By
Steve Frazier and Karene Witcher, Wall Street Journal, 2/15/1985
Summary
by Alison Cozby
Overview: Mexico is quibbling with the IMF over 1985 austerity payments, while the IMF is unhappy with Mexico’s performance in 1984. Implementation of the IMF program, and international loans could be delayed.
Summary:
The IMF sent out a signal that it was getting tougher with debtor nations when last month it cut off $1.5 billion of credits to Brazil until it is compliant with the economic targets set by the IMF austerity accord.
Mexico is testing this as it quarrels with the IMF over targets in its third and final year in the austerity program. This has delayed the implementation of the IMF program and therefore suspends Mexico’s ability to begin drawing the final $1.2 billion in credits that would be available this year from the fund. A $50 billion debt restructuring with foreign bankers could be delayed as well.
Mexico’s announcement for a $1.2 billion budget cut is encouraging, but Mexico still lacks necessary governmental actions to solve financial problems. The IMF has sent back staff members to work with a plan for 1985. Meanwhile, the fund is still upset that Mexico missed goals in 1984 with inflation at 59%, instead of the hoped 40%, and a government budget deficit at 6.9% of the country’s total output of goods and services, instead of the agreed upon 5.5%.
Mexico has said that its deficit target this for 1985 would be 5.1%, instead of the planned 3.5%, and it is doubted to be achievable. The IMF may push for faster devaluation of the peso, which has the danger of becoming overvalued against the U.S. dollar because prices have been rising much faster in Mexico than in the U.S. The devaluation could help non-oil exports be more competitive, and help offset the decline in oil export revenues, but would raise import prices and increase inflationary pressure.
Mexican officials are determined to get an agreement with the IMF within the next month, but has so far only announce budget cuts that amount to 1.5% of the 1985 budget. The government plans to sell off or close 236 government-owned enterprises, many of which are small and insignificant in terms of government spending.