IMF Completes Final Mexico Review

The Executive Board of the International Monetary Fund (IMF) approved on September 8 the completion of the third and final review under Mexico’s Stand-By Arrangement, which is scheduled to expire on November 30, 2000. Together with the observance of end-June 2000 performance criteria, Mexico may draw a further SDR 775.8 million (about US$1 billion). However, in view of the improved external position and the smooth political transition, the Mexican authorities have indicated that they do not intend to use these additional resources. In addition, reflecting the early attainment of the objectives under the Stand-By Arrangement approved in July 1999, including the consolidation of access to international financial markets, Mexico made a payment to the IMF of SDR 2.3 billion (about US$3 billion) on August 30, 2000, thereby repaying all its obligations to the IMF.

When final fiscal data for 1999 became available, there was a very minor revision resulting from the standard process for producing fiscal information in Mexico. The resulting deviation from a fiscal performance criterion was inadvertent and temporary. These minor data revisions do not change the Fund’s favorable assessment of fiscal policy implementation under the program.

In commenting on the Executive Board discussion of the review, Eduardo Aninat, Deputy Managing Director and Acting Chairman, made the following statement:

“The Mexican authorities are to be commended for their pursuit of sound economic and structural policies since the 1994–95 crisis, and for their swift response to international market turbulence in recent years. The authorities set out to give clear assurances about the conduct of macroeconomic policy in the run-up to the presidential election and to achieve an orderly transition to the next administration. In this context, their economic program for 1999–2000 is centered on a prudent fiscal policy stance as well as a continued strengthening of the banking system.

“Following the successful implementation of the program, economic performance in 1999–2000 exceeded expectations. Economic growth recovered in 1999 and accelerated sharply in the first half of 2000; inflation declined below the program target; and net international reserves rose significantly. However, the non-oil external current account deficit has been rising, as strong import growth more than offset robust growth of non-oil exports. Looking ahead, it is important that policies be geared toward consolidating recent economic gains. Continued prudent monetary and fiscal policies are warranted given the rapid expansion of domestic demand and the risk of overheating. In this regard, the Bank of Mexico’s recent actions to tighten monetary policy are well timed. Also, the authorities’ readiness to undertake an additional tightening of fiscal policy, if the expansion of domestic demand does not slow to more sustainable rates, is to be commended.

“The Mexican banking system has improved since the 1994–95 crisis. Progress in strengthening the banking system that builds on important previous efforts has taken place during the past few months, including the approval by congress of the new secured lending and bankruptcy laws. The operational performance of banks could improve further as credit growth responds to the progress in bank restructuring and legal reforms. The outlook for the banking system would be improved further by a more rapid increase in bank capital and a faster phasing in of the new bank capital requirements. The authorities are thus encouraged to continue monitoring closely banks’ compliance with the new capital regulations.

“A comprehensive tax reform aimed primarily at reducing the budget’s dependency on oil-related revenues is needed. In this context, it is encouraging that the economic advisors of President-Elect Fox have been working to develop a tax reform package. A prudent broadening of the tax base with the aim of increasing fiscal revenues could be used, in part, for needed higher social expenditure,” Aninat said.