IMF Calls on Mexico to Spend More to Speed Up Weak Recovery

(Bloomberg) -- The International Monetary Fund called on Mexico to implement short-term fiscal and monetary support to “limit the damage from the pandemic” and secure a faster economic recovery.

In a statement released after an official visit to the country, IMF staff said the Mexican government's response to the coronavirus outbreak was “very modest,” and encouraged it to more than triple fiscal support to households, private businesses and health care. The country could boost spending by 2.5%-3.5% of gross domestic product to offset further economic fallout, it said.

“Mexico has some fiscal space and enjoys comfortable market access that could be used in these difficult times,” the IMF said Tuesday, adding that it expects Latin America's second-largest economy to contract 9% this year. “Based on these projections, employment, income, and poverty will take several years to return to pre-pandemic levels.”

President Andres Manuel Lopez Obrador has so far refused to implement a more ambitious stimulus program, arguing that he won't increase Mexico's debt further to rescue private companies. The IMF estimates Mexico expanded health and household spending during the pandemic by just 0.7% of GDP, compared to the 3% average given by emerging markets in the Group of 20.

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Mexico doesn't agree with the IMF's recommendations, Deputy Finance Minister Gabriel Yorio said in a string of tweets Tuesday night.

The country rejects the recommendation to increase taxes on any item, including income, value-added or gasoline. “Even less so, in the current situation of the Covid-19 recession,” Yorio said.

The fund recognized that Mexico has sound macroeconomic policy and access to international markets, Yorio said.

The IMF's urgent call for a cash injection comes in stark contrast to austerity recommendations issued on Monday by the IMF to Brazil, where unprecedented spending on social programs has helped offset the economic pain of Covid-19.

Whereas millions of Brazilians are being pulled out poverty thanks to emergency handouts, the IMF said the share of Mexico's population in working poverty rose from 36% to 48%.

“This points to the disproportionate burden of the shock on the poor and the vulnerable,” the IMF said.

In the medium term, the Washington-based organization said Mexico would benefit from tax reform to close fiscal gaps and lower public debt. Mexico should also consider a review of its monetary policy framework, the IMF officials said.

“Lower rates would provide further relief to the economy, with likely limited risk to external financial stability,” they said.

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