Announcement of World Bank Approves First Policy-based Loan to Mexico on July 29, 1987

. ... ... •,• FOR IMMEOIA TE RELEASE tWorldBank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. BANK NEWS RELEASE NO. 87/10 Contact: Antonio Pimenta-Neves (202) 477-8826 a>RLD BANK APPROVES FIRST POLICY-BASED LOAR TO MEXICO WASHINGTON, July 29 -- The World Bank today approved its first quick-disbursing policy-based loan to Mexico in support of the government's efforts to resume growth in production and employment through the liberalization of its trade system. Besides the trade policy loan for $500 million, the Bank approved two other loans for Mexico, one of $150 million for industrial recovery, and another of $48 million for industrial technology development. These three loans, plus loans already approved in 1986, and additional loans expected to be agreed with the government in the next few months, will bring total World Bank connnitments to Mexico this year to the unprecedente·d level of $2.0 billion. However, the trade policy loan for $500 million will not be effective until other international lenders - especially the connnercial banks - assure the World Bank that they intend to help meet Mexico's financing .needs in 1986. Without strong support from its creditors, Mexico would be incapable of pursuing its ambitious program of trade liberalization. On the contrary, it would have to contain its imports even more than it has done in the recent past. The government's program of reforms in the trade sector is already being implemented. Its objective is to achieve a gradual and progrannned opening of the economy, in order to increase its efficiency and inter- national competitiveness. It involves changes in the instruments of protection, given to local industries, from non-tariff barriers to tariffs, and a reduction of tariffs over time. Despite last year's substantial reduction in protection, non-tariff barriers still cover 67.5% of domestic prod_uction. Mexico will be able to use the opening of the economy to exploit, in the medium term, its comparative advantages in manufacturing, agriculture, and mining. Properly implemented, the program will stimulate growth of non-oil exports and generate efficient import substitution in labor- intensive sectors. Mexico can be highly competitive in categories like beverages, preserved fruits and vegetables, leather products, textiles, fertilizers, glass, cement, tobacco, pharmaceutical products, paper, auto parts, and farm machinery. ... / NOTE: Money figures are expressed in u.s. dollar equivalents.  t • - 2 - New export revenues will help offset increased demand for imports resulting from the lifting of trade barriers. The trade policy loan proceeds will also be used to cover part of that additional demand. In the short term, however, trade liberalization is not expected to produce a surge in imports, because the real exchange rate is at record high level, and economic activity is likely to be depressed through 1986. Mexico's gross domestic product (GDP) is projected to fall between 4 to 5 percent this year. This opening of the economy was made necessary by the growing instability experienced by the country in the last few years. Mexico's growth performance over the three decades after 1950 is among the best in the world - 6.4% yearly average GDP growth - but it was the result of an import substitution strategy that has long reached its limits. Protection to new industries was intended to be temporary, but instead deepened and left the economy unable to compete in the world trade. Mexico's share in world exports declined steadily from 0.9% in 1948-50 to 0.5% by 1968-70, and today Mexico presents one of the lowest export-GDP ratios of any economy in the world. Industrial Recovery Project - Through this $150 million loan, the Bank will assist a government agency - the Fondo Nacional de Equipamien·to Industrial • (FONEI) - to carry out a project aimed at improving the quality and broadening the scope of financial services available to mediwn and large industrial firms. About 86 percent of the loan will be used to finance the acquisition of equipment, the construction or renewal of plants, and the provision of working capital. A pilot component, representing 13% of the loan, will finance commercial banks' purchases of equity and quasi-equity instrwnents of industrial enterprises. Thus FONEI, for the first time, will be able to offer comprehensive financial packages designed to meet the long-·term needs of companies that are operationally healthy but suffer from a weak financial structure and high financial costs. The $150 million loan will finance 50% of the project's cost, estimated at $300 million. The remainder will be covered by FONEI. Industrial Technology Development Project - This $48 million loan is the first Bank loan designed exclusively to finance research and development of industrial technology in Mexico. The project's main objectives are: a) review instrwnents and norms related to industrial technology development; b) make research and • development infrastructure more responsive to the needs of the private sector by partially privatizing four state-owned research and development ... / ' J .. • - 3 - centers or establishing new ones; c) restructure metrology services with a view to assure Mexican industry access to recognized international standards of weights and measures; and d) expand and improve the financing program of FONEI. The project, which has a total cost of $96.8 million, is expected to help the Mexican industry become more competitive at home and abroad. The World Bank loans are for 15 years, including three years of grace, with a variable interest rate, currently 8.23 percent, linked to the cost of the Bank's borrowings. They also carry an annual commitment charge of 0.75 percent on the undisbursed balances. - 0 -