Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Chile

August 11, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 06/97
August 11, 2006

On August 2, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chile.1


Over the past fifteen years, structural reforms and prudent economic policies have helped anchor Chile's successful economic performance. Since 2000, its economic strategy has been based on a fiscal policy rule, inflation targeting with a floating exchange rate, trade liberalization, and an open capital account, within a sound financial regulatory and supervisory framework. These policies have provided Chile with enviably high rates of economic growth and low inflation. During the 15-year period through 2005, growth averaged 5½ percent a year, per capita income tripled in U. S. dollar terms, and the poverty rate was cut in half, to about 18 percent. Income inequality, however, remains high.

In recent years, Chile has continued to deepen its sound macroeconomic framework, in the context of a surge in the world price of copper, its main export commodity. Chile's new administration, which assumed office in March, has reaffirmed its support for this framework. The central bank has continued to manage monetary policy prudently, in the context of the inflation targeting framework. Since September 2004, it has raised its policy rate by a total of 350 basis points, to 5.25 percent, in response to the economic recovery and the gradual closing of the output gap. Consistent with the structural surplus rule and high copper price levels, the central government registered an overall surplus of 4¾ percent of GDP in 2005, up from 2¼ percent in 2004. The ratio of Chile's net public sector debt (including the debt of the central bank and public enterprises) fell from about 13 percent of GDP in 2003 to 7½ percent in 2005.

The outlook for Chile remains positive, reflecting strong prospects for copper and robust domestic demand. Following growth of 6.3 percent in 2005, real GDP is projected to rise by 5-6 percent in 2006, buttressed by a favorable external environment and still supportive monetary policy. Domestic consumption growth is expected to remain buoyant, boosted by higher incomes and employment. Consistent with the structural surplus rule, and in line with projected copper prices, the central government would register an overall surplus of close to 6 percent of GDP in 2006. The current account surplus is projected at close to 2 percent of GDP in 2006, reflecting high copper prices and a moderation in capital goods imports. Inflation expectations remain well anchored and headline inflation is expected to move gradually to the middle of the 2-4 percent target range. Despite steady employment growth, the unemployment rate is still relatively high, at about 8 percent, as strong economic growth has encouraged more workers to return to the labor market.

Executive Board Assessment

Executive Directors commended the Chilean authorities for their continued exemplary implementation of sound macroeconomic policies, based on strong and well-established institutions, and reinforced by strict adherence to the structural fiscal surplus rule, a highly-regarded inflation targeting framework, increasing trade integration, and a robust financial system. These policies have yielded substantial benefits, including low inflation, sustained economic growth with an attendant significant reduction in poverty, and strengthened investor confidence and resilience to external shocks.

Directors noted that the near-term outlook appears bright, with the continuing strength of domestic consumption and exports expected to contribute to rapid economic growth, at a time when investment is returning to more sustainable levels. The risks to the outlook appear broadly balanced and the authorities have appropriately recognized the need to gear macroeconomic policies toward managing the copper price boom effectively.

Directors welcomed the authorities' strict adherence to the structural fiscal surplus rule, which calls for a structural surplus of 1 percent of GDP in the overall balance of the central government, and provides effective counter-cyclical support to the economy. They commended the authorities for keeping spending growth in check, despite higher revenues associated with the surge in copper prices. Going forward, Directors advised continued commitment to fiscal discipline, while recognizing the priorities of the government to increase social spending in health and education. They welcomed plans to use the copper windfalls prudently, by accumulating resources to cover future contingent liabilities, recapitalizing the central bank, and investing the surpluses. A few Directors suggested a faster pace of recapitalization than currently envisaged.

Directors highlighted the success of Chile's inflation targeting framework in anchoring inflation expectations. They supported the gradual tightening of monetary policy under way, and concurred that any further tightening should be largely data driven, given the difficulty of assessing the exact timing of the closing of the output gap. Directors also noted that, if the fiscal stance were to evolve differently than expected in 2007, the central bank should be ready to adjust monetary policy accordingly.

Directors observed that the floating exchange rate regime has allowed the economy to adjust smoothly to external shocks. The transparent policy framework, with no central bank intervention in the foreign exchange market and supported by fiscal prudence, has helped sustain competitiveness, as evidenced by the continued strength of nontraditional exports. Directors noted that, going forward, continued fiscal restraint, together with the investing of the fiscal surpluses abroad, would help limit upward pressures on the currency.

While commending the soundness of Chile's financial sector, Directors saw room for further efficiency improvements, while maintaining sound oversight, consistent with the recommendations of the 2004 Financial System Stability Assessment. They encouraged the authorities to keep the growth in consumer lending under close scrutiny and to continue enhancing the consolidation of risk information. In this context, Directors welcomed the authorities' recent announcement to restart the legislative process towards early approval of the Capital Markets II draft law. They also supported the plans to streamline financial taxation, including the stamp tax and capital gains tax, and to reform the private pension system with a view to extending its coverage, strengthening the social safety net, improving competition in the sector, and liberalizing the investment regime of the pension funds. Directors welcomed the recent revision to the AML/CFT legislation that will enhance the ability of the Financial Intelligence Unit (FIU) to obtain information and more effectively combat money laundering.

Directors supported the authorities' medium term emphasis on promoting sustained growth and reducing income inequality. They welcomed reforms to improve pre-school coverage for low-income groups, enhance funding for tertiary education, and promote research and development. Directors also encouraged the authorities to improve labor market flexibility further in order to increase employment opportunities and address the still high unemployment rate, especially among the young. Progress in these areas will be key to enhancing productivity and competitiveness and to supporting further economic diversification in the medium term.

Directors welcomed Chile's leadership role in opening markets through comprehensive and sustained trade and financial market liberalization. They commended the authorities for the implementation of recent bilateral free trade agreements and for their strong commitment to multilateral trade liberalization.

Table 1. Chile: Selected Economic Indicators

  2000 2001 2002 2003 2004 2005

(Annual percentage change)

Production and prices


Real GDP

4.5 3.4 2.2 3.9 6.2 6.3

Total domestic demand

6.0 2.4 2.4 4.9 8.1 11.4


3.6 2.9 2.5 4.0 6.1 7.6


14.0 0.8 2.2 7.8 14.3 22.2


8.9 4.3 1.5 5.7 11.7 24.7

Inventories 1/

1.2 -0.8 0.2 0.5 0.8 -0.3

Net exports 1/

-1.3 1.0 -0.2 -0.9 -1.9 -5.2

Consumer prices


End of period

4.6 2.7 2.9 1.1 2.5 3.7


3.8 3.6 2.5 2.8 1.1 3.1

Real wages

1.4 1.6 2.0 0.9 1.8 1.9

Unemployment rate (annual average)

9.2 9.2 9.0 8.5 8.8 8.0

Money, credit, and interest rates


Broad money

5.3 4.9 3.3 2.3 11.7 22.1

Credit to the private sector

12.1 8.1 9.6 11.4 14.8 15.4

Three-month interest rate 2/

10.8 7.2 3.9 2.8 1.8 3.5
(Billions U.S. dollars, unless otherwise indicated)

Balance of Payments


Current account

-0.9 -1.1 -0.6 -1.0 1.6 0.7

In percent of GDP

-1.2 -1.6 -0.9 -1.3 1.7 0.6

Trade Balance

2.1 1.8 2.4 3.7 9.2 10.2

Exports of Goods

19.2 18.3 18.2 21.7 32.2 40.6

Copper Exports

7.3 6.5 6.3 7.8 14.5 18.3

In percent of total exports

37.9 35.8 34.8 36.1 45.0 45.1

Agricultural Exports

1.7 1.7 1.8 2.1 2.3 2.5

In percent of total exports

8.8 9.5 9.9 9.8 7.3 6.1

Imports of Goods

17.1 16.4 15.8 18.0 23.0 30.4

Oil Imports

2.0 1.6 1.5 2.0 2.7 3.6

In percent of total imports

11.7 10.0 9.7 11.2 11.9 11.8
(Annual percentage change)


11.9 -4.9 -0.5 19.2 48.7 25.9


16.0 -3.9 -3.9 13.8 28.0 32.0

Terms of trade

4.5 -7.2 3.7 9.7 20.7 12.5

Real effective exchange rate 3/

-2.9 -10.1 -6.9 13.4 -3.7 11.9

Net Foreign Direct Investment

-85.9 196.5 -14.8 22.4 109.0 -19.9

In percent of GDP

1.2 3.8 3.3 3.7 5.9 3.9
(In percent of GDP)

Saving and investment


Gross domestic investment

21.9 22.1 21.7 21.9 21.4 23.0


2.7 2.6 2.6 2.3 2.1 2.1


19.1 19.5 19.1 19.6 19.2 20.9

National savings

20.7 20.5 20.8 20.6 23.0 23.6

Public 4/

2.0 2.4 1.6 2.5 4.9 7.7


18.6 18.2 19.1 18.2 18.1 15.9

External savings

1.2 1.6 0.9 1.3 -1.7 -0.6

Public sector finance


Net debt

... 10.9 11.0 13.1 10.8 7.7

Excluding public enterprises

... 6.4 5.5 7.2 5.5 2.6

Gross debt 5/

40.9 41.9 42.8 44.6 39.4 31.7

Central government

13.7 15.0 15.7 13.1 10.8 7.5

Central government balance

-0.7 -0.5 -1.2 -0.5 2.2 4.7

External Debt


Gross external debt

49.4 56.2 60.2 58.4 45.8 39.0


8.0 8.9 10.7 12.6 10.3 8.3


41.4 47.3 49.5 45.8 35.5 30.7

Sources: Central Bank of Chile, Ministry of Finance, Haver Analytics, and IMF staff estimates.
1/ Contribution to growth.
2/ Nominal rates, in percent per annum, period average, on 90-day central bank promissory notes.
3/ End of period; INS definition of the real effective exchange rate. A decline indicates a depreciation of the peso; data for 2006 as of April 30, 2006.
4/ Gross saving of the general government sector, including the deficit of the central bank.
5/ Gross consolidated debt of the public sector (central bank, non-financial public enterprises, and general government).

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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