IMF Executive Board Concludes 2007 Article IV Consultation with Chile

Public Information Notice (PIN) No. 07/82
July 19, 2007

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2007 Article IV Consultation with Chile is also available.

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On July 16, 2007 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chile.1


The Chilean economy is enjoying a broad-based upswing, fueled by a strong global environment and buoyant domestic demand. Underpinned by supportive fiscal and monetary policies, GDP growth is expected to reach 5¾ percent in 2007, above the estimated potential growth rate of around 5 percent. Buoyant credit growth and strengthening labor market conditions continue to boost consumer spending, solid corporate profits and favorable financial conditions have contributed to higher investment, and exports are rising with strong external demand. Despite a sizeable nominal appreciation against the U.S. dollar, the real effective exchange rate has only moderately appreciated since the onset of the copper boom in 2004.

Inflation has recently increased but remains close to the 3 percent inflation target. The increase is attributable to higher global food and energy prices and reduced slack in the economy, while labor cost increases have been contained. Citing these factors, the central bank raised its policy rate by 25 basis points to 5¼ percent on July 12, noting also that it would likely be necessary to further reduce monetary stimulus in the coming months.

Fiscal developments have continued to benefit from revenues associated with strong copper prices, with expenditure increases in line with permanent revenues under the structural fiscal surplus rule. The nominal fiscal surplus is expected to be at over 7 percent of GDP in 2007, based on strong corporate tax revenues and a projected rebound in VAT receipts. Invested government financial assets now exceed 10 percent of GDP, and the central government has become a net creditor. Reflecting the improvement in its financial position, the government announced a reduction of the structural fiscal surplus target from 1 percent to ½ percent of GDP beginning in 2008.

The authorities have advanced a broad structural reform agenda. A major pension reform, designed to achieve broader coverage, liberalize investment rules for pension funds, and increase competition in the financial sector has been submitted to Congress. A second round of capital market reforms was passed into law in May, aimed at further developing domestic markets and integrating the financial sector more closely into global capital markets. The government has also launched initiatives to boost education, strengthen job-specific human capital, and promote innovation.

Executive Board Assessment

Executive Directors commended Chile's strong institutions and sound macroeconomic policies, which, supported by ongoing structural reforms, have increased the resilience of the economy to external shocks, kept inflation and the public debt low, sustained high economic growth, and led to rising living standards over the past two decades. Directors supported the government's strategy of maintaining the current rules-based macroeconomic framework while addressing social issues and implementing structural reforms to boost long-term growth. A key challenge will be to further reduce income inequality and eliminate the remaining pockets of extreme poverty.

Directors commended the central bank for its success in maintaining price stability and anchoring inflation expectations at the target level. After supporting the economy through the slowdown in 2006, monetary policy has appropriately shifted toward withdrawing stimulus in view of the rebound in activity and the potential risks from higher global food and energy prices. Directors endorsed the floating exchange rate policy, and agreed that the value of the currency is broadly in line with economic fundamentals.

Directors welcomed the government's continued commitment to the structural fiscal surplus rule, which has helped maintain competitiveness under large positive terms of trade shocks. They viewed the modest reduction in the surplus target beginning in 2008 as appropriate in view of the sharp improvement in the government's financial position in recent years, noting that it provides room for additional social spending. Directors also welcomed the government's commitment to continue to build up a pension reserve fund and recapitalize the central bank. Directors noted the recent rebound in value added tax collections, and recommended that revenue performance continue to be monitored closely.

Noting the success of Chile's performance-based budgeting system, Directors considered the authorities' plans to further strengthen the quality of government spending and increase transparency as well placed. They encouraged the authorities to move toward adopting a medium-term expenditure framework to align annual budget decisions closely with the government's strategic objectives.

Directors supported the proposed pension reform, which is designed to address the main shortcomings of the current system while maintaining many of its pioneering basic features. They viewed the proposed liberalization of investment rules for pension funds as timely, in view of Chile's strong external position and the need to deepen domestic financial markets. Directors considered it important that, in implementing the reform, its overall cost be kept within the projected amount of one percent of GDP, and that incentives to save remain unimpaired.

Directors commended the authorities' structural reform agenda, aimed at raising long-term growth and closing the income gap with industrialized countries through improved education, innovation, and financial development. They noted the strength and resilience of the banking system, and welcomed recent measures to strengthen capital markets. Directors encouraged the authorities to continue with reforms aimed at fostering competition, enhancing labor market flexibility, and integrating the financial system further into global capital markets.

Chile: Selected Economic Indicators

  2002 2003 2004 2005 2006

  (Annual percentage change)

Production and prices


Real GDP

2.2 3.9 6.0 5.7 4.0

Total domestic demand

2.4 4.9 7.5 11.0 6.0


2.5 4.0 6.8 7.5 6.6


... 4.2 7.0 7.9 7.1


... 2.4 6.1 5.3 3.6


2.2 7.8 9.8 23.0 4.4


... 6.5 10.5 23.2 3.3


... -0.4 5.7 11.2 10.9

Inventories 1/

0.2 0.5 0.1 0.5 0.1

Net exports 1/

-0.2 -0.9 -1.2 -5.0 -2.2

Consumer prices


End of period

2.9 1.1 2.4 3.7 2.6


2.5 2.8 1.1 3.1 3.4

GDP deflator

... 5.8 7.7 7.9 11.7

Real wages

2.0 0.9 1.8 1.9 2.0

Unemployment rate (annual average)

9.8 9.5 10.0 9.3 7.9

Output gap (percent)

-2.5 -2.4 -0.9 -0.1 -1.1

Money, credit, and interest rates


Broad money

3.8 3.6 10.6 12.0 11.4

Credit to the private sector

9.6 11.4 14.8 15.4 17.7

Three-month interest rate 2/

3.9 2.8 1.8 3.5 4.8
  (Billions U.S. dollars, unless otherwise indicated)

Balance of Payments


Current account

-0.6 -0.8 2.1 1.3 5.3

In percent of GDP

-0.9 -1.1 2.2 1.1 3.6

Trade Balance

2.4 3.7 9.6 10.8 22.2

Exports of Goods

18.2 21.7 32.5 41.3 58.1

Copper Exports

6.3 7.8 14.7 18.9 32.3

In percent of total exports

34.8 36.1 45.3 45.7 55.6

Imports of Goods

15.8 17.9 22.9 30.5 35.9

Oil Imports

1.5 2.0 2.7 3.6 4.6

In percent of total imports

9.7 11.3 11.8 11.8 12.9
  (Annual percentage change)


-0.5 19.2 50.1 27.0 40.7


-3.9 13.6 27.8 33.0 17.7

Terms of trade

3.8 9.7 22.1 10.8 31.0

Real effective exchange rate

-6.9 13.4 -3.7 11.9 -5.2

Net FDI (in percent of GDP)

3.3 3.7 5.9 4.0 3.6
  (In percent of GDP)

Saving and investment


Gross domestic investment

21.7 21.1 20.1 22.4 20.4


2.6 2.3 2.1 2.1 2.1


18.7 17.8 17.0 18.6 17.2

Change in inventories

0.3 1.0 1.0 1.7 1.1

National savings

20.8 20.1 22.2 23.5 24.0

Public 3/

1.6 2.5 4.8 7.5 10.8


19.1 17.5 17.3 16.0 13.2

External savings

0.9 1.1 -2.2 -1.1 -3.6

Public sector finance


Net debt

11.4 13.3 11.0 7.7 -1.7

Excluding public enterprises

5.5 7.2 5.5 2.5 -7.3

Gross debt 4/

42.8 44.4 39.0 30.4 26.0

Central government

15.7 13.0 10.7 7.2 5.9

Central government balance

-1.2 -0.2 2.1 4.6 7.7

External Debt


Gross external debt

60.2 58.2 45.4 37.8 32.6


10.7 12.5 10.3 8.0 7.4


49.5 45.7 35.1 29.7 25.2

Memorandum items


Nominal GDP (in billions of US$)

67.3 74.0 95.8 119.0 145.8

Copper prices (in US$ per pound)

0.7 0.81 1.30 1.67 3.05

Nominal Exchange Rate (average)

688.9 691.4 609.5 559.8 530.3

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. 2007 refers to June 8, 2007.
3/ Gross saving of the general government sector, including the deficit of the central bank.
4/ Gross consolidated debt of the public sector (central bank, non-financial public enterprises, and general government). For comparability purposes, does not include securitized liabilities from pre-1981 pension system totaling 9.5 percent of GDP at end-2006.

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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