundred eighty (180) days:
gold coins or bullion Monetary Board has ascertained that the bank is not
insolvent and has the assets defined hereunder to
securities representing obligations of the Bangko secure the advances. Furthermore, it should have had a
Sentral or of other domestic institutions of recognized concurrent vote of at least five members of the
solvency Monetary Board obtained. The amount of any
commercial credits emergency loan or advance shall not exceed the sum of
fifty percent of total deposits and deposit substitutes of
production credits, for periods which shall not exceed the banking institution, and shall be disbursed in two or
three hundred sixty (360) days more tranches.
utilized portions of advances in current amount The Bangko Sentral then collects interest and other
covered by regular overdraft agreements related to appropriate charges on all loans and advances it
operations included under commercial and production extends, the closure, receivership or liquidations of the
credits, and certified as to amount and liquidity by the debtor-institution notwithstanding. The Monetary
institution soliciting the advance Board then fixes the interest and rediscount rates to be
charged by the Bangko Sentral on its credit operations
negotiable treasury bills, certificates of indebtedness,
in accordance with the character and term of the
notes and other negotiable obligations of the
operation, but after due consideration has been given
Government maturing within three years from the date
to the credit needs of the market, the composition of
of the advance
the Bangko Sentral’s portfolio, and the general
negotiable bonds issued by the Government of the requirements of the national monetary policy. Interest
Philippines, by Philippine provincial, city or municipal and rediscount rates shall be applied to all banks of the
governments, or by any Philippine Government same category uniformly and without discrimination.
instrumentality, and having maturities of not more than
Documents rediscounted, discounted or accepted as
ten years from the date of advance.
collateral by the Bangko Sentral must be withdrawn by
The Bangko Sentral may also extend loans and advances the borrowing institution on the dates of their
to banking institutions for a period of not more than maturities, or upon liquidation of the obligations which
seven days without any collateral for the purpose of they represent or to which they relate whenever said
providing liquidity to the banking system in times of obligations have been liquidated prior to their dates of
need. maturity. Banks have the right at any time to withdraw
any documents which they have presented to the
In periods of national and/or local emergency or of
Bangko Sentral as collateral, upon payment in full of the
imminent financial panic which directly threaten
corresponding debt to the Bangko Sentral, including
monetary and financial stability, the Monetary Board
interest charges.
may, by a vote of at least five of its members, authorize
the Bangko Sentral to grant extraordinary loans or The BSP and International Institutions
advances to banking institutions. While such loans or
One function of the BSP is to act as the “banker of the
advances are outstanding, the debtor institution shall
government”, representing the government in
not, except upon prior authorization by the Monetary
international monetary institutions. The Bangko Sentral
Board, expand the total volume of its loans or
represents the government in all dealings, negotiations
investments.
and transactions with the International Monetary Fund
The Monetary Board may, at its discretion, likewise and carries such accounts as may result from Philippine
authorize the Bangko Sentral to grant emergency loans membership in, or operations with, the IMF. It may also
or advances to banking institutions, even during normal be authorized by the government to represent it in
periods, for the purpose of assisting a bank in a dealings, negotiations or transactions with the
precarious financial condition or under serious financial International Bank for Reconstruction and Development
pressures brought by unforeseen events, or events and with other foreign or international financial
which, though foreseeable, could not be prevented by institutions or agencies. The President may, however,
the bank concerned. This is provided, however, that the designate any of his other financial advisors to jointly
represent the Government in such dealings, o Manages the procurement of supplies, equipment,
negotiations or transactions. and services for the SPC, client affairs and information
programs, development/implementation of SPC
The Security Plant Complex
construction/renovation projects, and general
The Security Plant Complex which is located in Quezon maintenance and upkeep of its facilities
City houses a banknote printing plant, a securities
• Financial Services Group
printing plant, a mint and a gold refinery. The banknote
printing plant and the mint take care of producing o Prepares financial statements and records financial
currency notes and coins, respectively. The Security receipts/disbursements, and processes bills for
Plant Complex also houses the Currency Management payment
Sector, which is responsible for the production and
Gold Reserve Management
issuance of the Philippine currency.
Gold producers, small-scale miners and other
The core products of the SPC are banknotes and coins.
individuals may sell their gold at prevailing global
It also produces refined gold and silver; judicial forms
market rates at various gold buying stations such as the
and other security documents; commemorative medals;
Mint and Refinery Operations Department (MROD) in
and presidential medals and state decorations.
Quezon City and the BSP offices in the cities of Baguio,
The SPC is under the Currency Management sector in Naga, Davao and Zamboanga. Purchased gold in the
the BSP Organizational chart. Under the SPC are the form of bars or discs are then refined at the MROD and
following: 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.
• Banknotes and Securities Production Management • Maximum Dimensions o Bar: 16.5 cm long x 8 cm wide
Department x 4 cm thick o Disc: 10 cm diameter x 5 cm thick
o Handles various control and support functions in • Weight o Maximum weight of bar or disc: @ 5
relation to the printing of banknotes and other security kilograms o Maximum weight per lot: @ 10 kilograms
documents • Minimum Preliminary Gold Assay – 30% Gold reserve
• Mint and Refinery Operations Department management is a challenging task. Although gold is a
relatively low-yielding investment in terms of interest, it
o Manages and performs the minting of coins and provides holders with other benefits such as security
commemorative medals, and the refinery of gold and diversification. With the Philippines being a major
purchased from local panners and miners gold-producer, the BSP seeks to help in the
• Department of General Services
development of the gold mining industry and therefore with applicable laws. Regulation is setting rules and
regards bullion as an essential part of its GIR. guidelines, setting operational standards and rules for
financial institutions. Sometimes regulations are
The BSP holds gold for several reasons. First is for
restrictive, meaning they limit a bank’s activities. Other
security purposes as it is a real asset and it is no one’s
times they are permissive, which means they allow
liability. Further, it is an attractive asset to hold during
banks to conduct a given activity.
times of uncertainty as it is considered a safe haven.
Another reason is for diversification as it has a low Supervision and Regulation by the BSP
correlation with other assets that the BSP manages. Still
The Bangko Sentral has supervision over the operations
another reason is that investors prefer to own gold
of banks and exercises such regulatory powers as
when inflation and inflation expectations are high as
provided in the New Central Bank Act and other
this precious metal is considered a hedge against
pertinent laws over the operations of finance
accelerating prices. Finally, the BSP maintains a portion
companies and non-bank financial institutions
of its reserves in the form of bullion since the
performing quasi-banking functions.
Philippines is a significant producer of gold.
The BSP monitors and compiles various indicators on
The menu of gold reserves management products
the Philippine banking system. The Philippine banking
available to the Bangko Sentral ng Pilipinas include:
system is composed of universal and commercial banks,
• Spot trading thrift banks, rural and cooperative banks.
• Development Committee
Extended Credit Facility (ECF) Financing under the ECF carries a zero interest rate at
least through end-2018, with a grace period of 5½
The Extended Credit Facility (ECF) provides financial years, and a final maturity of 10 years. On October 3,
assistance to countries with protracted balance of 2016, the Executive Board approved a modification of
payments problems. The ECF was created under the the mechanism governing interest rate setting of PRGT
Poverty Reduction and Growth Trust (PRGT) as part of a facilities and PRGT interest rates will remain at zero for
broader reform to make the Fund’s financial support as long as and whenever global market rates are very
more flexible and better tailored to the diverse needs of low. The Fund reviews the level of interest rates for
low-income countries (LICs), including in times of crisis. concessional facilities under the PRGT every two years.
The ECF is the Fund’s main tool for providing medium-
term support to LICs. Standby Credit Facility (SCF)
The ECF supports countries’ economic programs aimed The Standby Credit Facility (SCF) provides financial
at moving toward a stable and sustainable assistance to low income countries (LICs) with short-
macroeconomic position consistent with strong and term balance of payments needs. The SCF was created
durable poverty reduction and growth. The ECF may under the Poverty Reduction and Growth Trust (PRGT)
also help catalyze additional foreign aid. as part of a broader reform to make the Fund’s financial
support more flexible and better tailored to the diverse
The ECF is available to all PRGT-eligible member needs of LICs, including in times of shocks or crisis.
countries that face a protracted balance of payments
problem, i.e. when the resolution of the underlying The SCF supports LICs that have reached broadly
macroeconomic imbalances would be expected to sustainable macroeconomic positions, but may
extend over the medium or longer term. experience episodic, short-term financing and
adjustment needs, including those caused by shocks.
Under the ECF, member countries agree to implement a The SCF supports countries’ economic programs aimed
set of policies that will help them make progress toward at restoring a stable and sustainable macroeconomic
a stable and sustainable macroeconomic position over position consistent with strong and durable growth and
the medium term. These commitments, including poverty reduction. It also provides policy support and
specific conditions, are described in the country’s letter may help catalyze foreign aid. The SCF replaced the
of intent. Exogenous Shocks Facility-High Access Component (ESF-
Assistance under an ECF arrangement is provided for an HAC) effective January 2010.
initial duration from three to up to four years, with an The SCF is available to PRGT-eligible member countries
overall maximum duration of five years. Following the facing an immediate or potential balance of payments
expiration, cancellation, or termination of an ECF need, where the country’s financing and adjustment
arrangement, additional ECF arrangements may be needs are normally expected to be resolved within two
approved. years, thus establishing a sustainable macroeconomic
position.
An SCF arrangement can range from 12–24 months. As payments position. The EFF provides assistance in
the SCF is intended to address episodic short-term support of comprehensive programs that include
needs, its use is limited to two and a half out of any five policies of the scope and character required to correct
years. Subject to these limits, an SCF arrangement may structural imbalances over an extended period.
be extended or cancelled, and consecutive
Given that structural reforms to correct deep-rooted
arrangements may be approved.
weaknesses often take time to implement and bear
Access to SCF financing is determined on a case-by-case fruit, the engagement under an EFF and its repayment
basis, taking into account the country’s balance of period are longer than most Fund arrangements.
payments need, the strength of its economic program
Extended arrangements would normally be approved
and capacity to repay the Fund, the amount of
for periods not exceeding three years, with a maximum
outstanding Fund credit and the member’s record of
extension of up to one year where appropriate.
past use of Fund credit, and is guided by access norms.
However, a maximum duration of up to four years at
Subject to the applicable access limits, the amount
approval is also allowed, predicated on, inter alia, the
approved at the start of the arrangement may be
existence of a balance of payments need beyond the
augmented during an arrangement if needed. Total
three-year period—the prolonged nature of the
access to concessional financing under the PRGT is
adjustment required to restore macroeconomic
limited to 75 percent of quota per year, and 225
stability—and the presence of adequate assurances
percent of quota in total. These limits can be exceeded
about the member’s ability and willingness to
in exceptional circumstances. For precautionary use,
implement deep and sustained structural reforms.
the annual limit at approval is 56.25 percent of quota
There is also a longer repayment period of between
and the average annual limit at approval (over the
4½–10 years, with repayments in twelve equal
arrangement) is 37.5 percent of quota.
semiannual installments. In contrast, the Stand-by
A member country with a potential but not immediate Arrangement (SBA) is of shorter duration, with a
balance of payments need can treat access under the repayment period of 3¼–5 years.
SCF as precautionary, in which case no disbursements
As with the SBA, the size of borrowing under the EFF is
will be made. However, countries retain and
guided by a country’s financing needs, capacity to
accumulate the rights to request disbursements under
repay, and track record with use of IMF resources.
the arrangement if a financing need were to arise at a
later stage. SCF arrangements treated as precautionary • Normal access. Borrowing under the EFF is subject to
do not count toward the two and a half out of any five the normal limit of up to 145 percent of a country’s IMF
years’ time limit on the use of the SCF referred to quota annually and a cumulative limit over the life of
above. the program of 435 percent of quota, net of scheduled
repayments.
Extended Fund Facility (EFF)
When a country faces serious medium-term balance of • Exceptional access. The Fund may lend amounts
payments problems because of structural weaknesses above these normal access limits on a case-by-case
that require time to address, the IMF can assist with the basis in exceptional circumstances provided that the
adjustment process under an Extended Fund Facility country satisfies a predetermined set of criteria.
(EFF). Compared to assistance provided under the In addition, EFFs generally are not formulated on a
Stand-by Arrangement, assistance under an extended precautionary basis in anticipation of a future balance
arrangement features longer program engagement—to of payments problem.
help countries implement medium-term structural
reforms—and a longer repayment period. Rapid Credit Facility (RCF)
The EFF was established to provide assistance to The Rapid Credit Facility (RCF) provides rapid
countries experiencing serious payments imbalances concessional financial assistance with limited
because of structural impediments or characterized by conditionality to low-income countries (LICs) facing an
slow growth and an inherently weak balance of 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 Fund support under the RCF is provided without ex post
support more flexible and better tailored to the diverse program based conditionality or reviews. Economic
needs of LICs, including in times of crisis. The RCF places policies supported under the RCF should aim at
emphasis on the country’s poverty reduction and addressing the underlying balance of payments
growth objectives. difficulties in support of the country's poverty reduction
and growth objectives. Financing under the RCF carries
The RCF provides low-access, rapid, and concessional
a zero interest rate, has a grace period of 5½ years, and
financial assistance to LICs facing an urgent balance of
a final maturity of 10 years.
payments need, without ex post conditionality. It can
provide support in a wide variety of circumstances, Poverty Reduction and Growth Facility (PRGF)
including shocks, natural disasters, and emergencies
In September of 1999, the IMF established the Poverty
resulting from fragility. The RCF also provides policy
Reduction and Growth Facility (PRGF) to make the
support and may help catalyze foreign aid.
objectives of poverty reduction and growth more
The RCF is available to PRGT-eligible members that face central to lending operations in its poorest member
an urgent balance of payments need, where a full- countries. Reviews of the PRGF by IMF staff in 2002 and
fledged economic program is either not necessary (for by the Independent Evaluation Office (IEO) of the IMF in
instance because of the transitory and limited nature of 2004 confirmed that the design of the programs
the shock) or not feasible (for instance because of supported by PRGF lending has become more
capacity constraints or domestic fragilities). accommodating to higher public expenditure, in
particular pro poor spending.
Financial assistance under the RCF is provided as an
outright loan disbursement. While RCF financing takes Building on this progress and in response to a 2007 IEO
the form of a one-off disbursement, there is scope for report on the IMF and Aid to Sub-Saharan Africa, the
repeat use. A repeat use of the RCF is possible within IMF in 2007 adopted principles to promote the full use
any three-year period if the balance of payments need of external aid while maintaining macroeconomic and
is caused primarily by an exogenous shock or the debt sustainability. A review of PRGF program design by
country has established a track record of adequate the Executive Board in September 2005 found that
macroeconomic policies. However, no more than two while macroeconomic outcomes in low-income
disbursements may be made in any twelve-month countries had improved markedly in recent years, per
period. Repeat use of the RCF may facilitate eventual capita income remains low. The review noted in
transition to an ECF arrangement. particular, the importance of broad economic
institutions for sustained growth and stability, and the
Access to RCF financing is determined on a case-by-case
need to manage carefully increased aid flows.
basis, taking into account the country’s balance of
payments need, the strength of its macroeconomic The principles of broad public participation and country
policies, capacity to repay the Fund, the amount of ownership are central to the PRGF. Discussions on the
outstanding Fund credit, and the member’s record of policies underlying PRGF supported programs are more
past use of Fund credit. Under the RCF, access is open than in the case of other Fund arrangements,
normally limited to 18.75 percent of quota per year and since they are based on the nationally-owned PRSP.
75 percent of quota on a cumulative basis, although With increased national ownership, PRGF conditionality
augmented access limits apply under the RCF’s shocks has become more parsimonious, focused on the Fund’s
window (37.5 percent of quota per year and 75 percent core areas of expertise, and limited to measures that
on a cumulative basis). The RCF also has a higher annual have a direct and critical impact on the program’s
access limit of 60 percent of quota which is available macroeconomic objectives.
where a member faces urgent balance of payments
PRGF-supported programs reflect closely each country’s
needs arising from a large natural disaster (that is, a
poverty reduction and growth priorities and, as long as
natural disaster that causes damage of at least 20
macroeconomic stability is maintained, seek to respond
percent of the member’s GDP).
flexibly to changes in country circumstances and pro-
poor priorities. Key policy measures and structural
reforms aimed at poverty reduction and growth are Access was determined on a case-by-case basis. The
identified and prioritized during the PRSP process, and if ESF-HAC provided access up to 75 percent of quota for
feasible, their budgetary costs are assessed. each arrangement in normal circumstances. Resources
were provided in phased disbursements based on
PRGF-supported programs focus on strengthening
reviews, and programs were one-to-two years in length.
governance, in order to assist countries’ efforts to
design targeted and well-prioritized spending. Of The country’s economic program under the ESF focused
particular importance are measures to improve public on adjustment to the underlying shock, with less
resource management, transparency, and emphasis on the broad structural adjustment that often
accountability. PRGF supported programs also give characterizes other IMF-supported programs.
particular attention to the poverty and social impacts of
The ESF could be used concurrently with the Policy
key macroeconomic policy measures.
Support Instrument (PSI).
When appropriate, the IMF draws on World Bank
ESF loans carry a zero annual interest rate until end-
expertise in designing PRGF-supported programs, and
2018, with repayments made semiannually, beginning
the staffs of the Fund and Bank cooperate closely on
5½ years and ending 10 years after the disbursement.
conditionality. The Bank staff takes the lead in advising
On October 3, 2016, the Executive Board decided to
the authorities in the design of poverty reduction
waive interest rate charges on outstanding balances
strategies in areas such as poverty assessments,
under the Exogenous Shocks Facility until the next
monitoring, structural and sectoral issues, social issues,
review of the interest rate mechanism. The Fund
and costing priority poverty-reducing spending.
reviews the level of interest rates for concessional
Concessional lending under the PRGF is administered by facilities every two years with the next review expected
the IMF through the PRGF-ESF and PRGF-HIPC Trusts. to take place by end-2018.
The PRGF-ESF Trust borrows resources from central
IMF Conditionality
banks, governments, and official institutions generally
at market-related interest rates, and lends them on a When a country borrows from the IMF, its government
passthrough basis to PRGF-eligible countries. The agrees to adjust its economic policies to overcome the
difference between the market-related interest rate problems that led it to seek financial aid. These policy
paid to PRGF-ESF Trust lenders and the rate of interest adjustments are conditions for IMF loans and serve to
of 0.5 percent per year paid by the borrowing members ensure that the country will be able to repay the IMF.
is financed by contributions from bilateral donors and This system of conditionality is designed to promote
the IMF’s own resources. national ownership of strong and effective policies.
Exogenous Shocks Facility – High Access Component Conditionality covers the design of IMF-supported
(ESF-HAC) programs—that is, macroeconomic and structural
policies—and the specific tools used to monitor
The Exogenous Shocks Facility-High Access Component
progress toward goals outlined by the country in
(ESF-HAC), which was established in 2008, has provided
cooperation with the IMF. Conditionality helps
concessional financing to Poverty Reduction and
countries solve balance-of payments problems without
Growth Trust (PRGT)-eligible countries facing balance of
resorting to measures that are harmful to national or
payments needs caused by sudden and exogenous
international prosperity. At the same time, the
shocks. As part of a broader reform to make the Fund’s
measures are meant to safeguard IMF resources by
financial support more flexible and better tailored to
ensuring that the country’s balance of payments will be
the diverse needs of LICs, the ESF-HAC has been
strong enough to permit it to repay the loan.
superseded by the Standby Credit Facility (SCF), which
became effective in January 2010. Credit outstanding The member country has primary responsibility for
from ESF-HAC arrangements amounts to SDR 245.3 selecting, designing, and implementing policies to make
million as of end-February 2018, and ESF-HAC terms will the IMF-supported program successful. The program is
continue to apply to these balances. described in a letter of intent, which often has a
memorandum of economic and financial policies
attached. The program’s objectives and policies depend deviation was minor or temporary or because national
on a country’s circumstances. But the overarching goal authorities are taking corrective actions. Missed
is always to restore or maintain balance-of-payments structural benchmarks and indicative targets do not
viability and macroeconomic stability while setting the require waivers but are assessed in the context of
stage for sustained, high-quality growth and, in overall program performance. The IMF’s publicly
low income countries, reducing poverty. available database for the Monitoring of Fund
Arrangements covers all aspects of program
Most IMF financing is paid out in installments and linked
conditionality.
to demonstrable policy actions. This is intended to
ensure progress in program implementation and reduce Chapter 11: Central Banking for Socio-Economic
risks to IMF resources. Program reviews provide a Development
framework for the IMF Executive Board to assess
The Promotion of Human Dignity
whether the program is on track and whether
modifications are necessary. Periodic reviews combine Development is primarily concerned with the
an assessment of whether program conditions have promotion of human dignity. This is the priceless gift of
been met with a look ahead at whether the program God to man. Without human dignity, man is no better
needs to be adjusted in light of new developments. than an animal.
Policy commitments can come in different forms: The United States declares that:
• Prior actions 1. The aim of development should be the constant
improvement of the well-being of the peoples on the
o These are steps a country agrees to take before the
basis of their full participation in the process of
IMF approves financing or completes a review. They
development and a fair distribution of its benefits.
ensure that a program will have the necessary
foundation for success. 2. Each country has the right and responsibility to
choose its means and goals of development such as the
• Quantitative performance criteria (QPCs)
implementation of progressive economic and social
o Specific, measurable conditions for IMF lending that reforms.
always relate to macroeconomic variables under the
3. All the countries have the duty and, individually and
control of the authorities. Such variables include
collectively, to cooperate in removing the obstacles that
monetary and credit aggregates, international reserves,
hinder the mobilization and utilization of resources.
fiscal balances, and external borrowing.
As the UNESCO Director-General has stated: "The social
• Indicative targets (ITs)
reality of development is something much more than
o In addition to QPCs, ITs may be set for quantitative material well-being. Human Dignity is at least as
indicators to assess progress in meeting a program’s important a part of it as happiness, and that dignity is
objectives. Sometimes ITs are set instead of QPCs meaningless except in relation to those values which
because of uncertainty about economic trends. As make life worth living and of which culture is both
uncertainty is reduced, these targets may become custodian and the critic, the repository and the
QPCs, with appropriate modifications. originator."
o These are reform measures that often are The roots of poverty are the rural areas. The poorest of
nonquantifiable but are critical for achieving program the poor are found in such places. Hoping against hope,
goals and are intended as markers to assess program they go to the cities for possible better life. This influx of
implementation. rural poor to the urban centers has created slums and
squalor. Not a few of the live under the bridges and
If a country misses a QPC condition, the IMF Executive along river banks.
Board may approve a waiver if it is satisfied that the
program will still succeed. This may be because the
In urban societies of the world, the poorest of the poor • Housing is seen as a whole process of development
called "boat people" of Agriculture. They have no lands embracing all the needs important to man, his
of their own. They live in their small boats. They also community and the place he lives in;
use their boats as the principal source of their
livelihood. • Majority of the housing programs must be for the
poor since they have the largest need for decent shelter
Urbanization is a symbol of economic growth. However and deserve government assistance;
this is only for developed countries. Extreme rural
poverty has forced the people of the villages to move • The residents must actively participate in
into the cities in the hope of improving their economic improvement of their communities;
conditions. • Housing benefits, designs, and costs are planned
The Job of BSP according to the ability to pay of residents;
As the central monetary authority, the Bangko Sentral • Investments must be recovered either directly from
ng Pilipinas does not only control the volume of the beneficiaries or indirectly from other sources to sustain
money but also the allocation of available credit the efforts of the government to provide shelter to the
facilities. urban poor;
The main focus of the economic recovery is on the • Housing is the concern of everybody, thus every
development of agriculture and country side. sector of society must contribute to the solution of the
housing problem;
The Bangko Sentral extends loans either from domestic
or foreign sources - to the government for its various • All agencies of the government, both local and
socio-economic programs and projects. national, must participate in the total housing program;
and
Rural Development Programs and Urban Housing
Projects • Private resources, must be mobilized to satisfy the
housing need.
Here in the city, most poor families live in rooms and
apartments which are unfit for human habitation. On the other hand, rural development is primarily
Because of the law of supply and demand, rentals for concerned with optimum utilization resources - human,
bed spaces rooms and apartments have greatly economic, social, and physical - in a given area through
escalated. Those who cannot afford to pay put up their a systematic manner based on self-reliance.
shanties along river banks, railroads and seashores.
Many of our major rural development program and
Others erected their makeshift houses in vacant public
projects have been funded by the United States, Japan,
lots. The poorest groups sleep in Rizal Park, under the
Australia, and other rich countries. These include roads,
bridges and in underpass.
bridges, irrigation, electrification, water supply,
Our urban development program - which is primarily a communication, health and school facilities.
housing program - is largely funded by the World Bank.
The World Bank and the Asian Development Bank have
Nevertheless, the Bangko Sentral can also participate in
granted substantial loans for our rural development
the housing program for the poor by extending soft
which is the main focus of their development assistance
loans for housing projects through the government and
program.
the banking system.
The Social Responsibility of Central Banking
The urban poor can avail of such housing credit facilities
to be able to own their houses and lots on very easy The main function of central banking is the
installment scheme. Below are a few possible concepts management of money. The proper management of
on how to approach the housing issues for the urban money can lead to price stability, more jobs and better
poor: 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.