In the midst of the confusion caused by the decision of the Central Bank of Nicaragua to establish a fixed exchange rate for Córdoba against the dollar, the entity’s president, Ovidio Reyes, explained that financial institutions and exchange offices would continue to set their exchange rates to change with the public, as has always been the case, and that The BCN course will be for reference only.
Banks and all people in the business of selling foreign exchange will set their exchange rate according to the demand for the dollar in the domestic market and will only use the official exchange rate as a guide. And in the event that these market rates change greatly due to the supply and demand of the dollar, then the Central Bank of Nicaragua will intervene to stabilize the market.
As a rule, intervention is carried out through mechanisms for injecting or withdrawing liquidity from the national market, as has always been the case. The central bank, for example, sells or buys cordovas and dollars from commercial banks through the stock exchange, or uses the stock market to stabilize money circulation through the purchase or sale of debt.
That is, supply and demand will now prevail in the exchange rates of the national market. For example, in December, when more dollars flow in due to increased remittances, this means that more cords will be needed to ensure that these currencies are convertible into the domestic currency. The Central Bank then intervenes in the market by issuing more cordobas to keep the exchange rate fixed.
Previously, financial institutions used the official exchange rate as a guide when setting the weekly exchange rate change for the public, now it will be purely supply and demand. BCN tracked the changes through the behavior of the currency gap.
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But what happens if the exchange rate gap widens sharply? “If there are big fluctuations (in the exchange rate), we start selling the currency, we have enough currency to sell it in the market,” Reyes explained.
“This is a regulatory mechanism; That is, if the increase occurred, we would immediately begin to satisfy and balance the market. But the truth is that both people involved in buying and selling currencies, financial institutions and commercial institutions always set the selling exchange rate that suits them best,” he added.
Three functions of a fixed exchange rate
Reyes clarified that the official fixed exchange rate, established as of January this year, will serve only three purposes. “It is official (BCN exchange rate) in the sense that it applies to three elements, for the slippage that is applied in accounts, that is, when there are contracts and the contract is established in cordova with the preservation of value, It uses this official exchange rate for contract adjustments or in the same bank accounts it is adjusted to maintain value based on that exchange rate.”
In addition, the fixed exchange rate set by the Central Bank “is used to buy dollars, that is, when financial institutions come to sell us dollars, we buy them at 36.6243 (the fixed exchange rate since January 1), and it also applies when the public sector wants to pay off debts, they come and buy dollars from us, and we sell them for 36.6243,” explained Reyes, speaking in the propaganda publication of the dictatorship on January 9.
He reiterated that “the sale (of the dollar) is completely free, we, the Central Bank, have never interfered in the sales market except to sell dollars, but we do not force anyone to transact at the exchange rate.”
“December is a month of a lot of activity, and I think there was probably a lot of liquidity, there were bonuses; So, maybe the exchange rate there has gone up a little, but I hope that it will stabilize, and if not, then we will inject dollars so that it stabilizes. But the sale is free, the Central Bank does not regulate the sale of foreign currency, this is the official rate for those transactions that I told you about.”
Also read: Is the fixed Córdoba-dollar exchange rate that will be administered from January sustainable? Here’s what analysts say