Bolivia should not keep its currency high over the others… Monetary Policy 101, Jan 2012

El Dia reports today about the dangers of keeping a higher exchange rate of the Boliviano currency:

The Government has defended the Bolivian currency appreciation, because it is an economic protective shield depending on the local markets.

Several economists do not agree with this because the appreciation of one currency with respect to the other makes that even more expensive the products and, therefore, the currency will go down, and may thus affect the economy.

Increase the supply. Carlos Slinck, economic analyst: the appreciation of the Bolivian is a measure which counteracts the topic of inflation, but only in nominal terms, since it is difficult that at the time to appreciate the currency, so we can be able to buy the same amounts of foods we bought in previous efforts. “What should be done is to increase the supply and for this is simply encouraging the production and to encourage the production in open markets, opening up the exports, supporting the private sector, giving soft loans and to generate greater amount of production so the market could self regulate and prices will fall, which would be a more accurate measure than appreciating the Bolivian,” argued Slinck.

Weakness of the currency to be more competitive. Manager general of the Bolivian Institute of Foreign Trade (IBCE), Gary Rodríguez, mentioned that the desire that the currency is stronger than the dollar is nothing more than a good wish.

With regard to this, he said a second world power, like China, goes in the opposite direction, because since the 1980s it has been opening to the world and connecting to the world trading system.

“What China has done is rather to weaken its currency against the dollar, because it induces competitiveness thereof, a country that cares about appreciating the exchange rate, by strengthening its currency, it does not help much because a weaker dollar increasingly favours imports and penalizes the competitiveness of exports”, said Gary Rodríguez.

Import, bad signal to an economy. Similarly, Rodriguez stated that doing imports is removing currency and paying jobs abroad and sacrifice those of the importing country, but also, on the other hand, if the loss of competitiveness for tomorrow will mean losing markets, export less, produce less, it will create fewer jobs, “that is why there is this logic””, which is not the most prudent in the world, wanting to strengthen the currencies and weakening the dollar”, said.

For the Economist José Antonio Montaño, the appreciation of the Bolivian has to do with two strategies with regard to the exchange rate, “the first fixed change is where the Central Bank Bolivia determines the type of exchange rate with respect to a currency and the other with regard to the flexibility of the currency where varies freely between the demand and supply”.

1.4 billion dollars were the imports during 2011. This reflects the loss of competitiveness.

Weakening of the currency of neighbors, would cause Bolivia to be flooded with those foreign markets, and that can displace domestic production.

Floating currency

BCB controls inflation and dollar amount

The flotation consists of the Bolivian Central Bank intervening in currency markets by buying and selling dollars through a mechanism called the employment and open market operations. “The Bank is offering 50 million dollars to the market and in turn collects Bolivians and thus control inflation and controls the amount of dollars who are out there in the economy, it is a mechanism for auction of the currency in a stock  market with BCB where bodies of financial intermediation can buy and sell foreign exchange; it is where the exchange rate is determined”, explained Jose Antonio Montaño.–ojos-apreciacion-del-boliviano-&cat=1&pla=3&id_articulo=82199

Published by Bolivian Thoughts

Senior managerial experience on sustainable development projects.

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