By Unitel:

“It’s One Thing to Have a Flexible Exchange Rate and Another to Let the Dollar Climb the Stairs,” Economist Warns

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As Bolivia’s official exchange rate for the U.S. dollar continues to rise, economist Gonzalo Chávez said the challenge is not the abandonment of the country’s long-standing fixed exchange-rate system, but the way authorities are managing the transition toward a more flexible regime.

The Central Bank of Bolivia (BCB) set the official exchange rate at Bs 11.54 per dollar for Tuesday, July 28, up 17 centavos from the previous day and extending a steady upward trend since the introduction of the new mechanism.

“The problem is not having abandoned the fixed exchange rate, but how we are managing the transition,” Chávez said. “It is one thing to have a flexible exchange rate and another to let the dollar climb the stairs while the Central Bank watches from the ground floor.”

According to BCB data, the official exchange rate has increased from Bs 9.73 to Bs 11.54 since the flexible system was introduced, representing a cumulative rise of Bs 1.81.

Chávez argued that exchange-rate flexibility should not be interpreted as a one-way movement in which the dollar only appreciates. He noted that most countries operate under managed floating regimes rather than fully free-floating systems, allowing central banks to intervene in currency markets to smooth excessive fluctuations, maintain liquidity and contain inflationary pressures.

“The key difference with genuine flexibility is very simple: the dollar must be able to rise, but it must also be able to fall,” Chávez said. “If we describe a price as ‘flexible’ when it only moves in one direction, we are dealing with a rather unusual form of flexibility — like installing an elevator with only one button.”

The economist said a more structured approach would be to introduce an exchange-rate band, determined by macroeconomic fundamentals such as international reserves, inflation and balance-of-payments conditions.

Under such a framework, the exchange rate would be allowed to fluctuate within predefined limits, while the central bank would retain the ability to intervene during periods of market stress or abnormal volatility by buying or selling foreign currency.

According to Chávez, an exchange-rate band would provide clearer signals to market participants, help anchor expectations and preserve the central bank’s capacity to respond to disruptive movements in the currency market.

Bolivia’s exchange-rate policy has come under increasing scrutiny as the country grapples with declining foreign-currency availability and mounting pressure on its external accounts, prompting policymakers to seek alternatives to the fixed-rate framework that had been in place for more than a decade.