Question

Please discuss the impact of the international monetary system in Honduras. Does Honduras have a fixed or flexible exchange rate? How does the currency regime impact Honduras globalization and trade process?

Answer 1

A) At the moment, the currency exchange price in Honduras is managed by an auction system administrated by the National Bank created to control speculation.

The Honduran National Bank announced that the national currency, Lempira, will start as liberalization process as demanded by the International Monetary Fund.

It will have following impacts:

• It will raise fears of rapid devaluation and the creation of a parallel exchange rate.
• Honduras is a country with economic deficit so there is going to be an important pressure because the demand for dollars is much higher. This puts everything into the hands of private banks, and speculation is going to accelerate the devaluation of the Lempira.
• This will have a substantial impact on the national economy where things such as mobile phone bills, rentals, private school payments or private health bills are charged in dollars, while salaries are in Lempiras.
• To devaluate the Lempira means that people will have less economic power. There will be an impact on the economy, an impact on all aspects of daily life.

B) Honduras uses a crawling peg exchange rate that allows the Lempira to fluctuate by seven percent against the U.S. dollar in either direction. The peg is subject to the further restriction that any daily price be no greater than 100.075 percent of the average for the prior seven daily auctions.

C)

In recent years, the government has tried to promote economic growth through privatization and free trade agreements, although Honduras remains one world’s poorest countries.

The exchange rate of the Honduran Lempira to the US dollar is approximately L23.5 to one USD, which means one Lempira is worth around USD 4 cents.

• Globalization in Honduras during the past 20 years has been dominated by the rise of foreign investment into the maquila sector in which they import parts for assembly and re-export.
• Dependent on trade: mainly exports agricultural goods and food products and imports fuels, machinery, and equipment.
• Major Global Companies like Dole and Chiquita are responsible for Banana export. Honduras is considered a banana republic which means a majority of its economy is dominated by the growth and export of bananas.
• Honduras is the third largest exporter of clothes and textiles to the US market.
• Economy has begun to switch from agricultural based to industry based.