Economics: Banxico Law reform initiative poses major risk

MEXICO - Report 11 Jan 2021 by Mauricio Gonzalez and Francisco González

When the governing Morena party’s Senate leader proposed, and in short order passed in December reforms to the law governing Banco de México the reaction was swift. Private sector analysts, deputy governors at the central bank, the Mexican Bankers Association (ABM), international ratings agencies and others warned of the many potential consequences of such changes. The proposal betrays just how clueless its drafters are when it comes to the Mexican market for foreign currency, and generates concern about an apparent lack of definition on the part of the current administration, and especially the President, over whether it intends to undermine Banxico’s mandate and autonomy through legislative proposals.

The main purpose of the reform was to require the central bank to acquire all US dollars that pass through Mexican financial intermediaries and add those bills to its international reserves. The bill’s authors argue that this would help lower what Mexicans working abroad have to pay to send remittances back home.

While there is a problem with the market for cash dollars, it would not help to transfer the problem to Banco de México. The threats posed to its autonomy include depriving it of the ability to decide how many dollars to acquire and the level of international reserves to maintain in keeping with its own monetary policy priorities. And by forcing the institution to obtain all dollars that meet the specified characteristics, it would raise the risk of the central bank's vacuuming up dollars without the ability to determine whether they may have come from illicit sources. Deprived of the ability to demonstrate the origin of such bills through the anti-money laundering criteria demanded by international authorities, Banxico’s access to international markets could be greatly curtailed, and it could find itself the target of international sanctions and even see assets frozen.

The intensity of the opposition at home and abroad gave pause to the Morena camp. Instead of quickly ratifying the Senate vote, it was decided to postpone discussion of the bill in the Chamber of Deputies until that body reconvenes for its next regular session next month. It would be helpful if the Chamber of Deputies were to consult specialists before discussing the bill so that lawmakers are in a better position to devise a different option for managing foreign banknotes.

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