Download The New Monetary Unit

MEXICO: THE INTRODUCTION OF A NEW
MONETARY UNIT
GUILLERMO ORTIZ
Governor, Banco de México
IMI Conferences
Turkey
October, 2004
1
MEXICO: THE INTRODUCTION OF A NEW MONETARY UNIT
I. Introduction
II. Background: Stabilization in the Eighties
III. The New Monetary Unit (1992-1996)
a. Reasons to change the monetary unit
b. Main Concerns
c. Implementation
d. Information and Coordination Activities by Banco
de México
IV. Macroeconomic Convergence
V. Conclusions
2
I.
Introduction
• From the end of World War I up to now, 49 countries have
removed zeros from their currencies.
 Brazil: six conversions between 1967 and 1994;
 Hungary: maximum number of zeros removed (29) in the
aftermath of World War II.
 Sixteen countries: zero removal implemented more than once.
• Given that there is a high fixed cost of introducing a new monetary
unit and that it takes time to implement it, Mexico removed three
zeros from its currency in 1993 once the stabilization program
initiated in the late 80’s provided for low inflation levels.
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II. Background: Stabilization in the Eighties
• In 1982, the unraveling of the debt crisis induced a three-digit
inflation level.
• A stabilization program was implemented:
 Fiscal effort
 Privatization of public enterprises
 Trade liberalization
• Despite the progress in the program, a sharp decline in oil prices
and the stock market crash severely hit the economy and inflation
rebounded.
Primary Balance
As a Percentage of GDP
Mexican Oil Export Price
Dollars per barrel
8.0
40
6.0
35
4.0
30
2.0
25
0.0
20
-2.0
15
-4.0
-6.0
10
-8.0
5
1986
1987
Source: Secretaría de Hacienda y Crédito Público
Source: Pemex
1986
1985
1985
1984
1984
1983
1983
1982
1982
1981
1981
1980
1980
0
-10.0
4
II. Background: Stabilization in the Eighties
Pact of Economic Solidarity (PES) and Pact for Stability and
Growth (PSG)
•
The PES followed a three-pronged strategy:
a) Orthodox demand-management.
b) Income policies and nominal anchors.
c) Structural adjustment program.
•
The pact provided for a rapid decline in inflation.
•
The PSG, in 1989, established in addition:
a) Renegotiation of the external debt.
b) Additional privatization efforts.
5
II. Background: Stabilization in the Eighties
• The low inflation attained in 1992 and the favorable expectations for
1993 created the appropriate conditions for the introduction of a
new monetary unit.
Consumer Price Index
Annual variation in percent
200
180
160
140
120
100
80
60
40
20
Ene-03
Ene-01
Ene-99
Ene-97
Ene-95
Ene-93
Ene-91
Ene-89
Ene-87
Ene-85
Ene-83
Ene-81
Ene-79
Ene-77
Ene-75
Ene-73
Ene-71
0
Source: Banco de México.
Note: The vertical lines represent the dates when currency conversions were implemented.
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II. Background: Stabilization in the Eighties
• The introduction of the new monetary unit in an environment of
declining inflation differed from the experience of Argentina and
Brazil in the 80’s.
Argentina: Consumer Price Index
Annual variation in percent
Brazil: Consumer Price Index
Annual variation in percent
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
0
1982
0
2004
1000
2002
1000
2000
2000
1998
2000
1996
3000
1994
3000
1992
4000
1990
4000
1988
5000
1986
5000
1984
6000
1982
6000
1980
7000
1980
20,262.9% (III-90)
7000
Note: The red lines represent the dates when currency conversions were implemented.
7
III. The New Monetary Unit (1992-1996)
Reasons to Change the Monetary Unit
• Under an inflationary process the denominations of paper
money had to be adjusted by issuing notes of higher values.
Proportion of the Value in Circulation of Each Denomination with Respect to
the Value of Total Banknotes in Circulation
(Monthly Average, in Percent)
1984
1985
1986
1987
1988
1989
1990
1991
$500
6.0
3.8
2.2
1.2
0.2
0.1
0.1
0.1
$1,000
24.8
13.2
7.3
4.5
2.2
0.6
0.2
0.1
$2,000
5.1
6.9
5.3
3.8
1.9
1.6
1.3
0.9
$5,000 $10,000 $20,000 $50,000 $100,000 Other
23.7
35.8
4.6
22.0
41.4
11.5
1.3
15.7
34.0
19.2
16.0
0.4
10.4
22.7
24.7
32.6
0.2
5.0
11.9
17.6
61.2
0.1
3.1
8.6
12.9
73.0
0.1
2.4
6.4
9.7
79.8
0.0
1.8
4.5
6.6
72.3
13.8
0.0
Source Banco de México
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III. The New Monetary Unit (1992-1996)
Reasons to Change the Monetary Unit
• After inflation declined and stabilized, Mexico required a
simplification of the values of quantities expressed in monetary
terms:
 Simplify transactions and arithmetic calculations.
 Make a more efficient use of computer and accounting
systems.
• The reform would reflect what was already a common practice
in daily life (elimination of three zeros).
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III. The New Monetary Unit (1992-1996)
Main Concerns
Survey Results: Which will be the effects of
the new currency unit?
Better
Worse
No Effect
60%
53%
47%
40%
37%
26%
22%
29%
21%
17%
13%
9%
Inflation
Exchange Rate
Firm s' Accounting
Personal Finances
56%
52%
50%
42%
28%
25%
24%
29%
26%
19%
14%
Purchasing Pow er
Interest Rate
11%
Com m erce
Source: Newspaper “El Economista”, 24/06/1992
Wages
10
III. The New Monetary Unit (1992-1996)
Main Concerns
Measures adopted by Banco de México
Inflation due to rounding-up of Prices and vouchers should be written in
prices
both pesos and new pesos during a couple
of months before and after the introduction
of the new monetary unit.
Commitment by business organizations not
to round up prices.
Disguised devaluation
Communication strategy to inform that the
new monetary unit would not imply any
change to the exchange rate regime.
Money illusion
Extensive communication that prices and
contracts would be transformed identically
as wages and money holdings.
Costs of the currency change
The private sector faced short-run costs
(modification of accounting, computer
systems,
checks
and
credit
card
vouchers…) to be compensated by
medium-term benefits.
11
III. The New Monetary Unit (1992-1996)
Steps Taken Before the Introduction of the New Monetary Unit
• Design of the implementation strategy.
• Proposal to Congress of the required legal changes.
• Coordination:
 Groups to coordinate activities with the financial sector,
commercial retailers, certified public accountants
associations, labor unions, etc.
• Institutional changes:
 Regulations, accounting and fiscal standards.
 Computer and accounting systems.
 New formats (e.g. credit card vouchers, checks, etc.).
• Communication:
 Communication campaign.
 Surveys and focal groups to measure the understanding
and progress of the change in different sectors.
12
III. The New Monetary Unit (1992-1996)
Implementation of the New Monetary Unit
• Definitions
 The name of the Mexican currency would remain “Peso”.
 To avoid confusion, the name “Nuevo Peso” (new peso) was
adopted temporarily (3 years).
 1000 pesos = 1 new peso.
13
50,000 Pesos
50 Nuevos Pesos
50 Nuevos Pesos
STAGE ONE
(January 1st. 1993)
STAGE TWO
(October 1st. 1993)
STAGE THREE
(January 1st. 1996)
50 Nuevos Pesos
50 Nuevos Pesos
50 Pesos
14
III. The New Monetary Unit (1992-1996)
Implementation of the New Monetary Unit
• Writing of Monetary Quantities
 First step (January 1st. 1993): Quantities had to be written
using the word “Nuevos Pesos” or its symbol “N$”.
 Second step (January 1st. 1996): “Pesos” and its symbol
“$” were used again.
 These requirements applied to accounting systems, prices,
checks, credit card vouchers, contracts, etc.
15
III. The New Monetary Unit (1992-1996)
Information and Coordination Activities by Banco de México
• Information Campaign
 The Central Bank used posters, leaflets, press releases,
paid advertisements in newspapers, television and radio,
appearances in interviews in television and radio, etc.
 Information in native and foreign languages.
 Communication in elementary schools.
 15 different spots aired before the introduction of the new
monetary unit, and 7 afterwards.
16
III. The New Monetary Unit (1992-1996)
TV SPOTS
17
III. The New Monetary Unit (1992-1996)
Information and Coordination Activities by Banco de México
• Coordination Efforts
 Working groups were established:
 Commercial banks.
 Labor unions.
 Professional accounting associations.
 Retailers associations.
 Working with all sectors of the economy served not only to
have consistent interpretations of what should be done, but it
was also a means to explain the reform and to gather the
information necessary to detect and correct possible errors of
implementation.
18
IV. Macroeconomic Convergence
After the 1995 financial crisis adjustments were made to restore
macroeconomic stability. They have facilitated macroeconomic
convergence with Mexico’s main trading partners.
• Fiscal retrenchment
• Tight monetary policy
• Floating exchange-rate regime
• Pro-active debt management
19
IV. Macroeconomic Convergence
Mexico has achieved
macroeconomic stability.
significant
progress
in
fostering
Fiscal Deficit *
Public Sector Debt
Headline Inflation
(As a percentage of GDP)
(As a percentage of GDP)
(Annual percentage Rate)
16
50
Foreign Debt*/
180
14
45
Domestic Debt
160
12
40
140
35
10
120
30
100
25
6
80
20
20
0
0
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
**
-2
* Economic Deficit.
** Projected.
* Including PIDIREGAS.
Jun-04
5
Jun-02
0
Jun-00
40
Jun-98
10
Jun-96
2
Jun-94
60
Jun-92
15
Jun-90
4
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
8
20
IV. Macroeconomic Convergence
Monetary Policy is one of the macro-pillars that have experienced
important institutional changes in the recent past:
Central Bank Autonomy
Inflation Targeting Monetary Framework
• Absence of fiscal dominance.
• Inflation target (3%, with a +/-1% interval of variation).
• Accountability and transparency (Inflation Report, frequent
presentations by Board Members, press releases at
established dates, etc.).
Observed and Target Inflation Rate
(Annual percentage rate)
60
Observed
Target
50
Upper Band
42
Lower Band
40
30
20
20.5
15
12 13
10
0
Jan-95
10
6.5 4.5
Jan-97
Jan-99
Jan-01
Jan-03
3+/-1
21
IV. Macroeconomic Convergence
Another pillar has been the flexible exchange rate regime, which has
allowed the economy to absorb external shocks in an orderly manner.
This, together with prudent fiscal and monetary policies, has
prevented the build up of external disequilibria.
15
250
9.5
10
200
9.0
5
150
8.5
0
0.05
Jul-04
May-03
Mar-02
Jan-01
Nov-99
Sep-98
Jul-97
May-96
Mar-95
0.00
Nov-01
Jan-02
Mar-02
May-02
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
Mar-04
May-04
Jul-04
Sep-04
300
2004**
10.0
2003
350
0.10
20
2002
10.5
25
2001 *
400
Current Account Deficit
2000
0.15
11.0
30
1999
450
11.5
1998
500
Foreign Direct Investment
1997
0.20
Sovereign Risk
Differential (EMBI+)
35
12.0
1996
550
Pesos per
dollar
1995
Exchange Rate
(Billions of USD)
1994
Basis
points
0.25
Jan-94
FDI and Current Account Deficit
Exchange Rate and
Sovereign Risk
(Coefficient of Variation:
60-day moving average )
1993
Exchange Rate Volatility
22
IV. Macroeconomic Convergence
As a result of trade liberalization and NAFTA, Mexico’s export and
FDI performance has been remarkable.
Trade with NAFTA partners
(share of GDP)
60%
FDI Flows from USA and Canada
(Billions of USD)
18
United States
16
50%
Exports
40%
Canada
14
Total
Imports
12
Total Trade
10
30%
8
6
20%
4
10%
2
2003
2002
2001*
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
2004*
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
*Refers to the first semester
Source: DOTS, IMF
1990
0
0%
*Excludes the Banamex-Citigroup transaction, which generated
12.45 billions of dollars
Source: Secretaria de Economía.
23
IV. Macroeconomic Convergence
The macroeconomic stability and the proactive public debt
management strategy have contributed to the development of
financial markets. As a result, domestic interest rates have
decreased and the maturity of the yield curve has been extended up
to 20 years.
Government Bonds Yield Curve
(annual %)
50
45
40
35
30
25
20
15
10
5
0
%
1995
60
Inflation and Average Maturity of
Domestically Issued Public Debt
Days
Average Maturity
Inflation
900
50
750
1998
40
600
30
1999
2000
2001
2004*/ 20
300
200310
2003
150
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
20 years
10 years
7 years
5 years
3 years
2 years
0
1 year
91 days
1 day
2002
450
24
IV. Macroeconomic Convergence
Disciplined fiscal and monetary policies have allowed the Mexican
economy to smoothly adjust to the last global economic downturn.
Private Consumption
(Index = 100 at the max.;
seasonally adjusted)
108
1981 IV
1985 III
104
1994 IV
2000 III
Gross Domestic Product
(Index = 100 at the max.;
seasonally adjusted)
1981 IV
1985 III
1994 IV
2000 III
110
105
Gross Fixed Investment
(Index = 100 at the max.;
seasonally adjusted)
1981 IV
1985 III
1994 IV
2000 III
120
110
100
100
100
96
95
90
80
70
92
90
60
88
50
85
-2
0
2
4
6
8 10 12 14
-2
0
2
4
6
8 10 12 14
-2 0
2
4
6
8 10 12 14
25
IV. Macroeconomic Convergence
• Mexico and Turkey have attained significant progress in abating
inflation. Amongst the key pillars are:
1. Central Bank autonomy and strengthening of its credibility by
establishing inflation targets.
2. Exchange rate flexibility.
3. Decisive integration in the global market.
• In this regard, timing for the introduction of a new monetary unit in
Turkey seems appropriate.
• Nevertheless, fiscal and monetary discipline are essential to
maintain macroeconomic stability.
26
V. Conclusions
• The introduction of a new monetary unit is characterized by
short-term costs (modifying accounting and computing systems,
prices, checks, credit card vouchers, contracts, etc.) that yield
medium-term benefits that increase with macroeconomic
stability.
• Although it is very difficult to estimate the benefits of the change
of monetary unit, in Mexico there is a generalized perception that
the introduction of the new unit permitted ample savings and
considerably simplified monetary transactions.
• The main ingredients of what is considered a successful
monetary unit change were:
 the preparatory activities
 the wide information campaign
 coordination efforts with different sectors of society
27
MEXICO: THE INTRODUCTION OF A NEW
MONETARY UNIT
GUILLERMO ORTIZ
Governor, Banco de México
IMI Conferences
Turkey
October, 2004
28