Mexican Central Bank Freed for Inflation Fight
PRESIDENT Carlos Salinas de Gortari wants no backsliding by future Mexican presidents. So he is setting his anti-inflationary program into constitutional concrete.
On Monday, President Salinas sent a proposal to the Mexican congress to grant autonomy to the central bank, now under his control. The Bank of Mexico will operate similarly to the United States Federal Reserve System and Germany's Bundesbank.
"The main mandate - over any other objective - will be to preserve the purchasing power of the national currency," said a statement from Salinas's office.
The bank will have independent control over money supply and will no longer be at the Mexican government's disposal to print money to finance public deficits. As in the US, the governing board will be appointed by the president but at staggered, "relatively long" intervals to avoid giving the president power to load the board with his people, the statement said. A board member will only be removed prematurely for "grave crimes."
"This is a positive step that should have been taken two or three years ago," opines Abel Hibert, economist at the Mexico Center of Econometric Research. "It makes it much more difficult for any future president to return to the vices of the past."
Specifically, Mr. Hibert refers to the acts of former President Jose Lopez Portillo, who nationalized the Mexican banking system in 1982. Under him, the government borrowed money from the Bank of Mexico to finance expenditures and run up enormous debts. During the ensuing economic crisis the value of the Mexican peso plummeted and inflation soared. New step in Salinas plan
Salinas, a Harvard-trained economist, has labored to put the Mexican economy back on track. The granting of autonomy to the Bank of Mexico (the congress is expected to approve a phase-in starting in 1994) is seen as a follow-on to the reprivatization of 18 Mexican commercial banks in 1991. And by most indicators, Salinas has forged a successful Mexican economic recovery.
When Salinas took office in 1988, government internal debt amounted to 28 percent of Mexico's economic output. By 1992 the level was 12 percent. The annual inflation rate peaked in 1987 at 160 percent. With a combination of labor pacts and tight monetary policy, inflation was cut to 11.9 percent last year. The administration aims for single-digit inflation this year.
Salinas's anti-inflation program got a vote of confidence this week from the Pacific Economic Cooperation Council, which predicted that Mexico would close the year with a 9 percent annual inflation rate - the lowest in the last 25 years. High interest rates
That outlook fits with the general consensus among Mexican economists. Mexico is expected to post about a 2.2 percent increase in economic growth for 1993, down from 2.7 percent in 1992. Although taming the inflationary bull, tight credit has slowed the economy and curbed job creation. Interest rates on commercial bank loans have been more than 20 percent.
To attract investors worried about a possible peso devaluation and a widening trade deficit, the Mexican government pushed up Treasury bill interest rates to 15 to 18 percent.
Hibert and many Mexican businesses hope lending rates will come down if the North American Free Trade Agreement is approved later this year and the government feels less need to attract foreign funds with high rates. Also, Mexican presidential elections will be held in mid-1994, and traditionally that means increased spending to spur the economy. Indeed, the months leading up to the elections will likely be a test of the Bank of Mexico's independence and anti-inflationary discipline.