MEXICO CITY, DEC. 14 -- The Mexican government today drastically devalued the peso in one of a series of measures intended to spur economic growth, brake capital flight and control the country's runaway inflation.
On the "controlled" exchange market that Mexico uses for most foreign currency transactions the peso fell to 2,200 to the dollar, an 18 percent drop from the 1,805 rate in effect when trading ended Friday.
Though devaluations normally exacerbate inflation by raising the cost of imports, the government is simultaneously implementing new consumer price controls and threatening sanctions against merchants and manufacturers who raise prices "unjustifiably." At the end of November Mexico's inflation rate had reached a record annualized rate of 144 percent.
Fixed daily by the Banco de Mexico, the controlled peso -- set higher than the free-market peso, which was traded today at 2,300 to the dollar -- is used for nearly all import purchases, export sales, and foreign debt payments. Before today, the controlled exchange rate had been adjusted downward against the dollar at a gradual pace of about five units daily.
By closing most of the gap between the controlled and free rates, today's devaluation removes the incentive for exporters to circumvent currency controls and exchange their dollar earnings for pesos on the free market here or in the United States.
The move should boost foreign sales of Mexican manufacturers, which have risen 45 percent this year to a projected $10 billion. But the devaluation significantly increases the local cost of the more than $8 billion Mexico will owe in interest on its $104 billion foreign debt over the next year.
For American tourists, the new controlled rate should guarantee that the free-market peso -- used in hotel rates and for dollar cash exchanges -- will not appreciate against the dollar during the tourist season.