Journal Issue

$4.1 billion package: IMF approves Stand-By credit for Mexico, commends authorities for sound policies

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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In a press release dated July 7, the IMF approved a 17-month Stand-By credit for Mexico equivalent to SDR 3.1 billion (about $4.1 billion) to support the government’s 1999-2000 economic program. There will be seven disbursements under the Stand-By credit. The first three will be for SDR 517.2 million (about $687 million) each. The first is available immediately; the second, when the end-June 1999 performance criteria are met; and the third, based on the first program review scheduled to be completed by December 1999 and subject to the end-September 1999 performance criteria having been met. The next four disbursements of SDR 387.9 million each (about $515 million) will become available based on the performance criteria being met for end-December 1999, end-March 2000, end-June 2000, and end-September 2000, and subject to reviews scheduled to be completed by March and June 2000, respectively.

In commenting on the Executive Board’s discussion of the request by Mexico, IMF First Deputy Managing Director Stanley Fischer made the following statement:

“Directors commended the authorities for their pursuit of sound economic policies and structural reforms, which have restored confidence and set the stage for sustainable growth. As a result of these policies and the authorities’ prompt response to external shocks, the resilience of the Mexican economy has increased. Directors noted in particular the role that the floating exchange rate had played in absorbing shocks and ensuring that major external imbalances did not develop. Directors supported the program’s access to IMF resources, considering this an appropriate preventive strategy to maintain market confidence. The view was expressed that, should the international environment improve, the authorities should treat this arrangement as precautionary.

“Directors cautioned that the Mexican economy remains vulnerable to shocks. The continued fragility of the banking system was a major weakness, and Directors urged the authorities to accord this area top priority and to accelerate the pace of banking reform. They underscored the importance of enforcing strict adherence to existing financial regulations and upgrading the financial system’s legal, regulatory, and supervisory framework consistent with the Basle core principles.

“Directors considered that the fiscal stance was appropriately tight, and based on a conservative oil price assumption, as well as on measures that will increase non-oil revenues by about 2 percentage points of GDP. Directors praised the authorities for protecting social expenditures, while lowering noninterest expenditures to their lowest level relative to GDP in this decade. In this regard and pointing to the still high incidence of poverty, Directors considered it important to strengthen the social safety net and the delivery of social services, with due regard to budgetary constraints. They particularly urged the authorities to follow through on their own plans to restrain public expenditures through the presidential elections and to build a consensus for a tax reform package that could be submitted for congressional consideration. Directors also encouraged greater fiscal transparency, particularly related to banking restructuring costs.

“Directors also broadly supported the stance of monetary policy, within the context of the existing floating exchange rate regime. They recognized that the demonstrated commitment to inflation reduction was engendering confidence, as evidenced by the steady decline in inflation expectations, and encouraged continuation of policies aimed at further reducing inflation.

“Directors agreed that, as capital market access improved, the external current account deficit could well widen and be financed mostly by foreign direct investment. In this regard, they stressed the importance of monitoring private sector access to international capital markets, and making full use of the early warning debt monitoring system that has been established. They noted that the authorities’ prudent debt management strategy should provide a manageable medium-term external debt profile,” Fischer said.

Program summary

Mexico’s economy expanded strongly from mid-1995 as a result of a pursuit of sound economic policies and structural reforms, which have reestablished credibility and set the stage for sustainable growth over the medium term. These policies have also increased the resilience of the Mexican economy to external shocks, as reflected in the limited impact of recent international financial market turbulence. The government’s reaction to the shocks through prompt adjustments in fiscal and monetary policies, in the context of a flexible exchange rate regime, gave market participants confidence that major external imbalances would not develop. To further reduce vulnerability to adverse shocks, the Mexican authorities are continuing their efforts to restructure the banking system, which needs to play a key role in supporting economic growth.

The medium-term strategy seeks to consolidate the gains made in 1995-98 and set the economy on a sustainable growth path that would expand employment opportunities and reduce poverty in the context of low inflation. The economic program aims to reduce inflation to 13 percent during 1999 from 19 percent during 1998, and to 10 percent during 2000. Real GDP growth is expected to decline to 3 percent in 1999, reflecting, in part, reduced access to international capital markets, but is set to recover to 5 percent in 2000 as conditions improve. Correspondingly, the external current account deficit is projected to decline to 2.2 percent of GDP in 1999 and then to increase to 3.1 percent of GDP in 2000 as the pace of investment picks up. The overall public sector deficit is programmed, based on a conservative oil price assumption, at 1¼ percent of GDP in 1999. Fiscal measures already in place are expected to raise non-oil revenue by ½ of 1 percent of GDP, while noninterest expenditure is budgeted to fall to its lowest level relative to GDP this decade without affecting social expenditure.

The authorities also intend to continue carrying out structural reforms aimed at bolstering market confidence in the Mexican economy and consolidating access to international capital markets on increasingly favorable terms.

Despite a decline in public sector noninterest expenditures of 2 percent of GDP in 1998, social sector expenditure as a percent of GDP increased to 9 percent in 1998 from 8.6 percent in 1997. The authorities have also undertaken to improve the efficiency of social expenditure through better targeting, such as the linkage of family income transfers to compliance with preventive health care guidelines, vaccination schedules, and primary school attendance.

Mexico is an original member of the IMF; its current quota is SDR 2.6 billion (about $3.4 billion). Its outstanding use of IMF financing currently totals SDR 4.3 billion (about $5.7 billion).

The text of Press Release No. 99/28 is available on the IMF’s website (

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