Mexico has gone through great changes in its history to adopt its current exchange regime, from 1954 when the Bank of Mexico applied a fixed exchange rate parity, until the free floating that the country lives today.
The determination of the exchange rate in Mexico has gone through different regimes throughout history. In some of them, the existence of more than one exchange reference for currency conversion is observed.
Exchange rate regimes since 1954 in Mexico
The exchange rate regimes in Mexico since 1954 have been the following:
- Fixed parity.
- Controlled flotation system.
- Multiple exchange system.
- Generalized control of changes.
- Change control.
- Regulated float.
- Exchange bands with controlled slippage.
- Free floating.
In the following graph we observe the historical behavior of the exchange rate (Mexican peso – US dollar) from April 1954 to March 2021, expressed in current pesos, recording the exchange regimes that the Bank of Mexico has adopted throughout these years.
In 1954 the exchange rate was 12.50 pesos to the dollar. However, when transforming this amount into current pesos, they are simply 0.012 pesos per dollar, showing the great devaluation that the Mexican currency has suffered, only in 67 years.
Fixed parity regime
This regime began on April 19, 1954 and ceased to be used on August 31, 1976. Before Mexico applied this exchange regime, the US dollar was trading at 8.65 pesos per dollar, relatively stable.
At the end of 1953, the Mexican peso manifested a growing weakness in the international position, due to an imbalance in the trade balance, directly affecting the country’s balance of payments, an imbalance that several countries of the world also experienced, after the difficulties that it experienced. North American economy record in those years. However, Mexico was one of the most affected countries in those years, due to a reduction of almost 100 million dollars in reserves, in just 2 years, since the imbalance in the trade balance continued to worsen, demonstrating the fragile international situation of the Mexican currency.
The Bank of Mexico chose to devalue the national currency on April 19, 1954, to correct said imbalances, and set the exchange rate at 12.50 pesos per dollar.
Controlled flotation system
This regime began on September 1, 1976 and was discontinued on August 5, 1982. The Mexican monetary authority decided to abandon the fixed parity of 12.50 pesos per dollar, in favor of a controlled floating system.
Before the regime change, the Mexican economy took an unfavorable evolution, in the face of a rise in the inflation rate and a marked reduction in the pace of economic activity, resulting in a high deficit in the public sector and an imbalance between the increase in the demand and insufficient domestic production. These economic imbalances ended in an uncontrolled rise in product prices and a large deficit in the current account of the balance of payments.
Due to the economic situation that the country went through, the great public, savers and investors, showed a preference for the most liquid banking instruments, and in 1976, savers and investors began a process of converting financial assets in Mexican pesos for assets in currencies. foreign companies, showing an increasingly strong tendency to invest their savings abroad.
Faced with the aforementioned imbalances, the central bank abandoned the fixed exchange rate system and established a controlled floating rate system as of September 1, 1976, with which the institution would stop intervening in the exchange market to sustain the level of the exchange rate. exchange rate and would only intervene to avoid strong market fluctuations.
Thus, the exchange rate started said regime at levels of 20.50 pesos per dollar and stood at 48.79 at the end of this system on the fifth day of August 1982.
Multiple exchange system
This regime began on August 6, 1982 and was discontinued on August 31 of that same year. Since the Mexican economy again suffered a phase of instability, a year before applying this regime change.
This economic instability was caused by higher inflation in the country, compared to global inflation, together with a marked dependence on oil revenues and after a drop in the international price of crude oil, which negatively affected expectations about the future of the oil rate. change. Due to these events, the population’s conversion from pesos to dollars increased, international reserves were consumed and a devaluation originated in February 1982.
Subsequently, the wage adjustment in March 1982 added new inflationary pressures in the country, which, together with the aforementioned difficulties, negatively influenced the expectations of the country’s economy.
Given the economic situation of the country, the financial authorities were forced to take various measures to control operations in the foreign exchange market, and, as of August 6, 1982, a dual exchange rate system came into effect: a preferential one. and another general .
- The preferential exchange rate was set at 49.13 pesos per dollar. This was applied to the importation of priority goods, such as food, and some inputs and capital goods required for productive activity.
- The general exchange rate, on the other hand, was determined by the free market of supply and demand for foreign exchange.
Faced with these changes, the population reacted surprisingly and with some uncertainty due to the future evolution of the foreign exchange market.
Generalized control of changes
This regime began on September 1, 1982 and was discontinued on December 19 of that same year. After the uncertainty of the investing and saving public due to the previous regime, during the last days of August 1982, important speculative movements were observed in the foreign exchange market, accelerating the loss in the international reserves of the central bank.
Due to this situation, the protection of international reserves became the main objective of exchange policy, and on September 1, 1982, the monetary authority decreed the change of regime by generalized exchange control, eliminating exchange rates. that existed in the previous regime.
In this regime, two exchange rates were established: one preferential and the other ordinary , which would be determined by the Bank of Mexico and would determine in which cases a preferential exchange rate would be applied and in which other cases an ordinary exchange rate.
- The preferential exchange rate was used to calculate the equivalence in national currency in the payments of credits denominated in foreign currency payable in Mexico, in the sale of foreign currency to settle imports of goods, and sale of foreign currency to cover credits in favor of entities of the Federal Public Administration and Mexican companies.
- The ordinary exchange rate was applied to calculate the equivalence in national currency in the case of operations in foreign currency other than those mentioned for the preferential exchange rate.
During the time that this regime lasted, the preferential exchange rate started at 50 pesos per dollar and ended at 70 pesos per dollar, while the ordinary exchange rate started at 70 pesos per dollar and remained so until December 19. 1982.
This regime began on December 20, 1982 and ceased to be used on August 4, 1985. Along with the presidential change of the Mexican Government in 1982, the Mexican authority announced a change in the regime that replaced the generalized exchange control.
The exchange control system, which was the regime that the new administration instituted, was based on two currency markets that operated simultaneously, one subject to control and the other free .
- In the controlled foreign exchange market , payments for the export and import of merchandise were included, as well as the payments corresponding to financing by the Federal Government and companies established in the country.
- In the free foreign exchange market , all transactions not subject to the controlled market were included. Transactions in the free market, including the sale, possession and transfer of foreign currency, were not subject to any restriction and were carried out at the exchange rates agreed by the contracting parties.
In this new system, the central bank fixed the exchange rates, since the reorganization of the exchange market required that the exchange rate be fixed in the free , controlled markets and in a special one.
The evolution of the exchange rates used in the years covered by this regime was as follows:
- Controlled exchange rate: With the entry into force of the new regime, it was quoted at 95 pesos per dollar for purchase and 95.10 pesos per dollar for sale, with a daily increase of 13 cents. At the end of the period, the exchange rate devalued 20%.
- Special exchange rate: As of December 20, 1982, it was set at 70 pesos per dollar, subject to an increase of 14 cents per day, reaching a special exchange rate of 106.28 pesos per dollar. Therefore, on March 16, 1983 it was decided to equalize the special exchange rate with the controlled one, because many financial intermediaries suffered exchange losses.
- Free exchange rate: It was established to discourage the parallel foreign exchange market and on December 20, 1982 it was quoted at 148.50 pesos per dollar for purchase and 150.00 pesos per dollar for sale, leaving this exchange rate totally free.
This regime began on August 5, 1985 and ceased to be used on November 10, 1991. Since, towards the end of 1985, the current exchange policy did not take into account the current and expected evolution of monetary aggregates, nor their effect on international reserves, since the exchange rate moved uniformly and did not obey the conditions that prevailed in the market at that time.
For this reason, as of August 5, 1985, the regulated floating system of the controlled exchange rate began to operate, applied by the monetary authority to eliminate the uniform fluctuation that the exchange rate had experienced since December 1982.
According to the new system, the controlled exchange rate was modified daily by amounts that were not necessarily uniform, but not abruptly either. This system made it possible to adapt flexibly and gradually the level of the controlled exchange rate to the internal and external circumstances of the economy.
This new regime did not alter the free market, but it did modify the controlled market. Banco de México introduced the equilibrium controlled exchange rate that replaced the controlled exchange rate.
- The equilibrium controlled exchange rate was determined after purchase and sale bids of dollars that the credit institutions sent to the central bank, at an exchange rate previously announced by the Bank of Mexico, which finally adjusted the announced exchange rate until supply and demand will be balanced. The exchange rate that resulted in these sessions was applied to settle obligations denominated in foreign currency up to two business days after their publication date.
Currency exchange bands with controlled slippage
This regime began on November 11, 1991 and ceased to be used on December 21, 1994. The regulated float regime was abrogated in order to provide an additional stimulus to exporters and maquiladora companies in the country, unifying the two markets. exchange rate, free and controlled .
The new regime applied by the central bank consisted of letting the exchange rate float within a band that was modified daily by the institution. For this, a band floor was set at 3,051.20 pesos per dollar, while the ceiling was not fixed, and was adjusted daily by 20 cents upwards from 3,086.40 pesos per dollar.
The Mexican government introduced a new monetary unit as of January 1, 1993, called new pesos . The denomination new peso displaced the peso used as a monetary unit until that date. The monetary unit of a new peso corresponded to a thousand previous pesos.
This regime began on December 22, 1994 and is the regime currently used in Mexican territory.
After a period of instability in the financial markets and a speculative attack on the international reserves of the Bank of Mexico at the end of 1994, the monetary institution chose to carry out a change in the monetary regime, since these events made the gang regime unsustainable. exchange rates, causing a rapid depreciation of the national currency.
In addition, political and criminal events occurred that had a strong and negative impact on Mexican markets during 1994. The kidnapping of prominent businessmen, the conflicts in Chiapas, and the murder of a candidate for the country’s presidency, caused great concern among investors. leading the exchange rate to reach levels close to the ceiling of the band.
Therefore, on December 22, 1994, Banco de México agreed to abandon the exchange rate regime in force until then, deciding to move to a free floating regime. In the new regime adopted, the exchange rate is determined by the free market, without the intervention of the authorities. The operations carried out by the central bank in the foreign exchange market are carried out through the FIX exchange rate.
- FIX Exchange Rate: It is the referential exchange rate published by Banco de México, which can be used by individuals in their transactions denominated in dollars. However, it is important to note that the participants are free to agree on any other reference for the negotiations.