- Cecilia Barría
- BBC World News
Mexico followed the path of fiscal austerity during the covid-19 pandemic. A path that even the International Monetary Fund, IMF, has not recommended.
Unlike what it did at the outbreak of the 2008 financial crisis, the IMF this time was in favor of borrowing governments to cope with the recession, except in those economies whose fiscal coffers are dry or have no capacity to achieve resources in financial markets.
“To stop the decline in economic activity and the increase in poverty, Mexico would benefit from greater temporary fiscal support in the short term,” says a report by the agency published in October last year, in which it recommends spending between 2, 5% and 3.5% of the Gross Domestic Product, GDP.
“Mexico has some fiscal space and enjoys comfortable market access that could be used during these difficult times,” the document added.
And in February this year, Alejandro Werner, who was director of the IMF’s Western Hemisphere Department, said that an increase in fiscal spending “would obviously have benefited the population” and would have prevented midsize companies from going bankrupt.
However, the government of Andrés Manuel López Obrador decided to keep the belt fairly tight and spent a 0.7% of producto interno bruto in fiscal stimulus measures, the lowest figure of all Latin American countries.
Arturo Herrera, Secretary of the Treasury, defended the government’s policy a few weeks ago arguing that, compared to other Latin American economies, Mexico will have a much stronger macroeconomic and fiscal position when the crisis ends, thanks to the decision not to contract additional debt and generate good expectations for investors.
He added that in the coming months, the most important fiscal and financial tool will be the vaccination campaign, which will have a positive effect on the economy.
And in January of this year, he argued that the government did not contract more debt because the country’s legal framework does not allow it.
“There were related legal issues, in the case of Mexico, there is a very old law in which the use of public debt for anything other than public infrastructure is prohibited“Herrera said in a forum organized by the credit rating agency Fitch Ratings.
On another occasion, Herrera said that while developed countries pay an interest rate close to zero for debt issuance, Mexico, on the other hand, has to pay 4.25% for loans.
BBC Mundo contacted the Ministry of Finance, but received no response.
“The level of spending was extremely low, it was a mistake,” says Héctor Villareal, professor at Tec de Monterrey and director of the Center for Economic and Budgetary Research, CIEP.
Although he acknowledges that the government created some programs to combat the pandemic, Villareal maintains in dialogue with BBC Mundo that many measures were financed with adjustments in other areas of public finances.
Government officials have argued that it was necessary to have a prudential fiscal criterion in case the crisis lasted longer.
With a public debt close to 60% of GDP, much lower than that of Argentina and Brazil, the decision was, apparently, not to take risks.
“In theory we have a center-left government, but in terms of debt it behaves like a conservative government“, points out Villareal.
“Fight poverty and inequality”
Although the economy fell 8.2% last year and poverty soared to more than half the population, there are experts who have highlighted the decisions made by the government.
“Mexico’s policy in the face of the pandemic has been important because one of the objectives of this government has been to combat poverty and inequality,” Alicia Bárcena, executive secretary of the Economic Commission for Latin America and the Caribbean, ECLAC, said in March.
“Before the pandemic the government began to care for the poor, they went ahead and they expanded the monetary transfers “, added.
Protect public finances
José Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth, IDIC, considers that “the response was limited” in fiscal support.
“There was no movement in tax rates or in the transfer of subsidies, or mechanisms that would facilitate financing in the private sector.”
Although he acknowledges that there were direct transfer programs to micro-businesses, he tells BBC Mundo that “a countercyclical program was not applied in fiscal matters.”
“Although the government has a deep social sense, in fiscal matters it is actually a very orthodox government and more tending towards the liberal “, says the researcher.
According to De la Cruz, it was clear that, due to its size, the crisis was going to generate a significant cost and that is why most of the countries tried to soften the impact.
In the case of Mexico, he argues, the decision was to prevent public finances from ending up paying the cost of the crisis.
“Most of the social and economic cost ended up being pgiven by society“, he points out.
He argues that a million companies had to close and at least two million people have not managed to regain their jobs, a situation that from his perspective could have been mitigated.
“The political cost”
Rodolfo de la Torre, director of Social Development at the Centro de Estudios Espinosa Yglesias, CEEY, agrees on this.
De la Torre says that one of the government’s arguments to avoid the increase in the level of debt was that in previous financial bailouts the benefits were taken advantage of by the business class and not by the most vulnerable.
“It seems to me that this argument is very weak,” he tells BBC Mundo.
For De la Torre, although in the past there may have been deviations of fiscal resources, “it is also true that those resources supported the economy as a whole and prevented a greater collapse.”
But, in his opinion, there is a deeper reason that explains why fiscal aid was the lowest in Latin America.
“There would have been a great political cost if the government, after getting into debt, had to carry out a profound fiscal reform to pay the debts, “he warns.
Like these reforms or adjustments, they usually cause a widespread discontent, he adds, he chose to avoid that political cost.
The expert believes that the government took stock and determined that the current political cost, of not having increased fiscal aid, has a more dispersed political cost in a large number of people, generally poorly organized.
“It is a cost that would be partially justified by an external factor, which in this case would be the pandemic and its aftermath.”
If the objective was to improve the welfare of the population and increase the chances of an economic recovery, he adds, “you had to go into debt, spend, and then carry out a fiscal reform, incurring a political cost.
Despite the great recession that the country experienced in 2020, the projections of the government and international organizations indicate that this year will take place a bounce Y growth it will be close to 5%.
As long as vaccination advances and there is no new wave of infections, experts believe that this year should mark a clear recovery, following the global trend.
What is not going to recover very quickly are the social consequences of the pandemic which, as in the rest of the countries in the region, will require several years before returning to previous levels of well-being.
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Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.