Mexico City.- The country’s widespread extortion problem is not only a scourge affecting merchants, manufacturers and agricultural producers, among others, but is also putting pressure on some prices by passing on costs, making it difficult for the Bank of Mexico (Banxico) to tame inflation, Reuters reported.
Recorded extortion victims in Mexico rose from 6,895 in 2018, when outgoing President Andrés Manuel López Obrador took office, to a record 11,039 in 2022, before declining slightly to 10,946 in 2023, though the number of incidents is believed to be vastly underreported.
Twenty merchants harassed by floor charges, service providers frightened by criminal threats and industrial leaders told Reuters that prices have increased, in some cases by up to 20 percent as reported by producers of the emblematic tortilla, due to the impact of a silent “tax” that tends to grow progressively. Banxico’s deputy governor Jonathan Heath said that although the monetary authority does not have hard data to evaluate the impact of insecurity, extortion and floor charges on price formation, “we have ample anecdotal information that indicates that it is not only an important factor, but a growing one, in such a way that it contributes to the inflationary process that we face.”
In a written response to Reuters on how the room for manoeuvre to lower inflation and cut the reference rate is being affected, he added that this problem can no longer be characterised as “conjunctural” but rather as “structural”, given that it is rooted in the economy and, without a doubt, “makes it difficult to achieve our goals”.
“The problem is that while it affects the Bank’s ability to achieve our goal, we have no way to quantify it or how to adjust our 3 percent target in light of this fact. “We know that it contributes to explaining the current persistence of inflation and we believe that it is more present in the prices of services (which has to do with the distribution of goods), but we are very limited in wanting to quantify the phenomenon and therefore, modify objectives,” Heath said. General inflation stood at 5.16 percent annually in the first half of August, gradually decelerating from its highs in more than two decades of 8.77 percent in 2022. However, it is still far from Banxico’s 3 percent target.
Out of economic dynamics
Although analysts, officials and experts say that it is difficult to measure the impact of the extra costs due to insecurity and extortion, and there is no formal indicator that shows it, the transfer to prices is real, according to many of those affected. “The phenomenon of extortion has reached worrying levels with a significant impact that not only affects the companies that are directly extorted, but also has ramifications that reach the consumer’s pocketbook,” said Andrés Abadía, an economist at Pantheon Macroeconomics. The National Alliance of Small Merchants (Anpec) says that the collection of fees has focused mainly on some basic products, such as avocado, lemon, chicken and tortillas, essential in the diet of Mexicans. “The work of the Bank of Mexico is more complicated than that of other countries that do not have this type of problem because effects are being generated that are impacting inflation that are outside the economic dynamic,” said Jacobo Rodríguez, a financial specialist at the analysis firm Roga Capital. However, some economists believe that while extortions can distort prices, their real impact is very limited, so they would have little impact on the national inflationary process. Others say that they may already be incorporated into prices, although they admit that if the amount of the installments increases, the final price also increases. The Bank of Mexico did not respond to a request for comments on the effects of extortions on prices. However, in a 2023 Regional Economies Report, it referred to company executives from all over the country as highlighting that insecurity, particularly crimes against producers, distributors and transporters, such as theft and extortion, has been reflected in higher costs, which are passed on to the prices of products such as avocados, lemons, cereals and other primary foods.
‘We are hostages’
According to the Employers’ Confederation of the Mexican Republic (Coparmex), one in nine of its members reported having suffered some type of extortion in 2023, while 65 percent of members said they had increased their spending on security, by installing surveillance cameras, buying armored vehicles and hiring guards. It also did not detail estimates of the effects on prices. President-elect Claudia Sheinbaum, who will take office in October, has promised to strengthen the fight against this crime, after López Obrador acknowledged that he fell short in resolving this “pending” task of his administration. In the first 15 days of August alone, the price of lemon rose 8 percent at a time when farmers in Michoacán, the main producer of citrus in the country, began a weekly work stoppage to denounce an increase in criminal fees, which reached four pesos per kilo, more than half of their sale price. In the case of tortillas, another staple product on the population’s table, the floor charge can result in additional costs of up to 20 percent for consumers who pay up to 32 pesos per kilo in some regions of the country, said a leader of the sector. The impact of extortion, which creeps through the links of the production chain, is also a threat to the already weak growth of the Mexican economy, by inhibiting the entrepreneurial spirit to expand operations or even forcing businesses to close their doors. There are places so complex due to the pressures of crime that security sources said that members of the Armed Forces have to be present in some areas of the country to guarantee the security of businesses and merchants. In one of the most visible cases, the Oxxo convenience store chain, the largest in the country, closed 191 businesses and seven gas stations in Tamaulipas in July, due to “demands” from organized crime. A week later they reopened, arguing that national and federal authorities guaranteed the presence of police and security. In those days, Julio Almanza, a well-known local business leader, was shot dead after exposing the power of extortionists in the region. “We are hostages of extortion, we are hostages of criminal gangs, the collection of fees has practically become a ‘national sport’ in Tamaulipas,” he denounced.
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