monetary law prohibiting the central bank to engage in trade or otherwise have a direct interest in any commercial, industrial or other undertaking. in exter ’ s opinion, such interests would lead to money creation, generate conflicts of interest and prevent making investment decisions based on hard - core economic principles. as such, central bank ’ s involvement in economic activities would be sub - optimal. a central bank, by nature, is in a position to acquire assets by creating liabilities. these liabilities take the form of new money issued by a central bank. hence, any asset acquisition by a central bank is done at the expense of its main objective, namely, price stability. as such, a central bank should not pursue profit making as a goal. technically, profit seeking has no meaning, because a central bank could make any amount of profits by inflating the economy. hence, profits may arise from the central bank ’ s activities as a side product, but they do not form the main business of a central bank. as a result, a special procedure has to be adopted for the application of the profits of a central bank. exter knew this requirement very well. in the exter report, he has argued that the central bank ’ s profits deserved special attention because of the inflationary or deflationary effects which their payment or non - payment could have on an economy. he has recognized that when such profits are paid out and spent by the government, they would find their way into the reserves of commercial banks raising their multiple credit creating capability. in order to minimize the ill effects of using a central bank ’ s profits for government expenditure, exter has made special provisions in the monetary law regarding the application of profits of the central bank. accordingly, out of the surpluses of the central bank, the first charges should be to build the reserves of the bank to support the currency it issues. any remaining balance should be utilized to retire the government ’ s borrowings from the central bank or paid into the government as a normal profit transfer. however, it has to be done collaboratively by the minister of finance and the monetary board, having taken into account the inflationary impact of each such measure. as such, the government does not have the first claim on the profits of the central bank, though it is owned by the government. the profit criteria that are applicable to other governmental institutions are, therefore, not applicable to the central bank. a general concern which has often been raised at numerous public fora

foreign exchange swap arrangements which cbp entered with domestic banks ; losses which cbp had to bear on account of providing forward cover for exchange risk involved in international borrowings of domestic corporations and interest rate losses arising from higher out - payments on foreign loans and central bank ’ s own securities than domestic interest earnings. the swap arrangement was a mechanism used by the cbp to boost its dwindling foreign reserves. when cbp lost its ability borrow abroad due to the continuously experienced balance of payments deficits and cbp ’ s refusal to allow the currency to depreciate, it got the state banks and private corporations to borrow abroad under a guarantee by the government and swapped pesos for the foreign currency loan proceeds. in the process, cbp assumed the exchange rate risk at the time the swap was reversed. 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. 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. 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. various annual reports of the central bank of the philippines. the author is grateful to deputy governor of bs