International Bank for Reconstruction and Development
                                     International Development Association
                                        International Finance Corporation
                                                                                                       87357
                                   Multilateral Investment Guarantee Agency

                                             FOR OFFICIAL USE ONLY
                                                 CONFIDENTIAL
                                                                                                            EDS99-191
                                                                                                           June 7, 1999
                                                                                                           06:11:38 PM


                                                                               Statement by Ilkka Niemi
                                                                           Date of Meeting: June 8, 1999

                                             Mexico - Country Assistance Strategy


        We welcome the opportunity to discuss the proposal for a Country Assistance Strategy for Mexico and
commend the staff for a thoughtful CAS. It is encouraging to see that Mexico has fared relatively well during
the period of turmoil in financial markets and the collapse in international oil prices. Mexico also shows the
most convincing signs of economic recovery in Latin America. The GDP growth in the first quarter was
relatively high in a regional comparison. However, several development challenges remain.

        We agree with the staff’s assessment that reforming the banking system is of high priority for the
sustainable development of Mexico. This is a lesson also many other emerging market economies have learned
during the past years of financial crises. But as Mr. Rivera points out in his written statement, this point is
“barely supported by a Financial Technical Assistance Loan”.

        There is also a need for further reform of the Mexican tax system. In particular, there is a need to
strengthen the tax revenues. As experience from the Asian, Russian and Brazilian crises has shown, the most
effective way for the emerging market economies to avoid contagion is to correct macroeconomic imbalances,
overvalued exchange rates, structural weakness and strengthen the domestic financial sectors. It is therefore
important to continue with the reforms. However, Mexico is entering a political period that will limit the room
for reform. Although a comprehensive fiscal reform is needed, we can support the Bank’s more cautious
approach to adjustment lending in the financial and fiscal sectors if sufficient reform progress is deemed
lacking.

         Even though inflation increased early this year, there does not seem to be any fear for a renewal of
earlier inflationary tendencies. An important factor contributing to lower increases in prices has been the
currency's appreciation. The Bank assumes Mexico to reach the Central Bank's target of 13 percent for 1999.
How would staff assess the risks for a return to higher inflation and how would such a scenario affect the base
case lending?
        Several important risks are mentioned in the CAS. An additional downside risk might be diminishing
US demand. The CAS scenario is based on the assumption of continued expansion of exports. The risk of
raised US interest rates or a correction in the US stock market should also be considered.

        The biggest remaining challenge is poverty reduction in a situation with huge regional differences.
Success in improving social services will be closely linked with progress made with decentralization. Among
the most important areas, the quality of education remains a priority, and we particularly welcome the emphasis
given to this area in the CAS. The government is, however, in a situation where limited fiscal resources impose
a restraint. Alternative mechanisms should therefore be found to improve the human capital.

        Finally, we welcome the efforts taken so far to deal with the environmental problems. There is a clear
risk, though, that the high costs of Mexico's environmental degradation will before long increase even further.