By Noe Torres, Lizbeth Diaz and Ana Isabel Martinez
MEXICO CITY (Reuters) – Besides the usual challenges of exchange rate fluctuations and supply shocks that keep central bankers around the world awake at night, Mexico has an additional enemy for those devising monetary policy: protection rackets.
Extortion has become a huge problem in Mexico, with powerful drug cartels exerting influence over large parts of the country. In order to create new revenue streams, these groups have turned to extorting businesses by forcing them to pay protection money.
One unintended consequence: inflation.
Reuters interviewed about 20 small traders and producers who sell products including limes and tortillas, who said they are regularly forced to pay protection money.
Leaders of business associations confirmed the problem and estimate that extortion increases the prices of certain items by as much as 20%.
Policy experts and central bank officials are increasingly taking note of this problem, even though there is still little concrete data on the phenomenon.
“We have ample anecdotal information that suggests that extortion is not just a significant factor, but a growing factor, contributing to the inflationary process that we are experiencing,” Jonathan Heath, the central bank’s vice-chairman, told Reuters in a written response to questions last week.
Like many other countries, Mexico has been struggling with high inflation in the wake of the COVID-19 pandemic. Annual inflation stood at 5.16% in the first half of August and has gradually cooled from a two-decade peak of 8.77% in 2022. But it remains stubbornly far from the 3% targeted by Mexico’s central bank, known as Banxico.
Earlier this month, Banxico cut its benchmark interest rate by 25 basis points to 10.75% in a split vote, with Heath voting not to cut it. Despite the move, the bank said it expected prices to rise more than it had previously forecast.
Heath said the problem of extortion in the Mexican economy must now be viewed as “structural,” making it “difficult to achieve our objectives” on inflation.
“The problem is that while we know it affects the bank’s ability to meet our target, we have no way to quantify it or adjust our 3% target to take it into account.”
COMPLICATED WORK
Extortion incidents in Mexico are thought to be grossly underreported, but the data that does exist shows a sharp increase since Andrés Manuel Lopez Obrador took office and took a less confrontational approach to drug cartels.
This approach has led to fewer gun battles between security forces and cartels and has been praised by some for reducing the number of murders. However, according to official data, the number of murders remains high, at over 30,000 per year.
The number of registered victims of extortion rose from 6,895 in 2018, when Lopez Obrador took office, to a record 11,039 in 2022, before falling slightly to 10,946 in 2023.
“The work of the Mexican central bank is more complicated than in other countries that do not have this problem (of extortion),” said Jacobo Rodriguez, an analyst at Roga Capital.
Extortion “has consequences that affect inflation and that go beyond economic dynamics,” he added.
Banxico did not respond to a request for comment on how extortion affects prices.
A 2023 regional economic report from the bank said business leaders across Mexico had stressed that crime against producers, particularly theft and extortion, had led to higher costs for businesses and higher consumer prices for products such as avocados, limes, grains and other staples. No specific figures were given.
An industry leader, who spoke on condition of anonymity due to security concerns, said extortion has caused tortilla prices to rise by 20% in some places.
In the first half of August alone, the price of limes rose by about 8 percent as farmers in the state of Michoacan, Mexico’s largest producer, went on strike in protest at the increasing extortion. Cartels demanded four pesos ($0.20) per kilo, more than half the normal selling price for producers.
“The phenomenon of extortion has reached worrying proportions and is having a significant impact. It is not only affecting the companies that are directly extorted, but also the wallets of consumers,” said Andres Abadia, economist at Pantheon Macroeconomics.
(Reporting by Noe Torres, Lizbeth Diaz and Ana Isabel Martinez; Editing by Stephen Eisenhammer and Rosalba O’Brien)
