President Ernesto Zedillo opt for devaluation. On December 20, the government announced that the restrictive band within which the peso was permitted to trade would be raised 15 percent. Unfortun ately, the announcement caught investors by surprise and the government without a plan for restoring fiscal discipline. Only then was the decision made to let the peso float, i.e., let market forces set its prices. Mexico's basic economic problem, however, is its need to reduce its dependence on short-term flows of money by slashing its curr ent account deficit.
Devaluation helps, of course, because imports become more expensive and exports become cheaper.
But devaluation gains can be lost if prices and wages are permitted to rise. As a condition for assistance, Mexico is required to rein in its central bank and its over-expansive monetary policy as well as to take other actions to hold the line against inflationary pressures. These measures are expected to virtually eliminate most of the current account deficit and stabilize the peso's value. But this progress comes at a high cost. Private sector forecasts are even more pessimistic.