Image credits: Carl Campbell, Flickr
News Article

IMF: Government Should Grant Fiscal Aid Worth 3.5 Percent of GDP

By Peter Appleby | Wed, 10/07/2020 - 18:28

The International Monetary Fund has released a report that urged the Mexican government to grant near-term fiscal support equivalent to 3.5 percent of the country’s GDP to avoid long-term economic damage from the COVID-19 pandemic, directly contradicting the tactic that President López Obrador has taken.

The IMF report, published yesterday, outlined the country’s economic position after suffering over 75,000 COVID-19 deaths and 12 million job losses, though the majority have been recaptured. The report stated that the share of those in “working poverty” rose from 36 percent to 46 percent as a result with the poorest in the country taking the brunt of the damage.

“Building on Mexico’s strengths in terms of its macroeconomic policy framework and broadly sound external and financial sector fundamentals, the authorities are encouraged to implement a comprehensive package of near-term fiscal and monetary support, credible medium-term plans to anchor fiscal sustainability and reforms to boost investment and growth,” said the report. “Larger temporary near-term fiscal support would alleviate current distress, as well as limit lasting economic damage,” it added.

To stem the decline in economic activity and rise in poverty, Mexico would benefit from higher temporary near-term fiscal support of 2.5 percent to 3.5 percent of GDP,” the report said.

In a similar vein to most other intuitions and experts, the IMF is projecting a 9 percent contraction for Mexico’s economy in 2020, before a 3.5 percent rebound in 2021. A combination of a weak national health system, the potential for a feared second wave of COVID-19 cases as appears to be happening in other countries and an unclear timeline regarding the development of a vaccine, all point toward the need for government intervention. Many of Mexico’s major industries, including tourism and oil production, are unlikely to recover for a long time yet.

Among the suggestions the report makes are spending on health, which should remain a “top priority,” the expansion of a social security net for people likely to fall into poverty, such as workers of the country’s massive informal sector and extended fiscal support for SMEs.

Unlike other world leaders, President López Obrador has shied away from extending further financial help to the country’s SMEs, despite them providing the majority of employment opportunities. Loans of MX$25,000 (US$1,160) have been made available to SMEs but the government has stuck firm to its austerity position and insisted that it would not take on more debt to face the pandemic.

At the beginning of July, Deputy Minister of Finance Gabriel Yorio said that the government would not “pass the cost of this shock to future generations” and would continue with its financially austere strategy.

Today, President López Obrador rejected the IMF’s suggestions saying that, though he respected the institution, international financial institutions no longer dictated the country’s policies and that it should “stop covering up for corrupt governments,” Reuters reports.

Photo by:   Carl Campbell, Flickr
Peter Appleby Peter Appleby Journalist and Industry Analyst