IMF Highlights Mexican Economy Rebound

As Mexico continues to struggle with its economic recovery, the International Monetary Fund (IMF) praised current efforts and made a set of recommendations to further speed up the process.

During 2020, the country’s GDP shrank 8.3 percent, creating one of the worst economic debacles in recent Mexican history. IMF notes in a recent analysis that Mexico’s economy is bouncing back with projections estimating 6.2 percent growth in GDP in 2021 and 4 percent in 2022.

The executive board assessment also noted that Mexican authorities developed a correct strategy for successfully maintaining economic stability with strong macroeconomic policies and institutional policy frameworks. However, the report also sound some red flags. “Directors noted that recent inflationary pressures, while mostly temporary, pose a difficult balancing act amid still sizable slack. They recommend a gradual, data driven pace of policy normalization that carefully balances support for the recovery while keeping medium term inflation well anchored.”

Mexico also received praise for its policies and targets to fight climate change. The report also stated that the country would benefit from using its own large and diverse renewable resource base to develop a more sustainable, cheaper and competitive energy sector. IMF also encouraged Mexico to adopt a strategy to promote labor market formality while also promoting the narrowing of gender gaps, the fostering of financial inclusion and the improvement of governance.

The IMF’s staff report also made some indicated important fiscal policy recommendations: “Increase spending by 1.5 percent of GDP in 2022, rising to 3 percent of GDP over the medium term on quality public investments, education, health, and social programs. Finance this spending, while ensuring declining debt/GDP, through a credible tax reform that begins raising revenues once the recovery is well entrenched.” For the Mexican monetary policy, the staff report indicated that it is of major importance that the country central bank gives further information on its outlook and expected rate path, while signaling that it pursues a gradual pace of rate increases.

The International Monetary Fund credits strong US growth and rising vaccination rates as the major factor in Mexico’s rebound, while also highlighting that employment rates increased. COVID-19 continues to be a national threat as it represents significant human and social costs.