ECONOMY-MEXICO: IMF Praises New Flexibility in Exchange Rates

WASHINGTON, Dic 22 (IPS) - The International Monetary fund (IMF) praised on Thursday a Mexican government decision to loosen exchange rate controls and raise interest rates to curb the drop in the exchange and financial markets that resulted from Tuesday's devaluation of the peso.

Acting IMF Director Stanley Fisher said the measures "strengthen the healthy economic policies that Mexico has followed in recent years, and that led to improved performance of the Mexican economy, seen in low inflation rates and the country's integration into the global economy."

The 12.7 percent devaluation of the Mexican peso, announced on Tuesday by Finance Secretary Jaime Serra Puche, triggered a sudden rise in interest rates and a decline in stock market values, which dropped 11 percentage points on Wednesday.

Both the Bank of Mexico and the Finance Secretary attributed the new emergency programme, including the devaluation of the peso, to a growing trade balance deficit, which they say has reached intolerable levels.

Local authorities also blamed the decision on political instability in the southern state of Chiapas, where in recent days indigenous guerrilla forces took over 38 towns, claiming the government had broken an almost year-long truce.

However, according to analysts the measures revealed that the government is implementing a change in economic policy aimed at curbing a growing fiscal deficit which will reach some 17 billion dollars in 1994.

Confronted with the threat that the deficit will undermine future economic growth, Mexico set higher interest rates to attract increased investment, said U.S. analysts who closely follow the Mexican situation.

Nevertheless, Fisher said the decision made by President Ernesto Zedillo's government to temporarily loosen exchange rate controls is positive.

Meeting for the second time in 24 hours, representatives of the government, the business community, workers and the rural sector who negotiated the Pact for Welfare, Stability and Growth (PWSG) agreed that "the supply and demand of hard currency will freely set exchange rates" during the next two months.

The PWSG also agreed to hold down demand and keep rates, taxes, prices and salaries as stable as possible.

"The move is backed by adjustments in Mexico's credit policy, including a rise in interest rates and a drop in financing granted by development banks," Fisher stated.

He also praised a tough fiscal policy that would lead to the reestablishment of balance in public sector finances.

Meanwhile, Mexican authorities have promised to continue implementing structural reforms, although some of the new decisions contradict the promises of increased government investment and low interest rates that Zedillo campaigned on.

But the IMF official emphasised that the measures "represent an appropriate response to recent market developments."

Fisher added that exchange rate adjustments, backed by continued tough credit and fiscal policies, "will help strengthen the economic recovery that has been seen throughout the year, and ensure Mexico's position in the foreign market."

However, Carlos Tur with the National Autonomous University of Mexico said it will be difficult for the government to achieve its goal of a four percent inflation rate.

"Prices will rise and those that do not will cause shortages of some products or the disappearance of the services involved," Tur told IPS in Mexico.

"A fall as well as a restructuring is also expected, both in levels and patterns of consumption, because to devaluate is to redistribute resources, generally in a regressive sense, meaning the gap between rich and poor grows," the analyst added.

Trade Secretary Herminio Blanco called on financial operators, industry and the general public to remain calm, as "the loosening of exchange rate controls will tend to overcome the current speculative chaos and stabilise values and prices."

"The current instability is a transitory phenomenon triggered by movements that seek to take advantage of confusion," he added.

A rumour that Mexico's hard currency reserves have dropped from 14 to six billion dollars in the last 45 days - neither confirmed nor denied by the government - have further aggravated economic uncertainty.

The government refused to publicly reveal the level of its monetary reserves, saying the information is given out only three times a year. But an unofficial version has it that Finance Secretary Serra said during the PWSG meeting that reserves are currently around six billion dollars.

A more "pessimistic" version, echoed by analyst Osvaldo Caldu, holds that reserves barely surpass one billion dollars, and that the emptying of coffers occurred in the last few weeks of the government of former President Carlos Salinas de Gortari, who left office on Dec. 1.

The PWSG authorised the Mexican government to use nearly seven billion dollars in two credit lines granted to back the peso by the United States and Canada, Mexico's partners in the North American Free Trade Agreement (NAFTA).

NAFTA, in effect since Jan. 1, 1994, is a free trade area with 375 million inhabitants and a seven trillion dollar gross annual product.

© Inter Press Service (2014) — All Rights Reserved. Original source: Inter Press Service