MEXICO: World Bank to bail out banks by cutting environment, other loans

By Pratap Chatterjee Reprint | | Print |

Pratap Chatterjee

WASHINGTON, Jun 19 1995 (IPS) - A new billion-dollar World Bank package to help bail out private Mexican banks will be partly funded by cutting previously-approved Bank loans for the environment and other “not such high” priority projects, IPS has learned.

The Bank’s board of executive directors will vote on the new package Thursday. The package will help finance the study, recapitalisation, restructuring and supervision of the Mexican banking system.

The Bank loan will be part of a 2.75 billion dollar package that is expected to be signed in Mexico city Friday. The Inter- American Development Bank (IDB) is expected to chip in 1.25 billion dollars, while the World Bank will lend another 500 million dollars for social sectors, such as health and education.

A week or two later, all the senior staff of the World Bank’s Mexico division will fly to Mexico city to meet officials from nine ministries. Their task: to figure out how to cut funds from 4.1 billion dollars in already-approved loans.

The exercise could result in cancelling some loans which the Mexican government does “not consider such high priority,” one Bank official told IPS.

Plans for cutting existing loans have been underway since late March, according to Bank sources. They were drawn up in response to the Mexican financial crisis that began last December when the Mexican government devalued the peso. Foreign investors promptly fled the country’s bond markets, triggering upheaval in global markets and a halving of the peso’s foreign exchange value.

Bank officials insist that robbing Peter to pay Paul is nothing new. “Typically, every six months, we spend two or three days analysing our portfolio to decide if we need to change any loans. This is routine for the Bank’s larger borrowers,” Frank Lysy, the Bank’s lead economist for Mexico, told IPS.

But the size and scope of the current operation are much different this year for three reasons: the enormity of the financial crisis which has engulfed Mexico, the creation of new government ministries to deal with it, and a Bank decision to allow members to borrow in the currency of their choice, instead of being forced to take whatever was available.

On May 22, Bank officials flew to Mexico to analyse the portfolio with officials from nine Mexican ministries. They spent two weeks examining the portfolio, almost four times longer than in past exercises.

Each day, one sector, such as environment or infrastructure, was examined in minute detail. The negotiators discussed approved loans, existing loan proposals and new suggestions, according to Bank officials.

And, for the first time ever, officials from the IDB took part in the meetings, which were supposed to culminate in a special review of the entire portfolio Jun 6.

As the deadline approached, however, Bank officials decided they needed more time, and the final discussions were delayed until Jun 16. That deadline was then put off again until June 30 or Jul 6, according to officials, who said a final date has not yet been set.

One of the largest loans that will be considered for cuts is the 368-million-dollar “Northern Border Environment Project” that was approved on Jun 9 last year. The project, part of a package promised by President Bill Clinton to ensure U.S. Congressional passage of the North American Free Trade Agreement (NAFTA), is intended to help Mexican cities on the U.S. border clean up the environmental mess from “maquiladora” factories.

Bank sources told IPS that as much as 40 percent of this loan — a development that could create headaches for Clinton whose support first for NAFTA and then for the Mexican bailout has come under fierce attack from populist forces in the Congress.

“Some of the loans that the Bank has approved are no longer a priority for Mexico. Budget constraints have made them a second priority in light of the economic crisis. In addition, less money will be needed for the peso components of loans because of the devaluation,” says Lysy.

“It’s a bottom-up process. We have no final figure of how much will be cut. We need to plan what we should be doing over the next three to four years,” he added.

“We have been consulted in this process and we have told the Mexico department that there are no problems with any of the environmental loans,” says Bill Partridge, who supervises environmental aspects of the Bank’s work in Latin America.

“It has nothing to do with the technical aspects of the loans. Mexico is anxious to reduce its debt exposure and we are reviewing all their loans to achieve this,” says Thedore Nkodo, the Bank’s division chief for environment and urban development in Mexico.

Mexican activists, however, are upset about the Bank’s plans. “Here again is an example of the use of multilateral funds to bail out private concerns, which in turn are heavily indebted to New York financial conglomerates,” says Carlos Heredia, a former Mexican finance ministry official, who now runs Equipo Pueblo, a non-governmental organisation.

“The Bank seems to be more concerned about rescuing U.S. investors rather than contributing to improve the country’s productive infrastructure, agriculture, water supply systems and the environment,” he told IPS.

The largest undisbursed amount of money from a single loan to Mexico in recent years is a 500-million-dollar loan approved last September for rural roads, water supply and agriculture in Mexico’s poorest states. As of the end of May, some 424 million dollars of the loan had not been disbursed.

The second biggest chunk of money available for cutting is the 375 million dollars yet to be spent from a 412-million-dollar “Second Primary Education Project” approved last March.

Three loans approved last June — including the Northern Border Environment Project, 350 million dollars for water supply and sanitation, and 200 million dollars for solid waste management along the U.S. border — will be considered for cuts. None of these have actually been signed yet, say Mexican Treasury and Bank officials.

Two other loans approved last year — a 265-million-dollar loan for technical education and training, and 180 million dollars still to be disbursed from a 200-million-dollar farm and irrigation project — are also available for cutting.

From 1993 loans, two large, undisbursed chunks of money are available for pruning — 329 million dollars for highway rehabilitation and 179 million dollars for urban transportation in medium-sized cities.

Just over 500 million dollars in undisbursed loans from four large 1992 projects for agricultural technology, science and technology infrastructure, housing market development and transport air quality management are also available. Some 190 million dollars from an irrigation and drainage project approved in 1991 could also be axed.

Altogether, the Bank has 4.1 billion dollars of undisbursed loans that could cut or cancelled, including about 700 million dollars worth of loans costing less than 100 million dollars.