In a controversial decision, President Vicente Fox's administration has drafted a plan to eliminate some residential electricity subsidies. The decision, which becomes effective in mid-February, would phase out subsidies for households with high electricity usage but retain subsidies for homes that consume low amounts of electricity.
The administration initially contemplated eliminating 10 billion pesos (US$1.09 billion) in subsidies, but later scaled down the reduction to only 8 billion pesos (US$877 million) because of strong pressure from the business sector and some members of the Mexican Congress.
Finance Secretary Francisco Gil Diaz and Energy Secretary Ernesto Martens Rebolledo said the money saved from subsidies would be channeled into maintenance operations and expansion of the infrastructure for Mexico's two main electrical utilities, the Comision Federal de Electricidad (CFE) and the Compania Luz y Fuerza del Centro (LFC).
Critics say low-income consumers will suffer
Even with the scaled-down subsidy reduction, the move was strongly criticized by some business organizations, labor unions, and politicians, including some members of Fox's center-right Partido Accion Nacional (PAN).
Critics said eliminating subsidies would raise utility bills for a large share of the population, causing increased hardships for many consumers who are already struggling to make ends meet. The administration had projected higher utility bills for 25% of consumers in Mexico, but the Sindicato Mexicano de Electricistas (SME) said the higher costs would affect three out of every four consumers.
The Banco de Mexico (central bank) also raised concerns about the impact of higher electricity costs on consumer inflation during 2002. "Any adjustments to prices [of goods and services] administered by the public sector must occur in concert with the inflation objectives for the year," the central bank said in a document on forecasts for 2002.
Guillermo Ortiz Martinez, the central bank's chief governor, said the Banco de Mexico had not determined the full impact of the higher electricity prices on annual inflation, but hinted that the government is not likely to meet its inflation target of 4.5% for the year because of increased energy costs.
Ortiz, who criticized the administration for not consulting with the Banco de Mexico, said the central bank might have to resort to tightening the money supply if high inflation becomes a possibility.
Proposal divides business community
There was also grumbling within the business community, with organizations like the Consejo Coordinador Empresarial (CCE) raising concerns that the increase in residential power costs could have an inflationary impact on all electricity bills. "Our concern at this time is that high energy prices not increase our costs of production because this would affect our productivity and could cause us to reduce our labor force," said CCE president Claudio X. Gonzalez.
Still, some business leaders defended the Fox government's decision. "It is good to eliminate unnecessary subsidies to cut back on the fiscal deficit," said Hector Rangel Domene, president the Asociacion de Banqueros de Mexico (ABM), who said the only subsidies the government should maintain are those for the truly needy.
The decision to eliminate subsidies provided an opportunity for the long-governing Partido Revolucionario Institucional (PRI) to criticize Fox. The PRI is reeling from the administration's decision to investigate campaign- financing irregularities during the 2000 presidential campaign. The investigation is focusing on charges that the former governing party illegally used funds from the state-run oil company PEMEX for the campaign of its presidential candidate Francisco Labastida (see SourceMex, 2002-01-30).
Deputy Victor Infante, a leader of the PRI in the lower house, called for citizens to take matters into their own hands by refusing to pay their utility bills. …