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Dec 14, 2012, 10:29 AM

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IMF Annual report Dec. 2012 - Mexico

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Here is an alert for data junkies: The IMF has released its report that emerged from its Sept. 2012 consultations with Mexican economic and financial officials. The practical result was the IMF's approval of a renewal of the $USD 73 billion Flexible Credit Line (FCL) that the Bank of Mexico can call on if needed to defend the peso. (The FCL is significant as a stamp of approval more than meeting any current issue, given Banxico's healthy stash of foreign reserves, that is, principally USD.) See:

Among the many positive notes is that Mexican manufacturing's recovery from 2008 has outstripped the still below water partial recovery of US manufacturing.

(Note: All IMF country reports are issued with an eye to their public release and tend to be as upbeat as conditions permit, with the IMF perhaps being more pointed in its analysis in private discussions with a member government.)

Of particular interest, perhaps, to those of us who follow Mexican development and particularly for those resident here, may I point out two points in the report (from p. 27):

35. A broad structural reform agenda is needed to unleash Mexico’s growth potential. The agenda would involve inter alia reforming the energy sector; enhancing competition; improving the quality of education; facilitating access to credit for SMEs {small and medium enterprises -- Aaron+}; and strengthening the rule of law. Structural reforms would benefit from a broad-spectrum approach to ensure that productivity gains accrue to all sectors.
36. Mexico’s longer-term fiscal challenges from population aging and declining oil revenues will require additional revenue mobilization and expenditure rationalization. On the revenue side, mobilization efforts should focus on re-establishing a positive excise tax on gasoline, broadening the base of the VAT, eliminating preferential treatments in the income tax, and increasing subnational property taxes. {About 90% of the states' revenue comes from transfers from the Mexican federal government. --Aaron+} On the expenditure side, savings could be achieved by consolidating pension eligibility requirements, revisiting the retirement age in the unreformed system, and reforming special regimes (notably PEMEX’s). Moreover, over the medium term, Mexico’s fiscal framework could be enhanced by adding mechanisms to help save oil windfalls and reduce fiscal procyclicality, while maintaining its key role of ensuring debt sustainability.

There is so much in a compressed form, so allow me only to comment on one element of point 36. Currently there are so many voices from the financially well off folks calling for increasing IVA and/or expanding IVA to hit purchases, say, of food and medicines. (Already, the 16% IVA tax is leveled at medical lab tests.) My impression is that the rich in Mexico have even freer options to avoid paying the official tax rates than do their equivalents in the USA.

Oh, instead of defining "procyclicality", a good, clear read may be found at Interestingly, these two economist authors consider that Mexico "graduated" from spending more when times are tough, and less when revenues dropped, whereas the IMF suggests that any such graduation still needs strengthening.

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