In a competitive scenario for lower costs and higher productivity, devaluation against the Lempira Dollar in Honduras and the Cordoba Dollar in Nicaragua is a factor that could help these economies stay competitive.
In the last five years, the exchange rate in Honduras increased by 17%, from 21.06 Lempiras per U.S. dollar in June 2014 to 24.67 in the same month in 2019.
The 1.9% devaluation against the dollar could be the first of several downward adjustments in the value of the Chinese currency, making imported goods from China even cheaper.
International analysts are not ruling out that in the short and medium term, the Central Bank of China will re-enable its exchange rate policy and devalue the currency even more, which would directly impact the price of goods that Central American companies import from China.
One dollar in Mexico now costs over 16 pesos, having accumulated 9.5% depreciation since the beginning of 2015 and 23% since October 2014.
The importance of Mexico as a destination for exports from the Central American countries necessitates keeping an eye on the spread of exchange rate competitiveness of the respective economies.
Added to the loss of competitiveness which this means for Central American exports to Mexico, is the smaller flow of investment registered in the country, reducing its growth expectations.
Subsidies on exports to India and improvement in the competitiveness of Brazilian sugar, caused by devaluation of the real, explain part of the decline in international coffee prices.
The union of sugar producers in Honduras states that the country currently loses between $25 and $40 per hundredweight exported to the international market, on average a total of $40 million.
Dollar purchases by financial institutions in the first eight months of the year were down 6% compared to those in the same period of 2013.
From 2 January to 30 August 2014 $5,887.1 million was awarded to institutions participating in the auction of currency by the Central Bank of Honduras, while in the same period in 2013 the figure was $6,268.2 million.
Days after the IMF mentioned the need to adjust the Lempira, the exchange rate devaluation accentuated in June, closing at L20,97 per dollar.
Between January and June the rate referenced in the electronic auction of the Central Bank of Honduras went from L20 5975, to L20 9752 to the dollar, equivalent to a devaluation of 37.77 cents or 1.8%.
In June alone, according to an article on Laprensa.hn "...
A recommendation has been made that there be greater exchange rate flexibility within the current regime which would strengthen the external position and alleviate the costs of fiscal adjustment.
From a press release issued by the International Monetary Fund:
On June 9, 2014 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Honduras.
The planned and gradual devaluation of the currency favors the competitiveness of the economy by providing certainty in commercial transactions.
Also the competitiveness of the economy benefits when a properly fixed exchange rate does not generate profits for one sector to the detriment of another. The government has programed an annual slip of 5% for 2014, 2015 and 2016 and a depreciation of 4.5% per year for 2017 and 2018, a measure which is supported by the banking sector.
Despite the recommendation of the IMF's to make the exchange rate flexible, the government program forecasts that the Lempira will slip between 4.5% and 5% over the next four years.
Just as it did at the end of 2012, the IMF has again recommend that policymakers devalue the local currency, the Lempira, in order to minimize the negative effects of the growing fiscal deficit, which to date is equivalent to 68 % of GDP.
Some companies can become richer than others overnight, depending on decisions made by a few public officials.
Editorial
An article in Elfinancierocr.com reports on the positive effects of the devaluation of the national currency of Costa Rica, the-Colón, agains the dollar, for exporters in the country.
The causes of the devaluation were mainly external, but were catalyzed by decisions made by public officials, the Central Bank, whose missive it is to defend the value of the national currency, because this supposedly contributes to the economy.
International Monetary Fund officials have recommend greater flexibility in setting the exchange rate.
The IMF suggestion is that the exchange rate be adjusted to economic circumstances, free to move up or down, according to Lisandro Abrego, head of a mission from the International Monetary Fund (IMF) which visited Honduras.
Latribunahn reports that "During the press conference at the Central Bank of Honduras (BCH), the head of the IMF mission, Lisandro Abrego, said that "regarding the currency issue it is important to note that in the past we have stated that it would be desirable to have a little more flexibility in the exchange rate, the exchange rate being able to move depending on specific macroeconomic circumstances. "
Honduras' industry is asking government to contain spending, in order to curb the depreciation of the currency and rising interest rates.
In late July 2011, the Central Bank of Honduras (BCH in Spanish) reactivated the exchange rate band system, a scheme under which the dollar fluctuates between two bands, established by the entity that has the power to buy dollars if the exchange change goes towards the lower band, and sell if it is located in the upper limit, in order to increase supply and push the exchange rate lower.
The percentage of savings in foreign currency has been increasing in commercial banks since June 2011, when the country ended its fixed exchange rate against the dollar.
The Honduran private banking industry reports that up to 1st March the total balance of deposits was 156.026 billion lempiras ($8.188 billion), including lempiras as well as foreign currency, of which the equivalent of 45.247 billion lempiras corresponds to savings in dollars (about $2.374 billion). That is, 29 percent of the total savings in the domestic banking system corresponds to dollar accounts.
Yielding to old pressures, the government of Porfirio Lobo may have made a commitment with the IMF to devalue the lempira by 5% in 2012.
The lempira could depreciate by 95 cents this year, the biggest jump seen since 2005, and that change may have been agreed on in recent negotiations with the IMF in Tegucigalpa.
An article by Luis Rodriguez in ElHeraldo.hn, cites anonymous government sources who participated in the negotiations.
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