Press Release: IMF Approves US$17.8 Billion Stand-By Credit for Mexico
IMF News, February 1, 1995
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- Published: February 1, 1995
IMF financing and terms
- The International Monetary Fund has approved an 18-month stand-by credit for Mexico of up to the equivalent of SDR 12,070.2 million (about US$17.8 billion).
- Of the total, SDR 5.259 million (about US$7.8 billion) or 300 percent of Mexico's IMF quota is available immediately.
- The remaining SDR 6,810.3 million (about US$10 billion) will be provided by the IMF to the extent that contributions of governments and central banks fall short of the targeted amount of US$10 billion.
- This is the largest-ever financing package approved by the IMF for a member country, both in terms of the amount and the overall percentage of quota, 688.4 percent.
- The IMF credit is intended to complement other external financing for Mexico announced in recent days and to give confidence to the international financial system.
Background and causes of the crisis
- Mexico achieved substantial macroeconomic stabilization and structural reform since the late 1980s: sharp reduction in fiscal imbalances, lower inflation, and greater integration into the global economy.
- The exchange rate strategy limited currency movement within a band that was depreciated by a predetermined amount, contributing to lower inflation but resulting in a substantial real appreciation of the new peso and a sharp increase in the external current account deficit.
- Domestic investment increased while private savings declined substantially.
- During 1994, investor concerns about the sustainability of the current account deficit increased amid dramatic adverse political events, intense competition for foreign saving in other emerging markets, and generally higher interest rates abroad.
- Mexican authorities raised interest rates, allowed the currency to move to more depreciated limits of the exchange rate band, and substituted short-term foreign-currency indebtedness for local-currency debt; reserves fell significantly between February and April and then stabilized until October.
- A resurgence of investors' fears precipitated the financial crisis and led to the floating of the peso in late December 1994, contributing to pressures and volatility in regional and global markets.
1995-96 program objectives and macroeconomic policies
- Primary objectives for 1995:
- Reduce the external current account deficit from 8 percent of GDP in 1994 to 4 percent of GDP in 1995, and to 3-3 1/2 percent of GDP in 1996.
- Lower the annualized rate of inflation to around 9 percent in the fourth quarter of 1995, from more than 30 percent in the first quarter of the year.
- Output and inflation outlook:
- Economic activity expected to decline in the first half of 1995, then recover in the second half.
- Real GDP should grow by around 1.5 percent for 1995 as a whole.
- Fiscal policy:
- Revised 1995 budget for the nonfinancial public sector provides for a fiscal surplus of 0.5 percent of GDP (compared with a balanced position in 1994).
- Primary surplus of 3.4 percent for 1995 (compared with a primary surplus of 2.6 percent of GDP in 1994).
- Authorities stand ready to strengthen public finances through additional measures if necessary.
- Monetary and credit policy:
- Limit on growth of net domestic assets of the Bank of Mexico of MexN $10 billion in 1995, compared with MexN $60 billion in 1994.
- Under this limit, credit expansion by the Bank of Mexico would be 17 percent of the monetary base at the end of 1994, consistent with an inflation target of 19 percent for 1995 as a whole.
- Bank of Mexico stands ready to tighten credit conditions further if needed.
- Reduction in rate of credit expansion by development banks to 2.1 percent of GDP in 1995; development banks and trust funds will continue net financing to priority sectors including exports and agriculture.
- Exchange rate and external sector:
- Substantial depreciation expected to improve the current account.
- Merchandise exports projected to grow by close to 25 percent in 1995.
- Imports expected to decline by 7 percent in U.S. dollar terms.
- Bank of Mexico will support the floating exchange rate regime through limited intervention.
- 1996 outlook:
- Authorities aim to lower inflation to single digits and reduce the external current account deficit to 3-3 1/2 percent of GDP.
- With restored financial stability, real GDP growth could rebound to around 4 percent.
- Authorities committed to review tax policies to at least maintain the surplus position of the public sector and improve tax equity.
Wage, price, and incomes policy
- Agreement of Unity to Overcome the Economic Emergency between the Government, the Bank of Mexico, and labor and business sectors to guide wages and public sector price rises in 1995.
- Provisions:
- Increase of 7 percent in minimum and public sector wages.
- Additional 3 percent through an income tax credit for workers with incomes of up to twice the minimum wage.
- Contractual wage negotiations to follow these guidelines and include productivity bonuses freely negotiated.
- Limits public sector tariff increases during 1995 to about 10 percent (about two thirds of the expected average rate of inflation).
- The price strategy will cause a revenue loss for the public sector of about 0.6 percent of GDP to be compensated by other fiscal measures.
- Agreement implies a significant reduction in real wages on average; authorities recognize need to address price distortions that may result.
Structural reform and privatization
- Program reinforces government strategy for privatization and concessions to the private sector, extending privatization to basic infrastructure in 1995: rail, ports, airports, electricity generation, and radio and telecommunications.
- Implementation will require some constitutional changes and regulatory reforms already under way.
- Authorities expect revenues from privatization and concession operations to be about US$6 billion in 1995 and an additional US$6-8 billion in 1996-97.
- Privatization proceeds to be used largely for cancellation of public external debt.
International financial support package
- In addition to the IMF's US$17.8 billion stand-by credit:
- United States is expected to provide US$20 billion.
- G10 central banks through the Bank for International Settlements (BIS) US$10 billion.
- Commercial banks US$3 billion.
Social protection measures
- Recognition that the peso crisis and adjustment measures could complicate efforts to sustain improvements in well-being of the poorest sectors.
- Measures implemented to protect the poor:
- Development bank lending scaled back overall but refocused on financing agriculture through specialized agencies that lend to small farmers.
- Employers allowed to supplement wages of those earning up to twice the minimum wage and to claim a corresponding tax credit to limit real wage adjustment for lowest wage earners.
Key statistics (Mexico: Selected Economic Indicators)
- Real economic growth (percent change): 1990: 4.5; 1991: 3.6; 1992: 2.6; 1993: 0.4; 1994*: 3.1; 1995**: 1.5.
- Consumer prices (end of year): 1990: 29.9; 1991: 18.8; 1992: 11.9; 1993: 8.0; 1994*: 6.9; 1995**: 19.0.
- Overall fiscal balance (percent of GDP): 1990: –2.8; 1991: –0.5; 1992: 1.6; 1993: 0.7; 1994*: --; 1995**: 0.5.
- Primary fiscal balance (percent of GDP): 1990: 7.3; 1991: 5.0; 1992: 5.8; 1993: 3.9; 1994*: 3.4.
- Gross domestic investment (percent of GDP): 1990: 21.9; 1991: 22.4; 1992: 22.8; 1993: 20.6; 1994*: 21.6; 1995**: 21.0.
- Gross national savings (percent of GDP): 1990: 15.5; 1991: 14.3; 1992: 13.9; 1993: 14.1; 1994*: 13.7; 1995**: 16.6.
- External current account balance (deficit –) (percent of GDP): 1990: –3.2; 1991: –4.8; 1992: –6.8; 1993: –6.4; 1994*: –8.0; 1995**: –4.3.
- Net public external debt (percent of GDP): 1990: 31.7; 1991: 26.1; 1992: 30.5; 1993: 31.1; 1994*: 29.2; 1995**: 27.1.
- Notes: Sources are Mexican authorities and IMF staff estimates. *Preliminary. **Program.
International Monetary Fund press release, February 1, 1995.