Though this provided a temporary relief to CBP in the form of an augmentation of gross foreign reserves and a higher import cover adequacy, it forced CBP to take a huge loss amounting to 31 billion Pesos during 1983-90 on account of exchange rate risks. At the same time, the use of the foreign exchange balances so acquired for defending the currency led to an undue reserve risk by converting the foreign assets to a net negative position and forcing CBP to borrow abroad to settle its liabilities. The forward cover was provided by CBP to local corporations, especially the oil corporation, by guaranteeing the exchange rate when they borrowed abroad in the wake of the balance of payments crisis. When CBP had to relax its grip on the exchange rate from time to time due to the non-availability of reserves, the forward covers given by CBP resulted in massive losses. The total of such losses for the period 1983-90 amounted to 20 billion Pesos. 4  There have been a number of central banks which had become insolvent due to the erosion of capital. For a survey, see, Kazuo Ueda, “The role of Capital for Central Banks”, The text of Speech delivered at Japan Society of Monetary Economics on 25 Oct 2003. www.boj.or.jp. 5  A lucid description of the events that led to CBP’s insolvency is given by Mario B Lamberte in Central Banking in the Philippines: Then, Now and the Future Discussion Paper Series 2002-10, Philippine Institute of Development Studies.

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