Financial Management at Zeal

The peso float could have been forecast due to a number of reasons. First, the exchange rate that was set and maintained by the Zeal authorities was clearly overvalued. The purchasing parity theory of exchange rates predicted a rate of GP33.6 for $1, while it was being pegged at the rate of GP20 for $1. Second, the balance of payments was running in deficit for a number of years as can be seen in Table1. The current account deficit was constantly increasing over the years and it was being funded by capital flows from abroad, putting pressure on the currency to depreciate. Thirdly, Inflation was consistently rising and was at 12% in 1995. The money supply was rising at a greater rate than the price level, again placing peso under pressure. Fourth, Zeal’s central bank was continuously losing international reserves in an attempt to hold the exchange rate. Fifth, the country had to borrow capital to fill the gap in the balance of payments. And lastly, the sustainability of a particular level of current account deficit depends on how the capital flows are used and if the country has the appropriate debt servicing capability. A large and persistent current account deficit in the balance of payments of Zeal shows the employment of unsustainable macroeconomic policies. The exchange rate would have finally fallen victim to those policies. So, from the above reasons we can say that the peso float could have been anticipated. (Beenhakker, 2000)
There are still positive figures in unilateral transfers. The transfers have increased from a very minuscule $1 million in 1973 to reach $13 million in 1995. From 1973 to 1993 there was an increase of $6 million in unilateral transfers overall. But in the two years from 1993 to 1995 the country has seen an increase in unilateral transfers to the extent of $6 million. This increase has been seen within two years from 1993 to 1995. Unilateral transfers are a component of autonomous capital flows. They are independent of the current balance of payments situation. They are the result of private firms or persons having capital transactions conducted with foreigners. They’re also regarded as planned capital movements that emerge from the decisions of individuals, firms or the government to engage in capital transactions with the rest of the world. In this case, the transfers may indicate that many wealthy individuals may be selling their assets to foreigners to convert their wealth into dollars. So we can deduce that many wealthy individuals may be expecting devaluation and in this anticipation they are moving their funds outside the country, to safeguard their wealth from being reduced due to any weakness in the currency of Zeal. The study indicates that for 1995 the difference between the U.S. dollar interest rate and the Zeal peso interest rate ranged up to 9 percent in favor of the peso, but the forward discount rate for the peso ranged up to 20 percent. This indicates that there is a premium on the forward rate in the USA. Many wealthy individuals of the country have shifted their money out of the country through the dollarization of their assets. This is indicated by the unilateral transfers shown in Table1. The table indicates that the trade balance deficit has been increasing since 1973 and currently it stands at a very high $400,000,000.00.