The Mexican government had planned massive cuts in electricity subsidies to residential customers in an attempt to reduce the budget deficit. Electricity prices, already among the world's highest, would have risen by up to 300 percent. However, there were demonstrations in the northern states that use a lot of air-conditioning; and the opposition party urged customers not to pay their new bills. As a result, the government reduced the planned cut in subsidy by 20 percent, and only the wealthiest 25 percent of households will see an increase in prices.

The government also failed to convince Congress of the merits of a new 15 percent sales tax on food and medicine. Nevertheless, Congress did approve a patchwork set of sales taxes on cellular telephone service, flat computer screens, restaurant meals, and certain luxury goods.

The subsidy reductions and tax hikes are expected to increase inflation above the target 4.5 percent. Restrictive monetary policy may be necessary.

(Updated April 1, 2002)