From 2009 to 2012, thanks in big part to the overseas Filipino workers’ (OFWS’) remittance, the international reserves of the Bangko Sentral ng Pilipinas (BSP) skyrocketed and almost doubled from roughly P1.8 trillion to P3.6 trillion. With so much foreign currency coming in, based on textbook knowledge, the peso should have appreciated, yet it depreciated. From January 2009 to March 2013, the real effective exchange rate increased from 77.91 to 98.51 and the nominal effective exchange rate increased from 13.11 to 14.87.

So why is the peso depreciating? With the reserves shooting up, one would suspect that the BSP is printing money to buy foreign currency. If the BSP is printing currency to buy foreign currency, textbook thin king predicts that the printing of money would have accelerated inflation. Yet inflation has been steady, averaging 3.3 percent in 2009, 3.8 percent in 2010, 4.6 percent in 2011, 3.1 percent in 2012, and thus far 2.8 percent in 2013. So another puzzle: why has inflation not accelerated? It turns out that the BSP has been buying foreign currency, except that it is not buying using newly printed money. If we look at he financial statement of the BSP, the increase in currency issue is not enough to buy the increase in international reserves. For example in 2009, the increase in currency issue of P37.44 billion is only 14 percent of the increase in international reserves of P264.83 billion.

So here is another puzzle: if the BSP is buying foreign currency without printing money, where is it getting the resources to buy? The Special Drawing Accounts (SDA) facility was introduced in 1998 and it was a facility where banks can deposit and earn interest. Up to 2006, the SDA had been relatively irrelevant amounting to only P52 billion. But beginning in 2007, the SDA increased substantially, amounting to P385 billion in 2007 then to P1.6 trillion in September 2013. Observing the financial statement of the BSP, from 2009 to 2011, the increase in SDA has been hand in hand with the increase in international reserves. But beginning in 2012, the increase in reserve deposits has been hand in hand with the increase in international reserves.

So why is the peso depreciating? It is because the BSP has been buying foreign currency. Why has inflation not accelerated? It is because the BSP has not been printing much money. And where is the central bank getting the resources to buy foreign currency? From 2009 to 2011, the BSP has been using a combination of SDA and reserve deposits but more on SDA, and from 2012, it has been using reserve deposits.

As in any schemes in economics, there are winners and losers. The ultimate winners are the banks. Given the present SDA of P1.6 trillion and the SDA rate of 2 percent, the BSP is paying banks P32 billion this year. The rate of return is less than the 3 percent inflation giving banks a net loss of 1 percent. But losing 1 percent is better than losing 3 percent from inflation. On the reserve requirement “Deposits maintained by banks with the BSP up to 40 percent of the regular reserve requirement are paid interest at 4 percent per annum” (Source: BSP website). Given that inflation has gone below 4 percent and that government securities have gone way below 1 percent, reserve deposits hasve become a riskless investment that are superior to government securities. For instance, the present 3 percent inflation gives them 1 percent real rate of return. This explains the decrease in SDA and increase in reserve deposits beginning in 2012; the banks have transferred their BSP investment from SDA.

The BSP is a loser in this scheme. From 2009 to the present, the net worth of the BSP has been declining. I estimate the interest paid by the BSP on SDA only. Juxtaposing the nominal numbers, these are net worth losses versus interest payment of P2.19 billion versus P27.46 billion in 2009, P67.44 billion versus P49.56 billion in 2010, P31.35 billion versus P65.71 billion in 2013, P75.5 billion versus P73.8 billion in 2012 and P16.64 billion versus P46.63 billion up to September of 2013. The past four to five years, the total loss in the net worth is P193 billion. Without the SDA, the BSP would have increased its net worth by P70 billion (my approximation).

The people of the Philippines are winners in terms of stable inflation. But they are also losers in another sense. So much of the P1.6 trillion and so much of the excess reserve deposits are wasted capital. These have become financial investments when it could have been used for real job-generating investments. The banks making money and the people not benefitting is as non-inclusive as it gets.

Dumlao, Ph.D., is Chair of the Department of Economics, School of Social Sciences, Ateneo de Manila University.