February 27, 2007

The Dollar Against the Boliviano

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The US Dollar has been sliding down against the Boliviano since mid 2005. It's dropped 10 cents Bolivianos.

Why? Because the central bank has increased the difference between sell and buy of the dollar, thus creating a demand for Bolivianos. As simple as that. The Bolivian economy has been slowly de-dollarizing due to the rosy macroeconomic look (budget surplus, less debt, plenty of reserves, positive growth, etc.) and the central bank's policy. The government wants Bolivians to use Bolivianos instead of dollars, since the Bolivian economy has been relatively dollarized.

One advantage is that it gives Bolivia, for the moment, a good image. Any time a currency does better compared to the dollar, the world looks with glee. However, by the same token, Bolivian products do get more pricey, and imports win. A word of caution, the idea should not be to appreciate the Boliviano's value against the dollar, but to control inflation. If the Boliviano, continues on appreciating, it might result in a negative effect on Bolivian products. That would be the most obvious observation.


galloglass said...

Miguel: OT, but any idea on why the government won't call Beni a disaster area? El Deber says someone in the government said that a tsunami would have to hit before they did that.

miguel said...

It has to do with the land reform law. One of its articles says that the redistribution process cannot be applied to land affected by 'natural disasters'. So, naturally, the government does not want to stop the land reform process by declaring all that land in disaster. Beni is characteristically a cattle growing region. The Texas of Bolivia, if you will. In that sense, a major target of the government.

Guccio said...

The statement is not correct. To see if the apreciation of the Bolivano has a negative effect, we do not have to see what is happening with the nominal exchange rate, we have to check what is happening with the real exchange rate which takes into account the Bolivian inflation and the inflation of our commercial partners.

miguel said...

Which statement is not correct?

The effects on what? exports, imports, reserves, budget, BoP, ...?

What the central bank did is increase the differential between buy and sell, which has a direct effect on the nominal exchange rate.

As far as the Central Bank goes, there was no mention of the real exchange rate. That is because it cannot be changed, right? RER is a concept that indicates (mostly to economists) the competitiveness of foreign trade of a country compared to another. In that I agree with you. But, again, the post discussed what the Central Bank did (which BTW also has a real effects on the things I mentioned) and not the differences between RER and NER.