By TII News Service

WASHINGTON DC, DEC 02, 2019: THE Government of Mexico is planning to raise tax revenues and improve the efficiency of public spending, according to International Monetary Fund (IMF) Staff Report (SR) on the country’s credit arrangement. The report was issued along with IMF release dated November 25, 2019, announcing IMF Executive Board’s approval of a successor two-year arrangement for Mexico under the Flexible Credit Line (FCL) in an amount equivalent to SDR 44.5635 billion (about USD 61 billion) and cancelled the previous arrangement. The report mentioned that the Mexican authorities stated their intention to treat the arrangement as precautionary.

The previous two-year FCL arrangement for Mexico was approved by the IMF’s Executive Board on November 29, 2017 for an original access amount equivalent to SDR 62.3889 billion (about USD 86 billion). This amount was reduced to SDR 53.4762 billion (about USD 74 billion) on November 26, 2018 at the request of Mexican authorities. They consider that in an environment where external risks affecting Mexico remain elevated, an FCL arrangement in the requested amount would play a critical role in supporting their overall macroeconomic strategy, preserving investor confidence, and providing insurance against tail risks.

The report noted that Mexico stands out compared to its peers with only 13 percent of GDP in non-oil tax revenue; thus leaving scope to boost tax revenue and increase progressivity. The authorities do not envisage significant changes to the tax system in the next couple of years, except for measures to aid in collecting VAT from digital service providers while also strengthening tax administration; however, they do plan a broader tax reform to become effective in 2022. Moreover, they are working on enhancing expenditure efficiency by centralizing public procurement and consolidating social programs and various government agencies to generate savings. Strengthening the fiscal framework is also among the authorities’ priorities.

The authorities remain committed to fiscal prudence, but additional measures are needed to stabilize the public debt ratio. In 2019, staff expects the Public Sector Borrowing Requirement (PSBR) to reach 2.8 percent of GDP—slightly above the 2.5 percent target—owing to revenue underperformance amid slowing growth. For 2020, the authorities target a deficit of 2.6 percent of GDP, which appropriately balances fiscal prudence with the need to avoid a contractionary policy stance in the context of a large negative output gap. However, reaching the announced medium-term fiscal targets would require additional measures of some 1.5 percent of GDP by 2024; and even more ambitious medium-term targets would be needed to put the public debt ratio on a downward path.