Announcement of World Bank Approves 1.5 Billion Dollars for Mexico’s Adjustment Program on June 13, 1989

FOR IMMEDIATE RELEASE World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.* Telephone: (202) 477-1234 BANK NEWS RELEASE NO. 89/72 Contact: Ciro Gamarra (202) 473-8721 WORLD BANK APPROVES $1.5 BILLION FOR MEXICO'S ADJUSTMENT PROGRAM Package Includes $375 Million for Debt-Reduction Support WASHINGTON, June 13, 1989 -- Mexico's program to stabilize its economy and resume growth will be assisted by the World Bank through a package of three $500 million adjustment loans totaling $1.5 billion. These quick-disbursing loans will support reforms in the financial, industrial and public enterprise sectors. The World Bank has agreed, pending approval by its Executive Directors, that the Mexican government could use as much as $125 million of each loan (totaling as much as $375 million) for debt-reduction purposes in accordance with the Bank's guidelines for debt-reduction programs. A major portion of the loans is expected to be disbursed within the next 12 months, depending on the Mexican government's progress in carrying out economic reforms. The World Bank's support for Mexico's adjustment efforts through the three loans is expected to help restore domestic and international confidence in the economy. The programs supported by the loans will encourage investments, especially in the private sector; support continued improvements in the efficiency of the public enterprise sector; increased competition in the banking sector; help mobilize external resources and relieve some of Mexico's debt burden, enabling the country to meet its financing needs for its medium-term adjustment strategy. Financial Sector Adjustment A $500 million World Bank loan to support reforms in the financial sector was made to Banco Nacional de Comercio Exterior. The loan will help the government implement policies that are conducive to stabilizing the economy and resuming growth. Reforms supported by the loan include a series of taxation and related fiscal measures and actions to consolidate reforms in the financial sector, strengthen sector regulations and supervision, and reduce interest subsidies and fiscal transfers. The measures, which are in line with the macroeconomic framework agreed upon by the government with the International Monetary Fund are: more efficient resource allocation, better fiscal management and improved performance in the financial sector. The measures are expected to spur private-sector investments in Mexico. Social-sector programs will be extended to benefit a larger segment of the country's poor. NOTE: Money figures are expressed in U.S. dollar equivalents. -2- The program is expected to lead to sustainable growth and, together with the Bank's support in monitoring policy performance, help secure the country's required financing package. The program is fully in line with the structural reforms undertaken during the past few years in Mexico geared toward opening up the economy and substantially reducing the role of the public sector in the economy. The loan will be disbursed in two installments and will finance eligible imports in the private and public sectors. The first installment, of $250 million, will be released upon loan effectiveness. A second installment, of $235 million, will be released after November 1989. Conditions for disbursement include continued consistency of the macroeconomic program with the objectives of stabilization and economic recovery. Specific targets in areas of fiscal management, taxation, poverty alleviation, and financial sector have already been met. The remaining $15 million will be used to finance a technical assistance program in the priority areas of tax administration, public finance and public investment evaluation and programming. Computer equipment and software will also be purchased. The loan is expected to be fully disbursed by June 30, 1991. Industrial Sector Policy A $500 million industrial-sector policy loan is designed to remove market distortions and provide an appropriate institutional and regulatory environment, and stimulate investment and growth to enable industrial enterprises to compete internationally. The government has already undertaken a number of reforms in the industrial sector. A new procurement law has been introduced, and the country's foreign- investment regulations have been simplified and made more flexible to stimulate direct foreign investment. Reform measures include deregulating the industrial sector in the automotive, pharmaceutical, and microcomputer subsectors; easing bureaucratic procedures and trade barriers; stimulating direct foreign investment, technology transfer and research and development; and improving trucking services. The reform program will help accelerate adjustment in the structure of production to increase competitiveness and will provide a more attractive environment for investment and technological development and transfer. It will foster market flexibility, remove market distortions, and reduce the costs of doing business. The loan, made to Nacional Financiera (NAFIN), Mexico's public industrial- development bank and the financial agent of the Mexican government, will be disbursed against eligible imports in two installments of $250 million and $247 million. A $3 million component will finance technical assistance and studies to identify further areas of liberalization and deregulation. The first installment will be available for disbursement at the time of loan effectiveness. The second installment will be released after November 30, 1989, as progress is made in all key policy areas, including continued consistency of the macroeconomic policy framework and satisfactory progress in implementing programs concerning technology, trade, industrial sector programs and simplification of administrative procedures. -3- The government has already announced the harmonization of tax systems concerning profit remittance; reduction in the withholding tax on royalties payments, deregulation of interest rates to industry; a policy statement on trade, interest rates and fiscal incentives to industry; and preparation of plans to promote direct foreign investment and technology development. Disbursement of the loan is expected to be completed by June 30, 1990. Public Enterprise Reform One of the causes of Mexico's economic and financial crisis since the 1970s has been the large size of the public sector, particularly, the public enterprises. At present, these enterprises contribute about 12 percent of the gross domestic product, employ about 1 million people, and control the most important branches of basic industry and infrastructure. Since 1982 the government has implemented a major "disengagement" program (including sale, liquidation, transfer or mergers of public enterprises). Of the 1,155 public enterprises existing in 1982, 706 have been covered by the program, mostly through liquidations (53 percent) and..sales (35 percent). Enterprises disengaged since 1982 in the industrial, energy and mining sectors represent 77 percent of the total, 66 percent of labor, 41 percent of sales, and 23 percent of the asset-value of the public enterprises in these sectors. The $500 million loan to support public enterprise reforms was also made to NAFIN. It will support improvements in the efficiency of public enterprises and aims to reduce the heavy burden they impose on the economy and particularly on the national budget. The program will help the government continue disengaging public enterprises. It also comprises reforms in the policy and institutional environment to improve the efficiency of public enterprises retained by the government. The reforms are expected to improve the competitive environment and to provide greater managerial and financial autonomy and accountability to public enterprises. The reforms will increase market forces, decentralize decisionmaking, redefine the role of the government agencies, strengthen managerial capabilities and incentives, and improve the allocation of resources. The loan will be disbursed against eligible imports in installments of $250 million and $249 million. The remaining $1 million will be used to finance technical assistance and studies to identify further areas of liberalization and deregulation. The first installment is expected to be available for disbursement at the time of loan effectiveness. The second installment will be released after November 30, 1989. Loan disbursement is expected to be completed by June 30, 1991. A series of public-sector reforms has already been completed, including agreements on transfers to public enterprises in 1989 and a price-adjustment plan for goods ard services for public enterprises that receive the largest federal transfers. The World Bank loans are for 17 years, including five years of grace, with a variable interest rate, currently 7.65 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-