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

IMF News, January 3, 1995

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Date: January 3, 1995.
Acting Managing Director: Stanley Fischer.
Context: Mexican financial markets were under pressure over several weeks due to investor concern about Mexico's external current account deficit and uncertainties about political events. On December 22, 1994 the authorities allowed the peso to float and substantially raised short-term interest rates.
IMF view: Management believes the announced comprehensive economic program is appropriate to the circumstances and should result in low inflation, renewed economic growth, and a significant strengthening of the balance of payments.

Principal goals:
- Containment of inflation.
- 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.
Support and context:
- The program has received the support of Mexican business and labor sectors within the context of the Agreement to Overcome the Economic Emergency.

Overall public sector balance:
- Will move to a surplus of about 0.5 percent of GDP in 1995.
Composition of fiscal adjustment:
- Cuts of current expenditure.
- Temporary reduction in capital expenditure.
- Increase in the loan portfolio of development banks is to be cut by the equivalent of 2 percentage points of GDP.
Rationale:
- Despite a substantial rise in interest payments, the surplus will consolidate the substantial strengthening of the public finances achieved over the past several years.

Monetary policy:
- Program is centered on a restrictive monetary policy.
Wage policy:
- Wage restraint to support fiscal consolidation and ensure maintenance of a strong international competitive position.
Exchange rate regime:
- Peso floated on December 22, 1994; Exchange Stabilization Fund established to ensure orderly conditions under the floating exchange rate regime.

Privatization and market opening:
- Expansion of an already wide-ranging privatization program to promote faster economic growth and social development.
- Railroad operations to be open for private investment to address a major source of structural inefficiency.
- Mexican financial markets to be opened to greater foreign participation.
- Planned reforms in telecommunications to be accelerated.

Exchange Stabilization Fund amount:
- US$18 billion.
Contributors:
- Contributions under the North American Financial Agreement.
- Monetary authorities of other major countries.
- Private commercial banks.
Purpose:
- To underpin the program and ensure orderly conditions in foreign exchange markets under the floating exchange rate regime.

IMF management conclusions:
- The policies show the capacity of the authorities to respond promptly and effectively to economic and financial developments.
- The policies need to be seen against the background of the sound macroeconomic and structural reforms 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.
- IMF management supports initiatives to assist Mexico with a secondary line of reserves and stands ready to cooperate with the Mexican authorities as needed.

News Brief — IMF Management Welcomes Mexico's Comprehensive Economic Program, January 3, 1995, IMF EXTERNAL RELATIONS DEPARTMENT.