Mexico: Austerity or spending increases, a dilemma in times of COVID-19

Almost a week ago, the International Monetary Fund (IMF) released a report that showed projections of the different measures taken by governments around the world to try to stop the economic catastrophe caused by the global pandemic. In the case of Mexico, the international organisation encouraged the country to increase fiscal stimuli to alleviate the effects of the crisis. 

 Mexico, the second largest economy in Latin America and the fourth largest on the continent, has been hit hard by the COVID-19 pandemic. With nearly 80,000 deaths from the coronavirus, it has become the fourth largest country in the world in terms of the number of deaths recorded from the disease. The impact of the pandemic has also been felt in the economic sphere where, according to IMF estimates, some 12 million jobs have been lost and the economy is expected to fall by 9 per cent compared to last year.

In the wake of the pandemic, President Andrés Manuel López Obrador announced a package of measures based on spending restraint. His objective: not to get into debt. This was the beginning of a path of austerity policies to which he continues to cling and for which the IMF has given him a wake-up call. Added to all this are the recent cuts in science and research that were approved last Wednesday in the Senate of the Republic to the tune of 68 billion pesos (nearly 3.1 billion dollars) and alluding to alleged corruption in their distribution. 

Under this scenario, the conclusions presented by the IMF for the Mexican economy emerge and urge it to increase stimulus spending by around 2.5 and 3.5% of the Gross Domestic Product (GDP). So far these stimuli have amounted to 0.7 percent of Mexico's GDP, mainly from increased health expenditure and direct aid to households and companies, according to the IMF. This is related to one of the government's star measures: loans of 25,000 pesos, nearly $1,170, at soft interest rates. However, by mid-June, when the aid ended, only 192,000 of the 645,102 eligible employers had been selected, as reported by El País according to data from the Mexican Social Security Institute. In comparison with the other emerging economies in the G-20 group, Mexico is well below the average for this type of expenditure generated by the COVID-19, which is around 3%.  
 

So, what is the best solution? Different countries in the region, such as Chile and Peru, decided to keep their backs and asked the IMF to include them among the countries with access to the organisation's Flexible Credit Line (FCL), of which Mexico and Colombia already form part. Its operation is based on a kind of financial cushion for the countries with access to this credit line which, in exchange for an annual payment, would have access to the amounts agreed with the IMF in periods when they are needed, as a prolongation of the crisis arising from the COVID-19. Once granted, countries would have to repay the loan over a period of between 3.25 and 5 years.  

Only these four countries have this assistance from the IMF. Mexico is the country with the largest amount at disposal: $61 billion, followed by Chile with $24 billion and around $11 billion for Peru and Colombia.  

Despite this, Lopez Obrador has no intention of increasing the debt by the means offered by the IMF, but neither by any other means. His intention will continue to be based on cutting public spending. However, according to IMF forecasts, these decisions will not reduce the level of debt incurred by the Mexican public coffers. On the contrary, it will reach 65% of GDP, an increase of almost 12 percentage points over the debt contracted in 2019. An increase in debt that is not based on stimulus investments. This is undoubtedly a complicated scenario for the López Obrador Administration.