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Mexico
The currency of Mexico was the Mexican Peso (Mex$). The Banco de Mexico (Bank of Mexico, BOM) together with the Secretariat of Finance and Public Credit (SHCP) administered all currency matters, including the exchange control system. The intervention currency was U.S. Dollar. There were no taxes or subsidies on purchases or sales of foreign exchange, and banks were freely engaged in exchange transactions between the peso and any other currency. From 1954, the Official Rate of Mexican Peso was set at Mex$12.50 per U.S. Dollar. Mexico maintained a fixed peso-dollar exchange rate even after the collapse of the Bretton Woods system in 1971 and the world oil price shock in 1973. However, the distortions caused by import substitution policies, the public expenditure-led growth financed mainly by borrowing from the BOM, the accumulation of foreign debt, high inflation, the overvaluation of the peso, and a large capital flight led finally to the devaluation of the peso in 1976. This basically ended the regime of fixed exchange rates. The Peso switched to the managed floating exchange rates in 1976, which gave more flexibility for discretionary economic policy (Li). The exchange rates were determined largely on the basis of demand and supply conditions in the exchange markets. However, the authorities intervened when necessary to maintain orderly conditions in the exchange market. In August 1982, the Effective Rate was abolished. There were two exchange markets (the controlled market and the free market), with 2 Preferential Rate and Free Market Rate. The exchange rate in the controlled market was adjusted daily, based on the differential between the rates of inflation expected in Mexico and its main trading partners and other indicators. A week later, MexDollar rate was also introduced to form three-tier exchange market. However, this rate was abolished in September. In the same month, the Free Market Rate was changed to Ordinary Rate. At the end of 1982, the Ordinary Rate converted to Free Market Rate again and a Special Rate was introduced. However, the Special Rate was abolished in March 1983. In July 1985, a Super Free Market Rate replaced the Official Free Market Rate and the nationalized commercial banks were allowed to deal the transactions closer to black market rate. In the following years, the exchange rate of Mexican Peso depreciated

continuously. At the end of 1991, the Controlled Rate and Super Free Market Rate were unified into Official Rate while the Controlled Exchange Market was eliminated. Started from the end of 1994, a floating rate policy was maintained by the government, with BOM intervening in the foreign exchange market under exceptional circumstances to minimize volatility and ensure an orderly market. Major sources of reference include: 1) World Currency Yearbook (WCY) 2) IMF Annual Report on Exchange Arrangement and Exchange Restriction (IMF) 3) Li, Carmen A., Apostolis Philippopoulos and Elias Tzavalis. 2000. Inflation and Exchange Rate Regimes in Mexico. Review of Development Economics, 4(1), 87-100. (Li) Mexican Peso per U.S. dollar

Date 19 April 1954

Changes to the exchange rate regime The Mexican Peso (Mex$) was devaluated from an Official Rate of Mex$8.65 to Mex$12.50 per U.S. Dollar. (WCY 1984, p.513)

15 August Following the floating of the U.S. Dollar, the Peso 1971 maintained its links to the American unit, thus effecting devaluation. (WCY 1984, p.513) 22 The gold content of the currency was reduced 7.89%, December paralleling the U.S. Dollar devaluation and thereby 1971 retaining the Official Rate at Mex$12.5 per U.S. Dollar. (WCY 1984, p.513) 13 Following the devaluation of the U.S. Dollar, the gold February content of the Mexican Peso was reduced 10%, thus 1973 maintaining the Official Rate unchanged at Mex$12.50 per U.S. Dollar. (WCY 1984, p.513) 31 August The Peso was devaluated, as the unit was placed on a 1976 controlled, floating basis creating an Effective Rate as well as a Free Market Rate at the exchange houses. (WCY 1984, p.513) 1 The Mexican Peso ceased to be pegged to the U.S. September Dollar at Mex$12.50=US$1 and was allowed to float. 1976 The BOM set its initial intervention rates at Mex$20.40 buying, and Mex$20.60 selling, respectively, per U.S. Dollar. It was announced that no exchange controls would be introduced and the Central Bank would intervene in the exchange market to prevent speculative

fluctuations. (IMF 1977, p.317) 13 The BOM, without abandoning its policy of managed September floating, announced a tentative quotation for the U.S. 1976 Dollar of Mex$19.70 buying and Mex$19.90 selling, respectively, per U.S. Dollar. (IMF 1977, p.317) 26 October The BOM announced that, with effect from October 1976 27th, it would not be necessarily intervene in the exchange market to maintain the exchange rate within the limits of Mex$19.70 buying and Mex$19.90 selling, respectively, per U.S. Dollar. Banking institutions were required to observe daily a spread of at most 1% between their average buying and selling rates. They were also required to maintain normal foreign exchange positions and to report to the BOM their foreign currency assets and liabilities on a daily basis. (IMF 1977, p.317) 27 October The BOM quoted new rates for the U.S. Dollar of 1976 Mex$26.24 buying and Mex$26.50 selling, respectively, per U.S. Dollar. (IMF 1977, p.318) December 1976 April 1977 Two minor foreign exchange values were created. A Foreign Debt Rate of Mex$21.875 per U.S. Dollar for public foreign debt repayment and an Interest Tax Rate of Mex$22.475 per U.S. Dollar for the withholding tax on bank interest earned by Foreign Currency Accounts. (WCY 1985, p.563) December 1977 December 1978 December 1979 December 1980 December 1981 18 The Peso was left to float freely in exchange markets February before the Central Bank intervention was resumed on 1982 June 5th with a controlled float. (WCY 1984, p.513) 5 June 1982 The BOM announced that it would intervene again in the foreign exchange market, and a policy was adopted to 22.740 22.720 22.800 23.260 26.230 19.950

allow the Peso to continue its depreciation at a rate of Mex$0.04 per U.S. Dollar a day. (IMF 1983, p.323) 5 August A two-tier exchange market (the controlled market and 1982 the free market) for the Peso was established, with a Preferential Rate of Mex$49.50 per U.S. Dollar made applicable to priority imports, conversion of petroleum export proceeds and foreign debt payments. A floating Official Free Market Rate was introduced, set initially at about Mex$70.00 per U.S. Dollar for all other transactions. (WCY 1984, p.513) 6 August The Peso closed at Mex$49.13 in the preferential market 1982 and Mex$76.33 per U.S. Dollar in the floating market. (WCY 1984, p.513) 13 August All Foreign Currency Accounts in Mexican banks were 1982 frozen and their conversion limited to Mexican Pesos at Mex$69.50 per U.S. Dollar, the so-called MexDollar Rate, which was also made applicable to liquidation of maturing "Petrobonds", thus creating a three-tier exchange rate system. (WCY 1984, p.513) 19 August The foreign exchange market was re-opened, and banks 1982 were authorized to buy and sell foreign currencies at a free market rate. (IMF 1983, p.324) 1 Foreign exchange controls were decreed and two basic September exchange rates were to operate, the Preferential Rate and 1982 the Ordinary Rate which was applicable to all transactions not covered by Preferential Rate. The MexDollar was abolished. (WCY 1984, p.513) 6 The Free Market Rate was changed to Ordinary Rate. September (WCY 1984, p.521) 1982 The Preferential Rate and Ordinary Rate were announced, at Mex$50 and Mex$70 respectively, per U.S. Dollar. (IMF 1983, p.324) 3 The Peso was again devalued via the creation of a November floating Official Free Market Rate applicable within a 1982 special free zone along the United States border. (WCY 1984, p.513) The authorities announced the establishment of a new exchange market in the border areas and free trade zones. The exchange rate was to be determined by supply and demand conditions in the area. Sales of

foreign exchange could be effected by local or foreign residents, but purchases were restricted to individuals and enterprises residing in the border areas. (IMF 1983, p.324) December 1982 20 The Ordinary Rate was changed to Free Market Rate. December (WCY 1984, p.521) 1982 A new exchange rate structure came into operation. A Controlled Preferential Rate (Controlled Rate) initially at Mex$95.00/95.10 (buying and selling) per U.S. Dollar was made applicable to all export proceeds, essential imports and the servicing of some foreign debts. A Free Market Rate at Mex$148.50/150.00 (buying and selling) per U.S. Dollar was created for all other transactions. Both rates were periodically revised. (WCY 1984, p.513) The MexDollar Rate became the Special Rate initially at Mex$70.00 per U.S. Dollar and depreciated 13 Centavos (Centavos = 1/100 Peso) daily. (WCY 1985, p.563) 3 January The BOM announced that the Controlled Rate was 1983 applicable to all obligations in foreign currency with respect to debt contracted prior to 20 December 1982 and negotiable in Mexico, provided that such obligations were in the form of liabilities to Mexican banks for export-related financing. (IMF 1984, p.332) 16 March The Preferential Rate was made applicable to the 1983 conversion of MexDollar, thus abolishing the Special Rate. (WCY 1985, p.563) 6 April 1983 A Debt Rescheduling Rate was created for the forward purchase of foreign currency to cover private debt repayments provided a rescheduling of at least six years and a three-year grace period was arranged. The rate was to be subsidized and announced the extent of the terms. (WCY 1985, p.563-564) 149.250

23 The Official Free Market Rate became subject to a daily September depreciation of 13 Centavos (i.e. Mex$0.13 per U.S. 1983 Dollar). (WCY 1985, p.564) December 1983 27 January The Secretariat of Commerce and Industrial Promotion 161.350

1984

announced that all items subject to import duty would be eligible for imports under the Controlled Rate. Settlements for related foreign payments, as well as conversion of credits obtained from foreign suppliers, would also be effected at the Controlled Rates; but temporary imports would be eligible for this provision only under special authorization. (IMF 1985, p.343) 206.970

December 1984 6 The Controlled Preferential Rate and the Official Free December Market Rate were depreciated 17 Centavos daily (i.e. 1984 Mex$0.17 per U.S. Dollar). (WCY 1985, p.564) 6 March 1985 11 July 1985 The Controlled Preferential Rate and the Official Free Market Rate were depreciated 21 Centavos daily (i.e. Mex$0.21 per U.S. Dollar). (WCY 1985, p.564) The Official Free Market Rate was replaced by a Super Free market Rate as the nationalized commercial banks were allowed to deal closer to the street or black market rate. Tourists were allowed to avail themselves of this rate. (WCY 1986/87, p.326) The Controlled Preferential Rate was devalued 16.7%, changed from Mex$233.1 to Mex$279.7 per U.S. Dollar. (IMF 1986, p.363)

25 July 1985

5 August A system of managed floating of the Mexico Peso in the 1985 controlled market came into effect, with daily fixing sessions. The 21 Centavo daily depreciation being abolished. At the same time, the Controlled Preferential Rate was split into two categories, the Equilibrium Rate that was set each day (managed float) and the Retail Rate that was negotiated between participants and the bank. (WCY 1988/89, p.330-331) December 1985 December 1986 5 January The BOM began to operate a short-term foreign 1987 exchange risk coverage market through which commercial and financial operations were covered against exchange rate fluctuations. The scheme applied only to the U.S. Dollar, and the coverage was based on the equilibrium exchange rate prevailing on the date of contract. (IMF 1990, p.315) 18 The BOM ceased intervention in the free exchange 450.750 914.500

November market. (IMF 1988, p.341) 1987 December 1987 14 The Controlled Preferential Rate was depreciated by December 17.4%, reducing the spread between the exchange rates 1987 in the controlled and free exchange market to about 1.5%. (IMF 1988, p.341) February For the month of February 1988 only, the Controlled 1988 Preferential Rate was devalued Mex$3.00 per day against the U.S. Dollar. During the remainder of the year, the rate was frozen at Mex$2,281 per U.S. Dollar. (WCY 1988/89, p.331) 1 March 1988 The Government undertook to fix the exchange rate for the U.S. Dollar for a period of three months, within the context of the anti-inflation pact. The period of the fixed rate was subsequently extended through the end of the year. (IMF 1989, p.322) 2,295.000 2,245.000

December 1988 1 January The rules governing the establishment of the Peso's 1989 exchange rate were modified, whereby it would be depreciated daily against the U.S. Dollar by preannounced fixed amounts of Mex$1.00. (IMF 1990, p.318) 31 August Loans from international financial organizations were 1989 transacted at the controlled exchange market rate. (IMF 1990, p.318) December 1989 28 May 1990 The rules governing the establishment of the exchange rate of the Peso were modified, whereby the rate would be depreciated daily against the U.S. Dollar by the preannounced amount of Mex$0.80. (WCY 1990/93, p.327)

2,679.500

12 The rules governing the establishment of the exchange November rate of the Peso were modified, whereby the rate would 1990 be depreciated daily against the U.S. Dollar by the preannounced amount of Mex$0.40. (WCY 1990/93, p.327) 27 The foreign exchange risk coverage was extended for November transactions up to one year. (IMF 1991, p.321)

1990 December 1990 11 The dual exchange rates (Controlled Rate and Super November Free Market Rate) were unified into Official Rate. A 1991 band within which the market rate would fluctuate was defined, and the daily rate of depreciation of the Peso against the Dollar was reduced to Mex$0.20 from Mex$0.40 (i.e. from an annual rate of 5% to 2.4%) In addition, the differential between intervention points was widened to 60 Pesos from 35 Pesos. While the selling rate would be depreciated by Mex$0.20 daily, the buying rate would remain fixed until 15 March 1992, and begin to be depreciated subsequently at the same rate. The Controlled Exchange Rate Market was eliminated and all controls on exchange transactions were abolished. (IMF 1992, p.319) December 1991 20 October The maximum selling rate was depreciated daily against 1992 the U.S. Dollar by Mex$0.20, and the minimum buying rate was held constant. (IMF 1993, p.333) 1 January The new Mexican Peso was introduced. One new Peso 1993 would be equivalent to 1000 of the former Mexican Pesos. (IMF 1993, p.335) 20 The upper limit of the exchange rate band was raised to December Mex$3.99 per U.S. Dollar, representing a devaluation of 1994 15%. (IMF 1995, p.326) 22 The external value of New Mexican Peso was December determined in the interbank market on the basis of 1994 supply and demand conditions. The Peso was allowed to float, and the exchange regime based on the crawling peg was abandoned. (IMF 1995, p.325-326) 31 The exchange rate for the U.S. Dollar was Mex$5.325 December per U.S. Dollar. (IMF 1995, p.325) 1994 17 March An over-the-counter market in forward and options in 1995 foreign exchange was introduced. (IMF 1996, p.320) 3,071.000 2,941.900

April 1995 The Chicago Mercantile Exchange started trading futures contracts on the Peso. (IMF 1996, p.318) 31 The exchange rate for the U.S. Dollar was Mex$7.6425 December per U.S. Dollar. (IMF 1996, p.318) 1995 31 The exchange rate for the U.S. Dollar was Mex$7.6425 December per U.S. Dollar. (IMF 1996, p.318) 1995 1 August The BOM introduced a scheme to purchase foreign 1996 exchange from the market without abandoning the commitment to the floating rate system. Under the scheme, the BOM holds monthly auctions of option up to $130 million, giving financial institutions the right to sell U.S. Dollars to the BOM in exchange for Mexican Pesos. The options, which are valid for a 1-month period, can be exercised at the discretion of the holders, provided that the rate of exchange is no more depreciated than the average rate over the preceding 20 working days. (IMF 1998, p.591) 27 August The BOM increased the amount of options auctions to 1996 $200 million. (IMF 1998, p.591) 27 The BOM increased the amount of options auctions to December $300 million. (IMF 1998, p.591) 1996 19 Two modifications to the exchange rate system were February introduced. First, the BOM doubled the potential amount 1997 of options auctioned each month to $600 million. If 80% ($240 million out of $300 million maximum) of the options to sell U.S. Dollars to the BOM was exercised within the first 15 days of the month, the BOM would conduct a second auction of options for the same amount auctioned. Second, the BOM also announced that it would be prepared to auction (sell) up to $200 million a day in the foreign market, but would accept only those bids that were at least 2% more depreciated (in terms of Mexican Pesos per U.S. Dollar) than fix of the previous day. (IMF 1998, p.597) 30 July 1997 The BOM increased the amount of options auctions to $500 million. (IMF 1998, p.591)

29 The BOM reduced the amount of options auctions to September $400 million. (IMF 1998, p.591) 1997 30 October The BOM decreased the amount of options auctions to

1997

$250 million. (IMF 1998, p.591)

16 March The BOM permitted commercial banks to enter into 1998 futures and options transactions referred to any kind of domestic or foreign government securities, real interest rates and swaps. (IMF 1999, p.575) 27 August The BOM modified its dollar auction mechanism so that 1998 up to three auctions may be held in the same day, instead of only one, for an aggregate amount of $200 million a day. (IMF 1999, p.575) 14 The Mexican Derivatives Exchange was included as a December recognized market in which commercial banks could 1998 enter into futures or options transactions. (IMF 1999, p.576)

Deterioration in the 1970s[edit]

Although the Mexican economy maintained its rapid growth during most of the 1970s, it was progressively undermined by fiscal mismanagement and by a poor export industrial sector and a resulting sharp deterioration of the investment climate. The GDP grew more than 6 percent annually during the administration of President Luis Echeverra lvarez (197076), and at about a 6 percent rate during that of his successor, Jos Lpez Portillo y Pacheco (197682). But economic activity fluctuated wildly during the decade, with spurts of rapid growth followed by sharp depressions in 1976 and 1982. Fiscal profligacy combined with the 1973 oil shock to exacerbate inflation and upset the balance of payments. Moreover, President Echeverra's leftist rhetoric and actionssuch as abetting illegal land seizures by peasantseroded investor confidence and alienated the private sector. The balance of payments disequilibrium became unmanageable as capital flight intensified, forcing the government in 1976 to devalue the peso by 58 percent. The action ended Mexico's twenty-year fixed exchange rate. Although significant oil discoveries in 1976 allowed a temporary recovery, the windfall from petroleum sales also allowed continuation of Echeverra's destructive fiscal policies. In the mid-1970s, Mexico went from being a net importer of oil and petroleum products to a significant exporter. Oil and petrochemicals became the economy's most dynamic growth sector. Rising oil income allowed the government to continue its expansionary fiscal policy, partially financed by higher foreign borrowing. Between 1978 and 1981, the economy grew more than 8 percent annually, as the government spent heavily on energy, transportation, and basic industries. Manufacturing output expanded modestly during these years, growing by 8.2 percent in 1978, 9.3 percent in 1979, and 8.2 percent in 1980. This renewed growth rested on shaky foundations. Mexico's external indebtedness mounted, and the peso became increasingly overvalued, hurting non-oil exports in the late 1970s and forcing a second peso devaluation in 1980. Production of basic food crops stagnated and the population increase was skyrocketing, forcing Mexico in the early 1980s to become a net importer of foodstuffs. The portion of import categories subject to controls rose from 20 percent of the total in 1977 to 24 percent in 1979. The government raised tariffs concurrently to shield domestic producers from foreign competition, further hampering the modernization and competitiveness of Mexican industry.

1982 crisis and recovery[edit]

The macroeconomic policies of the 1970s left Mexico's economy highly vulnerable to external conditions. These turned sharply against Mexico in the early 1980s, and caused the worst recessionsince the 1930s. By mid-1981, Mexico was beset by falling oil prices, higher world interest rates, rising inflation, a chronically overvalued peso, and a deteriorating balance of payments that spurred massive capital flight. This disequilibrium, along with the virtual disappearance of Mexico's international reservesby the end of 1982 they were insufficient to cover three weeks' imports forced the government to devalue the peso three times during 1982. The devaluation further fueled inflation and prevented short-term recovery. The devaluations depressed real wages and increased the private sector's burden in servicing its dollardenominated debt. Interest payments on long-term debt alone were equal to 28 percent of export revenue. Cut off from additional credit, the government declared an involuntary moratorium on debt payments in August 1982, and the following month it announced the nationalization of Mexico's private banking system. By late 1982, incoming President Miguel de la Madrid had to reduce public spending drastically, stimulate exports, and foster economic growth to balance the national accounts. Recovery was extremely slow to materialize, however. The economy stagnated throughout the 1980s as a result of continuing negative terms of trade, high domestic interest rates, and scarce credit. Widespread fears that the government might fail to achieve fiscal balance and have to expand the money supply and raise taxes deterred private investment and encouraged massive capital flight that further increased inflationary pressures. The resulting reduction in domestic savings impeded growth, as did the government's rapid and drastic reductions in public investment and its raising of real domestic interest rates to deter capital flight. Mexico's GDP grew at an average rate of just 0.1 percent per year between 1983 and 1988, while inflation on an average of 100%. Public consumption grew at an average annual rate of less than 2 percent, and private consumption not at all. Total investment fell at an average annual rate of 4 percent and public investment at an 11 percent pace. Throughout the 1980s, the productive sectors of the economy contributed a decreasing share to GDP, while the services sectors expanded their share, reflecting the rapid growth of the informal economy and the change from good jobs to bad ones (services jobs). De la Madrid's stabilization strategy imposed high social costs: real disposable income per capita fell 5 percent each year between 1983 and 1988. High levels of unemployment and underemployment, especially in rural areas, stimulated migration to Mexico City and to the United States. By 1988 (de la Madrid's final year as President) inflation was at last under control, fiscal and monetary discipline attained, relative price adjustment achieved, structural reform in trade and public-sector management underway, and the economy was bound for recovery. But these positive developments were inadequate to attract foreign investment and return capital in sufficient quantities for sustained recovery. A shift in development strategy became necessary, predicated on the need to generate a net capital inflow. In April 1989, President Carlos Salinas de Gortari announced his government's national development plan for 1989-94, which called for annual GDP growth of 6 percent and an inflation rate similar to those of Mexico's main trading partners. Salinas planned to achieve this sustained growth by boosting the investment share of GDP and by encouraging private investment throughdenationalization of state enterprises and deregulation of the economy. His first priority was to reduce Mexico's external debt; in mid-1989 the government reached agreement with its commercial bank creditors to reduce its mediumand long-term debt. The following year, Salinas took his next step toward higher capital inflows by lowering domestic borrowing costs, reprivatizing the banking system, and broaching the idea of a free-

trade agreement with the United States. These announcements were soon followed by increased levels of capital repatriation and foreign investment. Due to the financial crisis that took place in 1982, the total public investment on infrastructure plummeted from 12.5% of GDP to 3.5% in 1989. After rising impressively during the early years of Salinas' presidency, the growth rate of real GDP began to slow during the early 1990s. During 1993 the economy grew by a negligible amount, but growth rebounded to almost 4 percent during 1994, as fiscal and monetary policy were relaxed and foreign investment was bolstered by United States ratification of the North American Free Trade Agreement (NAFTA). In 1994 the commerce and services sectors accounted for 22 percent of Mexico's total GDP. Manufacturing followed at 20 percent; transport and communications at 10 percent; agriculture, forestry, and fishing at 8 percent; construction at 5 percent; mining at 2 percent; and electricity, gas, and water at 2 percent (services 80%, industry and mining 12%, agriculture 8%). Some two-thirds of GDP in 1994 (67 percent) was spent on private consumption, 11 percent on public consumption, and 22 percent on fixed investment. During 1994 private consumption rose by 4 percent, public consumption by 2 percent, public investment by 9 percent, and private investment by 8 percent.

1993: Hyperinflation and the Nuevo Peso[edit]

The nuevo peso (new peso) was the result of hyperinflation in Mexico. In 1993, Presidente Carlos Salinas de Gortari stripped three zeros from the peso, creating a parity of $1 New Peso for $1000 of the old ones. Main article: Nuevo Peso

1994 crisis and recovery[edit]

Main article: 1994 economic crisis in Mexico The collapse of the new peso in December 1994 and the ensuing economic crisis caused the economy to contract by an estimated 7 percent during 1995. Investment and consumption both fell sharply, the latter by some 10 percent. Agriculture, livestock, and fishing contracted by 4 percent; mining by 1 percent; manufacturing by 6 percent; construction by 22 percent; and transport, storage, and communications by 2 percent. The only sector to register positive growth was utilities, which expanded by 3 percent. By 1996 Mexican government and independent analysts saw signs that the country had begun to emerge from its economic recession. The economy contracted by a modest 1 percent during the first quarter of 1996. The Mexican government reported strong growth of 7 percent for the second quarter, and the Union Bank of Switzerland forecast economic growth of 4 percent for all of 1996.

2011: 40 Years of lag in income[edit]

Data by the Encuesta Nacional Ingreso Gasto de los Hogares (ENIGH) revealed that one minimun wage in 1970 equals 3 minimum wages in 2010. That is expressed in real salaries, which means the real [4] [5] buying power of salaries.