To try to tame inflation, Mexico spends $28 Billion USD in subsidies


Mexico’s programs and subsidies to tame inflation will cost the country almost 575 billion pesos ($28 billion) this year as the government tries to cap inflation that has spiked to the highest in over 21 years.

Finance Minister Rogelio Ramirez de la O said Tuesday that the wide-ranging government programs used to contain price gains include gasoline and residential electricity subsidies for a total of 503 billion pesos on top of fertilizer handouts, measures to guarantee food supply and freezing highway tolls.

Without the subsidies and handouts, inflation in Mexico would be 2.6 percentage points higher than the current rate of about 8%, he said at a press briefing in Mexico City.

The fiscally austere government of President Andres Manuel Lopez Obrador, which had refused to implement stimulus measures earlier in the pandemic, has in recent months moved aggressively to announce price caps and handouts as inflation reaches the highest since 2001, hurting poor Mexicans.

The cornerstone of that strategy has been massive energy subsidies and a deal with leading companies to temporarily cap prices on 24 food and other basic products announced in May. The gasoline subsidies are financed by higher revenue from crude oil exports, the government has said.

Read More: Mexico Inks Deal With Top Companies to Tame Rising Inflation

“We have guaranteed that there was control in price increases because we, fortunately, took decisions on time,” Lopez Obrador said at the same briefing. “It was smart to put into place a subsidy so that gasoline prices wouldn’t go up.”

The government programs to fight inflation include:

  • 430 billion pesos for gasoline subsidies
  • 73 billion pesos for electricity subsidies
  • 68.9 billion pesos to control food costs
    • Includes 11.4 billion pesos for the food pact with companies
    • 29.9 billion pesos on tree-planting program
    • 14 billion pesos to support small farmers
    • 5.2 billion pesos on fertilizers
  • 2.75 billion pesos to freeze highway tolls

“The resources that are going into this package could not have had any better use,” Ramirez de la O said, defending the measures. “When the consumption of homes falls, so does the volume of sales, the collection of the VAT tax, and all economic movement, and the Banco de Mexico has to raise interest rates.”

Fuel subsidies won’t be fully covered by extra revenue from crude oil exports, BBVA analyst Arnulfo Rodriguez wrote in a research note Tuesday, citing the Finance Ministry’s own projections for the crude windfall this year to reach only 369 billion pesos. That’s close to $3 billion less than the projected cost for the fuel subsidy announced Tuesday.

Nevertheless, the government expects public revenue to be 1.1% of GDP above budget, “an amount that the government will spend to meet the public deficit target for 2022,” Rodriguez wrote.

Source: El Financiero

Mexico Daily Post