The Mexican economy is in the midst of a broad expansion driven by private consumption and investment, so gross domestic product (GDP) is expected to grow 3.2% before slowing to 2.1% in 2024, according to a report by the International Monetary Fund (IMF). ) published since its last visit to the country. Several parties warned that the increase in public spending in the 2024 budget was unnecessarily high and would leave the next administration in a much weaker fiscal position.
Mexico “has shown remarkable strength in the services, construction and automobile manufacturing sectors. This has led to historic low unemployment rates and record productivity utilization rates,” financial experts wrote this Tuesday. Pays,” they added.
Andrés Manuel López Obrador’s government has proposed increasing debt to spend on social projects to 12.8% of GDP by 2024, an “unprecedented” increase, according to the Finance Ministry. Additionally, spending on infrastructure projects increased in some states.
“The projected fiscal path to 2024 is hypercyclical,” the IMF report said. A pragmatic policy refers to an increase in public spending and/or a decrease in taxes during periods of economic growth. During a recession, doing this to stimulate the economy is a counter-cyclical policy. “Budgetary pressures from lower revenues are compounded by targeted increases in current expenditures (ie salaries, pensions and social spending) and higher expected expenditures to complete primary investment projects,” the IMF said.
Mexico’s deficit is expected to rise to 5.4% of GDP, implying a fiscal stimulus of 2.4% of GDP. This will boost demand at a time when the economy is already running above its potential and inflation has yet to return to the central bank’s target of 2% and 4% a year. The Bank of Mexico kept interest rates at 11.25%, their highest level since 2008, in an effort to curb rising costs of living.
“This would lead to a higher trajectory for interest rates, a stronger currency, a higher debt-to-GDP ratio and a slower decline in inflation. Therefore, a tight fiscal stance would be more consistent with Banxico’s efforts to bring inflation back to its target,” the report said.
The fund also expressed itself over the federal government’s decision to support parastatal Petroleos Mexicanos (Pemex). In September the Treasury announced plans to transfer 145 billion pesos ($8.2 billion) to the world’s most indebted oil company to help pay its interest and maturities. Support for Pemex in the 2024 budget is a step forward, the IMF considered.
It “increases transparency and will help facilitate discussion of the trade-offs between directing public resources to Pemex over other budget priorities.” Continued budget support for Pemex should be conditional on credible projects to improve its business viability risks, the multilaterals believe.
The report also contains a warning for the next president who will take office in October next year. “The next administration will face tough decisions to stick to the planned medium-term fiscal path. “A major fiscal consolidation is forecast for 2025, which will cause a significant drag on growth, reversing the expected momentum for 2024,” the report said.
To sustain public finances, the IMF estimates that the next government will need to raise taxes by an additional 2.5% of GDP, largely related to increases in non-oil revenues. This can be achieved by eliminating the zero rate of value added tax (VAT), rationalizing deductions, expanding personal income tax and increasing property taxes.
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