Mexico - Current economic position and prospects

RESTRICTED FILE COPY R e p o r t N o. W.H. 49a This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CURRENT ECONOMIC POSITION AND PROSPECTS OF MEXICO November 1, 1956 Department of Operations Western Hemisphere  CURRENCY EQUIVALENTS U.S. $ 1 - 12.50 pesos 1 peso - U.S. $ 0.08 1 million pesos - U.S. $ 80.000 On July 22, 1948 the par value of pesos 4.86 to the U.S. dollar that had been in effect from 1940 was abandoned. Until April 1949 the rate was maintained between 6.50 and 7.00 pesos per U.S. dollar: in April-May 1949 it was allowed to fall to approximately 8.50 pesos per U.S. dollar, and on June 18, 1949, a par value of 8.65 pesos per U.S. dollar was adopted. Effective April 19, 1954, the par value was changed from 8.65 to 12.50 pesos per U.S. dollar.  TABLE OF CONTENIS Page No. BASIC DATE SUIviMARY CURRENT ECONOMIC POSITION AND FROSPECIS OF MEXICO 1. Introduction 1 II. The Price and Wage Level 2 III. Monetary Policy 4 IV. Fiscal Policy 7 V. Balance of Payments 9 VI. Labor Situation 11 VII. External Public Debt 12 VIII. Conclusions 13 STATISTICAL APPENDIX Table 1 - External Public Debt Iable 2 - Estimated Service of External Public Debt 16 Table 3 - Indices of Volume of Production 18 Table 4 - Agricultural Production 19 Table 5 - Gross Product, Consumption, Investments 20 and Savings. Table 6 - Price Indices 22 Table 7 - Origin of Changes in Money Supply 23 Iable 8 - Federal Government Revenue 25 Table 9 - Federal Government Revenue and Expenditures 26 Table 10- Public Expenditures and Savings 27 Iable 11- Public Investment by Agencies 28 Tfable 12- Financing of Public Investment 29 Table 13- Balance of Payments 30  BASIC DATA Area 760,000 square miles Population - 1955 30.8 million (appprox) National income - 1955 77,300 million pesos (at factor cost) u.S.g,6,200 million 'j210 per capita Balance of Payments - 1955 (millions of b.S.4i) Exoorts (f.o.b.) 810 Non-monetary gold exports 14 Foreign travel receipts 365 Receipts from other services (net) 24 Total Receipts 1,213 Imports (c.i.f.) 884 Foreign travel payments 165 Direct investment service and official interest payment 93 Total payments 1,142 Net current account 71 Private long-term capital 98 Private shlort-term capital 65 Official loans 40 lqet capital account 207 Net errors and omiss ions -46 Surplus 231 Principal Exports - 1955 iMillions of U. 5 % of total Cotton 186.5 25 Coffee &2.3 11 Shrimps 15.0 2 Copper 46.5 6 Lead 52.6 7 Zinc 27.7 4 Petroleum 8.0 1 Principal Imports - 1955 Gasoline 20.7 2 Raw materials 296.3 34 Consumer goods 101.8 11 Capital goods 364.5 41 Federal Government Finances-1955 Millions of pesos Revenue 6,988 Expenditures 6,502 Surplus 436  - i - 1. The devaluation of April 1954 was followed by a period of rapid price increases which now has come to an end. It is likely that the present orice level, and its corresponding wage level, are in proper relation to the existing rate of exchange, and that by avoiding domestic inflation and excessive wage increases Mexico can maintain economic growth with stability during the next few years. 2. It is not likely that expansion of private bank credit will upset stability. The reserve requirements presently enforced by the Bank of Mexico are strict and the Bank may be expected to show great caution in loosenir,g credit controls. 3. The moderation shown by the trade unions in recent years and the close relations between the Government and the labor movement give reason to believe that wage increases during thle next two years can stay within the limits necessary to maintain economic stability. As these limits are likely to be narrow, however, labor relations may present more difficult problems in the future than in the recent past. 4. The diversification of exports, the steady development of new exoort articles and self-sufficiency in food, petroleum and basic raw materials make the economy resistant against shocks from the outside and calamities from within. In addition, present foreign exchange reserves of F, 400 to 450 million orovide a good cushion against adversities. Even substantial orice falls in somie of the country's important export articles are unlikely to disrupt the economic stability now being established. 5. There are considerable risks of inflationary pressures from the public sector during the next few years. In spite of increases in income and export tax revenue Federal Government revenue as a whole has not increased in relation to national product. Is current expenditures at the same time have increased substantially, the Government's capacity to finance investment is lower than previously. The ability of autonomous Government agencies to finance investment from their own resources has also declined, as they have not been permitted to raise their prices in proportion to increased costs after the devaluation. As public investment presently is low and the needs for it great, while private investment may soon slacken, a strong pressure for increased public investment is likely to develop smon. The Government banks may also before long find themselves in lack of funds for expansion. 6. This situation can be met in part by strict planning and control of public investment and the operations of the Government banks and in part by measures to augment the revenue of the Federal Government and the autonomous agencies. As for the planning and control of public investment, the basis has already been laid by the efficient preparatory work of the Investment Commission in the past two years. This Commlittee is now preparing an investment program  - ii - for the remainder of the Presidential term (i.e. through 1958). On the other hand, the plans of the Government banks are not subject to central control. 7. In recent years efforts to increase public revenue have been con- centrated on improvements of tax legislation and administration. On the other hand, the Government has not considered it advisable to carry out any substantial increases in tax rates. It is the Government's intention to continue this policy during the next two years. WhRiile it is not likely to lead to rapid increases in revenue, it may be expected to yield signifi- cant results over a period of years. It is also the Government's intention to carry out gradual increases in the prices and tariffs of autonomous public agencies. In the meantime, the Government would be justified in increasing the use of external loans, especially long term loans, for the financing of public investment. u. Owing to increased use of short and medium term credits during the last three years, the service of external public debt has increased from its previous level of Ai.O-50 million a year to 4,99 million in 1955 and about eP80 million in 1956 and 1957. A special commission was set up in August 1954 to approve all external public credits, but the use of short and medium term credits has continued during the last year. The present high service of external debt is not a serious threat to balance of payment stability as most of the short and medium term loans are likely to be renewed, and their amortization in any case would not exceed a period of two to three years? 9. In additiorn to the short and medium term credits, Mexico has in recent years been drawing down on several long term loans from the Eximbank and the I.B.R.D., most of them contracted several years ago. The use of these loans has been about the same as the annual amortization of long term debt (between $30 and 40 million). At the end of 1956 these loans will practically be used up, and the Government will have to decide whether to increase the reliance on short and medium term credits or prepare to contract substantial amounts of new long term loans. As most of the development projects represent long term investments, the latter alternative would allow Mexico to absorb and service considerably higher amounts in long term loans than it has been doing in recent years.  CURRETT ECONOMIC POSITION AND P1ROSP?1S OF MEXICO I. INTRODUCTION 1.. The devaluation of the peso in April 1954 was the outstanding economic event of recent years in Mexico. In the past two years its effects have been a dominant influence on the econony; the crucial question for the future is wihether the country will be able to attain economic growth with stability or is heading for a period of instability which might lead to a new devaluation. 2. In the Economic Report on Mexico of July 29, 1954, the developments leading up to the devaluation were described and the economic position as it appeared immediately after the devaluation appraised. It was pointed out that several accidental factors, such as poor crops, fall in export prices, decline in tourism and the Government's desire to overcome aneconomic recession had precipitated the devaluation; nevertheless, underlying this devaluation as well as previous ones, was the fundamental problem of Meexico's economic de- velopment: the need for high investment if progress was to be made, and the inadeqiacy of normal private and public savings to meet this need. The report concluded that the outlook for the Mexican economy for the next two years or so was fc vorable; that under the influence of good crops and improved export prices, output and exports were likely to increase rapidly; and that a favorable balance of payments position could be maintained as long as the temporary effects of the devaluation continued to stimulate production and keep consumption down. The critical period would come later, vh en the tem- porary effects of the devaluation had played themselves out, when foreign export prices might become less favorable and the country again would be faced with the need of financing its investment from normal levels of saving. The report pointed out the importance of taking measures to raise public revenue and to improve public investment in order to prepare for this situa- tion. If this was done, Mexico would stand a good chance to break the in- flationary circle, while, on the other hand, with continued inflation, the country's economic growth was likely to be progressively impaired, with periodic balance of payments crises becoming increasingly difficult to deal with. 3. Somewhat more than two years have now passed since the devaluation of 1954. During these years favorable weather conditions and good export prices have combined with the beneficial effects of the devaluation to create the most rap id economic growth Mexico has experienced in recent decades. Agricultural production increased by 18% in 1954 and 10% in 1955 and in- dustrial production by 9% in 1954 and 12% in 1955. The indications are that the overall increase in real product was about 10% in each of the tvo years. At the same time sound monetary and fiscal policies have helped to bring the process of price and wage increases which followed the devaluation to an end and to prepare the economy for the less favorable situation of the next few years when the beneficial effects of the devaluation will no longer be felt and the prices of some export articles are likely to fall. Bank credits have been kept under strict control by the Bank of Mexico and the Federal Government has been running appreciable surpluses in 1955 and the first half of 1956.  Foreign exchange reserves i ich fell to no more than about $100 million during the months following the devaluation, reached $450 million early in 1956, and a