Central Bank Cuts Peso’s Value by 22%

The government announced a sharp 22% devaluation of the peso Monday, the first of a series of sweeping measures expected to be put in place to shore up the nation’s faltering economy.

The Bank of Mexico, the nation’s central bank, issued a one-paragraph statement announcing that the controlled rate of the peso was adjusted to 2,200 pesos to the dollar. It had traded at 1,796.9 to 1,805.2 on Friday.

“As part of a cooperative program between the government and the worker . . . and business sectors . . . the controlled exchange rate has been increased today to 2,200 pesos to the dollar,” the statement said.

The controlled rate, which is set daily by the central bank and the nationalized banks, is used in about 75% of all commercial transactions.

The adjustment puts the controlled rate at about the same level as the free-market rate. The free rate is used in tourism and most transactions along the Mexico-U.S. border.

Less than a month ago, the value of the free-market peso plunged nearly 46% in one day after the central bank stopped selling dollars to support the currency.

That unexpected fall in the currency caused widespread uncertainty in the financial markets and gave a boost to the already high inflation rate.

“What the controlled rate is doing is catching up (to the free rate),” said Jonathan Heath, senior economist at the consulting firm of Macro Asesoria Economica.

The new economic program was expected to include increases in wages and prices for such public-sector goods as gasoline, according to sources who spoke on condition of anonymity.

It also was likely to include fresh measures to cut the enormous federal budget deficit and open up the economy more to foreign trade.

“Clearly, the situation is ripe for firm measures,” said a financial analyst who requested anonymity.

There have been widespread rumors in recent weeks that the government would take drastic economic measures along the lines of the “shock” programs Argentina and Brazil put in place in recent years to jolt their economies into shape.

Government officials have repeatedly denied that such strong medicine would be administered to the Mexican economy, and analysts said the new package did not appear to be particularly drastic.

Even so, the new measures will be intended to tame inflation, which is expected to reach about 150% by year-end, well above the record 105.7% of 1986.

Private analysts have pegged inflation at nearly 200% in 1988 if the government does not work to bring it down.

Heath and other analysts have expressed concern about the government’s 1988 federal budget plan, which calls for even greater red-ink spending next year.