Mexico - Airports Development Project

IL CY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1406a-ME REPORT AND RECOMMENpATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA,S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR AN AIRPORTS DEVELOPMENT PROJECT May 28, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Unit - Peso (Mex$) US$to-0 Me i2 50 Mex$1000 = US$0.08 Mex$1 million US$80,000 Fiscal Year - January 1 to December 31  INTRNATIONAL BANK FOR RECONSTRUCTION AND DEVEIDPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED IOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR AN AIRPORTS DEVEIDPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to Nacional Financiera, S.A,, with the guarantee of the United Mexican States, for the equivalent of US$25 million to help finance a project for airports development. The loan would have a term of 24 years, including four years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. "The Economy of Mexico: A Basic Report" (192-ME) was distributed to the Executive Directors on June 2S, 1973. It was designed to provide both a long-term perspective on the Mexican economy and a framework for the assess- ment of short run trends. An economic mission visited Mexico in March 1974 and its report is now being prepared for distribution to the Executive Directors; the mission's preliminary conclusions are reflected in the discussion which follows. Annex I contains country data sheets. 3. For the three most recent of the six decades since the Revolution of 1910, the success of the Mexican economic system, measured in terms of GDP growth, has been outstanding. Since 1940, the annual average growth rate has exceeded 6 percent. And from the mid-1950s to 1972 Mexico was among the few countries in the developing world to combine a sustained high rate of growth with monetary and balance of payments stability. The average annual rate of inflation was less than 5 percent and the dollar value of the peso was maintained at the level fixed in 1954. 4. Rapid and sustained growth was the product of successful policies affecting the mobilization and use of both private and public sector resources. The role of Government in promoting economic growth was concerned on one hand with the development of strategic infrastructure and major utility industries and on the other with policies which featured, in the agricultural sector, the development of price support, import control and agrarian reform measures, and in the industrial sector external protection and the provision of fiscal incentives. 5. The sectoral allocation of public and private investment was reflected in a changing structure of output and employment. This featured the growth of manufacturing industry and the relative decline of agriculture; the latter, however, continued to be the chief source of employment and accounted in 1970 for 41 percent of the economically active population. 6. However, given rapid population growth at an annual rate of 3.4 percent over the last decade, economic expansion has not generated suffi- cient employment opportunities to absorb the labor force which has recently been growing at about 3.0 percent per year. In 1973 it was estimated  - 2 - that about 40 percent of the labor force was engaged in either aargLnal <<cupations - relatively unproductive and hence poorly paid - or was totally Euemployed. Partly as a consequence of rapid population growth but also as a result of the pattern of distribution of incomes and assets in the Mexican econ=Vy, the strategy which succeeded in promoting rapid growth was not ;-onparably successful in spreading its benefits. The incidence of poverty nas now been imch reduced fram earlier levels. But the differentials between -rich and poor, both between people and places, have probably increased over s;'ue. There was, until recently, little evidence (apart from the continua- tion of the land reform program begun in earnest during the Cardenas regLme in the 1930s) that Government policies were much ooncerned with these problems. tr 1970, however, it was apparent that a revised economic strategy - one which would focus on the improvement of the living conditions of the poor - was required. It seemed to be understood that this goal should not be pursued at the expense of rapid growth or of the monetary and balance of payments stability which appeared to be sine qMa non of sustained economic expansion. The last three years have demonstrated the Government's determination to develop such a strategy. The events and trends of this period have also revealed same of the constraints to doing so. 8. Among the progressive measures introduced since 1970 are a revision of the Agrarian Reform Law (1971) which )lad the purpose of democratizing and increasing the efficiency of the eiido2l system; a new Federal Water Law (1972), the outstanding feature of which is to izpose minimum and aximi farm sise limitations (of 10 and 20 has.) in new irrigation and drainage districts in an effort to achieve a better distribution of the benefits of public irrigation programs and to avoid excessive fragmentation; and changes in the allocation of bank credit which are aimed at increasing the flon of resources to low income farzers and ejidatarios. These measures are all responsive to the needs of the rural sector and demonstrate the Government's coneern to confront them. Another initiative in this category was the introduction (1972) of a 5 percent payroU tax to finance a new housing progrm for workers in the lower-middle income groups. It is clear, however, in the light of the experience of the last three years, that neither the needs of the poor nor those of the public sector industries (on which the growth of the econowu as a whole partly depends) can be met without the mobilisation of additional public sector resources. 9. In 1971, after the econoqy had begun to show signs of stress in 1970, the Government took restraining action in order to preserve monetary and balance of payments stability and the GDP grawth rate fell from the 1960-70 decade average of 7.1 percent to only 3.7 percent, while prices increased by 4.8 percent. In 1972 reneved econamic expansion was stimulated by public sector j1/ The ejido is a form of collective land tenure based on usufruct rather than ownership.  - 3 - expenditures and the GDP growth rate rose to 7.5 percent while prices increased (in terms of the GDP deflator) by slightly more than 5 percent. In 1973 a further substantial increase in public expenditures was largely financed by recourse to increased internal and external borrowing. Private savings mobilized through the financial intermediaries, which in the past provided non-inflationary internal financing for budget deficits, fell below the levels of previous years. Consequently, in 1973 the government's internal borrowing had a significant effect upon money supply, which increased by 24 percent during the year. This expansion coincided with and was partly responsible for an acceleration in the rate of domestic price increases. These, however, also reflected changes in international prices, the impact of which was especially serious because of a poor harvest in 1972 and the resulting need to import basic foodstuffs. Consumer prices increased by 22 percent and wholesale prices by 25 percent during 1973, while the deficit on the current account of the balance of payments increased by 63 percent over 1972. 10. In the light of these trends the Government and the monetary authorities began to take action to stabilize the economy in the middle of last year. First, monetary policy was tightened from June 1973 onwards. Second, in an effort to mobilize additional domestic resources electricity rates were increased by an average of almost 30 percent in October 1973 and hydrocarbons prices were increased by an average of almost 100 percent in December 1973. In aggregate, these measures are expected to yield the equivalent of almost 2 percent of 1974 GDP for public sector revenues. Third, the increase in real expenditures in the 1974 budget (approved in December) was very modest, while the planned use of resources emphasized the more intensive use of existing fixed investment on one hand and new investment in productive sectors on tha other. Consistent with a restrictive monetary program and with restraint in foreign borrowing, the projected nominal fiscal deficit for 1974 is lower than the final fiscal deficit for 1973, Fourth, interest rates on private savings were increased in March 1974. 11. These measures are expected to have a stabilizing effect on the economy in 1974. While the rate of price increases is expected to be higher than in other recent years, inflation should be substantially lower than in 1973. Some of the inflationary pressures this year will be derived from a general increase in wages at the end of 1973 which was negotiated against the back- ground of deteriorating real incomes of lower paid workers. Furthermore, the exact amount of inflation in 1974 will depend, in part, on whether an addi- tional wage adjustment is forthcoming during the year. With respect to the balance of payments,the stabilization program should have a moderating influence on the current account deficit which is expected to decline from 3.1 percent of GDP in 1973 to 2.8 percent of GDP in 1974. The deficit will, however, be higher than it would have otherwise been because of the need to import hydrocarbons at high international prices. 12. This impact notwithstanding, Mexico will be relatively less affected by the world energy crisis than many developing countries. Some 95 percent of the country's energy requirements are satisfied by hydrocarbons, the balance being supplied from hydro resources; about 10 percent of total hydrocarbons requirements have been imported in recent years; the hydrocarbons import bill for 1973 was US$283 million. In 1974 the value of hydrocarbons imports is estimated at  - 4 - .-S$i418 million. This figure would have been noh higher but for the developsent t,+' new fields in Chiapas and Tabasco which were formerly expected to amc on- - treaa in 1975 but are now expected to do so this year. The impact of the