News Brief: IMF Management Welcomes Mexico's Comprehensive Economic Program

January 3, 1995

IMF Management Welcomes Mexico's Comprehensive Economic Program

Acting Managing Director of the International Monetary Fund (IMF), Stanley Fischer, made the following statement today:

"Over the past several weeks Mexican financial markets have been under pressure, reflecting investors' concern about Mexico's external current account deficit and uncertainties about political events. In an effort to address financial market imbalances, on December 22, 1994 the authorities allowed the peso to float and substantially raised short-term interest rates.

"The Mexican authorities have announced a comprehensive economic program aimed at stabilizing the economy, restoring financial market confidence, and deepening the process of major structural reform. The principal goals of the program are the containment of inflation, and the reduction in the external current account deficit by about 4 percentage points of GDP to a level that can be financed on a sustainable basis. The program has received the support of Mexican business and labor sectors within the context of the Agreement to Overcome the Economic Emergency.

"The program is centered on a further strengthening of the public finances, a restrictive monetary policy, and wage restraint. Despite a substantial rise in interest payments, the overall public sector balance will move to a surplus of about 0.5 percent of GDP in 1995, thereby consolidating the substantial strengthening of the public finances achieved over the past several years. The programmed fiscal improvement is to be achieved through cuts of current expenditure and a temporary reduction in capital expenditure. At the same time, the increase in the loan portfolio of development banks is to be cut by the equivalent of 2 percentage points of GDP. The program will be supported by a wage policy that will strengthen the public finances and ensure the maintenance of a strong international competitive position.

"The authorities also have announced the expansion of their already wide-ranging privatization program to promote faster economic growth and social development. In particular, railroad operations, which are a major source of structural inefficiency, will be open for private investment; Mexican financial markets will be opened to greater foreign participation; and planned reforms in the area of telecommunications will be accelerated.

"To underpin the program, and to ensure orderly conditions in foreign exchange markets under the floating exchange rate regime, an Exchange Stabilization Fund of US$18 billion has been established, with contributions under the North American Financial Agreement, and from the monetary authorities of other major countries and from private commercial banks.

"After reviewing the economic policies described above, IMF management believes that they are appropriate to the circumstances and that they should result in low inflation, renewed economic growth, and a significant strengthening of the balance of payments. Moreover, they show the capacity of the authorities to respond promptly and effectively to economic and financial developments, and need to be seen against the background of the sound macroeconomic and structural reforms that have been adopted over recent years. These policies provide a solid basis for discussions on an agreement that could be supported by the use of IMF resources, at the request of the Mexican authorities. We support the initiatives being undertaken to assist Mexico with a secondary line of reserves and stand ready to cooperate with the Mexican authorities as needed."


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