MANILA, Philippines ? The Bangko Sentral ng Pilipinas is seeking a clear mandate in its charter to set aside a portion of its income to cover for potential foreign exchange losses.

A monetary official said allocating a portion of the BSP?s income as reserves for potential foreign exchange losses was not only prudent, but necessary.

Having a financially sound central bank was vital to maintaining market confidence and proper management of liquidity in the economy, the official said.

Having a buffer for potential losses indicates financial discipline, and an economy cannot afford to have a financially troubled central bank.

This is why the BSP has been setting aside a portion of its income as reserves.

The practice, however, was recently questioned in Congress because the central bank?s charter does not explicitly allow it to put up reserves.

It was also noted that setting aside reserves for foreign exchange losses reduces the amount of dividends the BSP remits to the government.

The monetary official said, however, that in other countries, central banks were not required to remit dividends to the national government.

The official said the BSP does not mind remitting dividends, but it should not be questioned for allocating a portion of its income as reserves.

?We need to have flexibility to set aside a certain amount for foreign exchange movement. You may recall that in 2007, we lost P87 billion primarily because of foreign exchange movement,? said the official who declined to be identified, citing the sensitivity of the issue.

The BSP lost money in 2007 because of the sharp appreciation of the peso, which would have hurt exporters and families of overseas Filipino workers even more if not for market intervention done by the BSP.

When the peso appreciates significantly, the BSP usually buys dollars to temper the rise in the value of the local currency.

The official stressed that when the central bank posted losses, it did not receive or seek any assistance from the government.

Given its financial independence, it must have flexibility to implement measures to keep it financially sound.

The BSP maintains a policy of letting the market determine the rate of exchange between the peso and other currencies, mainly the US dollar.

However, the BSP could intervene in the market if there are sharp and sudden fluctuations of the peso, which could hurt businesses.