• by IPS Correspondents (mexico)
• Friday, December 23, 1994
• Inter Press Service

MEXICO, Dic 23 (IPS) - The Inter-American Development Bank (IDB) praised the Mexican government's decision to introduce a floating exchange rate, and announced that its loans to Mexico would increase some 26 percent in 1995.

IDB representative Jairo Sanchez said the floating rate would generate confidence in the economic community, although he added that it would also cause some nervousness at first.

In the long term, Sanchez said, a liberalised exchange rate is a "healthy" measure, as a rate determined by market forces frees the state of this responsibility.

Assuring that the international financial community has not lost its faith in Mexico, he said IDB loans to the country would total between 1.2 and 1.5 billion dollars in 1995, compared to just over one billion this year.

Mexican President Ernesto Zedillo introduced the floating exchange rate less than one month into his term, arguing that the measure would halt speculation and stabilise prices.

A 15 percent devaluation of the peso was announced Tuesday, and the fall to 5.5 pesos to the dollar when the floating rate was introduced means that the peso has lost nearly 38 percent of its value since the beginning of the week.

The floating exchange rate was announced as a provisional measure, to be reviewed in 60 days.

Local analysts said the devaluation was designed to balance the foreign trade deficit by favouring exports, and to increase Mexico's international reserves - estimated at less than 6.5 billion dollars, than 22 billion less than in February.

The International Monetary Fund joined the IDB in praising the floating rate, saying that the measure would "strengthen the healthy economic policies Mexico has followed in recent years."

Mexico's financial and political changes have caused a wave of uncertainty, with an 11 point drop in the stock market Wednesday.

Seeking to ease investors' fears, representatives from the Bank of Mexico held conferences in the United States and Europe to explain the extent of the devaluation and Finance Minister Jaime Serra went to New York on Friday to meet with U.S. Federal Reserve authorities.

Serra acknowledged that he had "made a political mistake in not consulting the international financial community" on the planned exchange modifications.

Meanwhile, the U.S. government activated a six billion dollar line of credit created several months ago under the North American Free Trade Agreement to support member nations (Canada, Mexico and the United States) in case of emergency.

© Inter Press Service (2014) — All Rights Reserved. Original source: Inter Press Service

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