Statement by Juan L. Cariaga at the Board meeting of March 26, 1998

International Bank for Reconstruction Development International Association 87134 [ntemationai Finance Multilateral Guarantee EDS98-13Z March 25, 1998 Board Meeting of March 26, 1998 Statement by Juan L. Cariaga Mexico: Country Assistance Strategy Progress Report Introduction This progress report on implementation of the CAS for Mexico is welcome and we appreciate stafrs detailed presentation. We would also like to congratulate the government for the impressive recovery from the 1995 financial crisis. Mexico's fast return to economic growth has exceeded most expectations. We would like to offer some brief comments on this progress report and also have several questions. Overall, however, we are pleased that the Country Assistance Strategy appears to be successful, as described in this progress report, and receives our continued support. CAS Progress Report and Economic Considerations: The Mexican economy's recovery since 1995 and its return to sustainable growth during 1997 have been aptly described as "remarkable." Real GDP growth of 7 percent in 1997, while holding inflation to 16 percent, attests to the vigor and ability of Mexican authorities in facing this crisis. An important contribution seems to be the robustness being displayed by what the progress report characterizes as a maturing of the political system and its evolution towards greater openness, participation and accountability. Nevertheless, many challenges continue to exist, including serious inequalities in income. poverty and limited access to public services. Moreover, the impact of the Asian crisis remains of serious concern. It seems to have adversely affected Mexico more than other economies of the region. This development, combined with the recent uncertainty in international oil prices. threatens fiscal policy and growth for 1998. An important effect stemming from the crisis in Asia is pressure on the trade balance. Most Asian currencies have depreciated sharply, increasing competition for Mexican domestic producers. However, with the possible deceleration in US growth, as suggested by some market ''; i  2 analysts, there is also a risk that Mexico's flexible exchange rate policy, together with potential fiscal slippage, may compromise inflation objectives We welcome the staffs candid assessment about the tightening of macro management options and are pleased w see that the Bank and authorities will continue their attention to the challenges of balancing concerns for economic growth with control of inflationary pressures. Poverty, Productivity and £'1:port Growth The 1996 CAS highlighted three areas where Mexico faces extremely serious challenges: poverty ~nd inequality; lack of productivity growth; and sustaining competitive export growth. The progress report emphasizes that in spite of having overcome the fmancial crisis, Mexico continues to confront serious challenges in these areas. As mentioned in this progress report, the 1995 recession had negative implications for poverty and inequality, mainly on the less skilled urban population. The report notes that 80% of indigenous communities live in extreme poverty. In this respect, we welcome the Bank's strategy of supporting government initiatives to expand coverage of basic health services. but we would note that maintaining price stability, while expanding and improving primary and secondary education, are very important means of reducing poverty. Low inflation and efforts to broaden access to education should also contribute to strengthen productivity, export competitiveness, and medium-term growth. Given possibly adverse scenarios and the challenges involved, developments in productivity are also of great importance. Thus, we welcome the Bank's studies on export competitiveness and labor market flexibility in order to increase productivity. As outlined in the CAS, the Bank will support productivity increase in the rural and urban sectors, through loans for agriculture productivity, competitiveness, small and medium enterprise support, and knowledge and innovation. We would appreciate receiving staff views on overall productivity developments in 1998. We are also pleased to see that the Bank Group's program has performed within the base case scenario envisioned in the 1996 CAS and that the broad objectives of our programs are being met. We note however that many of these objectives (state modernization, improvement of the state's social programs) are in process and require continued attention. We are particularly pleased to note that the quality of the Bank's portfolio has improved and that decentralization and an increased field presence have contributed to sector dialogue. However, the progress report also mentions that these actions are helping to reduce the number of problem projects. We would appreciate knowing what are the areas in which ongoing projects are considered to be problems and how this is expected to be ameliorated. In spite of Mexico's recovery from the financial crisis, it seems evident that further reforms of the finance sector are necessary. We are pleased to see that the authorities now seem ready to proceed with some of the needed actions and that the Bank will continue supportive. We feel it is important that the Mexican government and the Bank should reach consensus on the areas where these reforms should be implemented.  3 Equally, in the energy sector, we note that the Bank has renewed its dialogue with the government regarding privatization and believes there will be progress on the reform agenda. Given recent developments in the petroleum supply industry, we believe this is especially appropriate at this time. Decentralization We see the Bank's direct involvement with local states as fully consistent with the overall development strategy for deepening decentralization. The work program for the next three years. wi11 cover different aspects regarding assistance to the sub-national governments, ranging from loans to specific development projects guaranteed by the federal government to state-adjustment loans. Nevertheless, we remain concerned about sustained delays in the implementation of this strategy in the near future_ The lack of an in-depth analysis of state creditworthiness and the prohibition by the Mexican Constitution of the contracting of foreign debt by states are important constraints on the decentralization process. Notwithstanding, we encourage the government and Bank to continue working together in order to address the remaining legal, economic, and institutional aspects that will help in achieving a prompt implementation of this program. Perhaps for the time being and until after the presidential elections in 2000 it may be useful for the Bank to continue primarily working directly with the central government, particularly in education and health sector programs. These areas, particularly primary education and the sanitation sector, require a great deal of attention. We would also urge that the Bank increase personnel specialized in these areas in order to offer the Mexican government the assistance it needs. We are overall very supportive of the efforts made by Mexican authorities and the progress shown by this report. Mexico has overcome a severe financial crisis and we believe that by staying on this course there will be important future benefits. Finally, we wish the Government success in the implementation of this program, which we think will continue to bring important benefits to all the people of Mexico_