Liberalization Years

On February 21, 1970, the Philippines adopted the floating rate system with the first interbank guiding rate subsequently determined at P5.6282 to US$1.00 on February 24, 1970. This was a consequence of the breakdown of the Bretton Woods agreement which provided the basis for the fixed parity regime. The freely floating rate was made applicable to all foreign exchange transactions wxcept the surrender of export receipts of the four leading export products, namely, logs, sugar, copra, and copper concentrates. Of their total export proceeds, 80 percent was sold at the established par value while 20 percent was converted at the prevailing free market rate. On May 1, 1970, the 80 percent surrender requirement was replaced by an export tax, thereby completely freeing affected exporters from the official parity requirement. Under the floating rate system, most exports received the full peso value while import-dependent industries paid the full cost of imports. Immediately after the peso was allowed to float, exporets rose by 24 percent while imports grew at slower pace at 4 percent in 1970.

Many restrictions on foreign trade and investments were further removed with the declaration of martial law on September 21, 1972. Certain nationality requirements in the establishment of selected industries were suspended and immigration policies for potential investors were relaxed. The rules on repatriation of profits were liberalized. The tariff structure was also revised and the number of the tariff rates was trimmed down from 34 to 6. A subsequent phased general tariff reduction program and the liberalization of the importation of previously banned or prohibited goods were also underaken in the early 1980s.

The exchange rate system operative during this period was of managed float rather than one of completely free float. The Central Bank, under previous commitment with the IMF, had to intervene when needed to maintain orderly conditions in the exchange market and to reduce short-term volatility. In addition, the Central Bank observed bands or margins around the guiding rate within which the peso was permitted to float. Before April 1972, the band was 3/4 percent above and 1 percent below the guiding rate. After this date, the band was widened to 4-1/2 percent below and above the guiding rate.

In 1981, as the external financing situation became more difficult with the international economic slowdown and the mounting debt problem of the less developed countries, the Central Bank opted to rely more on reserves drawdown than on substantial realignment of the exchange rate. It was only on June 23, 1982 and again on October 5, 1983 that the exchange rate depreciated significantly. The resulting exchange rate was de facto fixed particularly because trading in the foreign exchange market was suspended on October 14, 1983 in view of the highly destabilizing balance of payments crisis which started in the last quarter of the same year.

The peso's exchange rate experienced two hefty depreciations in 1983: from P10.083 per US$.00 in May to P11.0015 per US$1.00 in June (9.1 percent) and from P11.002 per US$1.00 in September to P14.002 per US$1.00 in October (27.3 percent).

Several policy measures highlighted the foreign exchange management of the Central Bank at the onset of the crisis period. First, the peso-dollar rate was adjusted to dampen import demand and improve the competitiveness of Philippine exports. Second, interest payments on foreign loans were kept current as much as possible. And third, all foreign exchange receipts were pooled for allocation to industries according to a priority system with all imports of export industries and vital food products at the top of the list. This rationing scheme was temporary and gave way to freer international transactions as the country's international finances gradually improved.

On October 15, 1984, the Central Bank implemented open foreign exchange trading system by allowing commercial banks to keep their foreign exchange receipts and trade among themselves which served as basis of the free market rate. This liberal directive led to the narrowing of the differential between the official and parallel or black market exchange rates and the relative stabilization of the peso after two years of depreciation. After June 1984, when the peso depreciated by 28.6 percent from P14.002 to P18.002, the peso thereafter settled at P19.97 at the end of 1984 and appreciated by 7 percent to P18.4 in January 1985.

In December 1984, the Philippines' foreign exchange system was classified by the IMF under the 'independent float' category.

The authorities continued liberalizing the allowable foreign exchange retention by banks by expanding further the allowable deductions from their net spot and net forward exchange positions such that by August 1985, the monetary authorities had lifted the ceiling in the amount of allowable foreign exchange holdings, thus permitting a market-based exchange rate determination.

In 1986, the Central Bank started to liberalize a great number of regulations. These included the abolition of the requirement for foreign financing of capital goods imports; in 1987, notes and coins were allowed to be deposited in Foreign Currency Deposit Units (FCDUs); the rates of import duties restructured, and certain articles under the Tarrif and Customs Code of 1978 were reclassified; and the allowable travel funds of residents travelling abroad were increased.

The exchange rate system operative at end-1984 could be characterized as a 'free' float of the peso as contrasted to the 'managed' float in the 1970s through 1983. Under this regime, the Central Bank has done away with the guiding rate in determining the international value of the peso against the US dollar. Commercial banks were allowed to trade directly among themselves and to freely quote their buying and selling rates. The spot buying and selling margins were determined on a competitive basis for all transactions under the general jurisdiction of the Bankers' Association of the Philippines (BAP). As a market participant, the Central Bank from time to time acts as a buyer or a seller on the trading floor. In November 1987, the Central Bank required all interbank foreign exchange transactions, whether spot or forward, to be consummated only at the BAP trading floor of the Foreign Exchange Trading Center. This increased the transparency of foreign exchange transactions, enhancing the market orientation of the exhange rate.

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