## 2023. The headline fiscal balance is estimated to decline to about -2.5 percent of GDP in 2023

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### Overview
- Headline fiscal balance: estimated to decline to about -2.5 percent of GDP in 2023 due to weaker tax revenues amid an economic slowdown, lower copper prices, and other transitory factors.
- 2024 budget: envisions a moderate deficit reduction within a medium-term fiscal plan to a broadly balanced fiscal position by 2026.
- Financial resilience: ongoing implementation of the countercyclical capital buffer will strengthen financial resilience in periods of stress.

### Macroeconomic outlook and risks
- Transition: economy moving to trend growth and targeted inflation but faces significant risks.
- External risks:
  - Uncertainties around potentially higher-for-longer interest rates in advanced economies.
  - Growth slowdown in major trading partners.
  - Intensification of regional conflicts.
- Domestic risks:
  - Political polarization and fragmentation could lead to continued reform gridlock.
  - Social discontent over inequality and security.
  - Uncertainty related to the solvency of private health insurance companies (Isapres ruling, November 2022).
- Upside opportunity:
  - Benefits from the global green transition given Chile’s endowment in copper, lithium, and renewable energy.

### Fiscal developments and projections
- Fiscal trajectory and targets:
  - 2024 budget envisages a path to a broadly balanced fiscal position by 2026.
  - Authorities commit to keeping debt below the prudent debt ceiling of 45 percent of GDP.
- Drivers of 2023 fiscal deterioration:
  - Weaker tax revenues amid the economic slowdown.
  - Lower copper prices.
  - Fading one-off effects and higher spending related to health care, forest fires and floods, and the Pan American Games.
- Policy guidance and recommendations:
  - More frontloading of deficit reduction would facilitate meeting the medium-term fiscal target.
  - Permanent spending measures should be conditioned on structural revenue performance to preserve fiscal sustainability.
  - Refinements to Chile’s fiscal framework would enhance resilience, including in the context of proposed gradual decentralization.
  - Strengthen tax compliance and enhance spending efficiency; additional measures will be needed to finance social needs and security priorities.

### Monetary and financial policy
- Monetary policy developments:
  - Disinflation accelerated; headline inflation declined to 3.9 percent (yoy) in December 2023 from a peak of 14.1 percent in August 2022.
  - BCCh lowered its monetary policy rate from 11.25 percent to 8.25 percent between July and December 2023; later lowered by 100 basis points to 7.25 percent on January 31.
  - Pace of further monetary easing should remain data dependent; real rates likely need to remain above neutral levels for the near future.
  - BCCh recommendation: resume accumulation of international reserves when market conditions are conducive and develop a longer-term international reserve strategy.
- Financial sector resilience:
  - Financial sector remains resilient; ongoing implementation of Basel III capital and liquidity requirements and activation of the countercyclical buffer welcomed.
  - Vulnerabilities to monitor: construction and real estate sectors, smaller firms with government-guaranteed loans (FOGAPE-Covid and FOGAPE-Reactiva), and low-income indebted households.
  - Importance of calibrating the neutral level of the countercyclical capital buffer swiftly to provide banks with planning certainty.
  - Progress with 2021 FSAP recommendations and adaptation of regulation and supervision to digitalization will enhance resilience.
  - Efforts underway to establish industry-funded deposit insurance and a new bank resolution framework.

### Structural reforms and social policy
- Policy priorities: make the economy more dynamic, inclusive, and greener.
- Key reform areas and measures:
  - Promote investment and streamline permitting processes.
  - Develop renewable energy and lithium industries within a clear and balanced institutional framework.
  - Advance tax reforms to sustainably finance social needs, security priorities, and green infrastructure.
  - Raise pension contribution rates to ensure adequacy of self-financed pensions and sustainability of the pension system.
  - Improve pension adequacy for low-income pensioners (noting improvement following the higher minimum pension, PGU).
  - Continue efforts to narrow labor market gender gaps and refine gender equality policies (target: by 2031, 40 percent female representation on boards of CMF-supervised companies).
- Climate and energy:
  - Decommission coal-fired plants by 2040 and achieve carbon neutrality by 2050.
  - Electricity from solar and wind increased from "1 to 20 percent" of total electricity supply during "2010–21".
  - Replacing coal with renewable energy could lift GDP level by "at least 1 percentage point" over the long term, implying a "nearly 30 percent" positive productivity shock in electricity generation.
  - Main bottleneck: geographic mismatch between power generation and consumption; state support for transmission could create aggregate net economic benefits.
- Lithium strategy:
  - National Lithium Strategy (April 2023) aims to upgrade the lithium industry sustainably, increase production via public-private partnerships, and develop downstream industries.
  - MoU (December 2023): new company in 2025 jointly owned by Codelco (50 percent plus one share) and SQM (50 percent minus one share) for Atacama operations; contracts expire in 2030 and 2043.

### Key statistics and projections (selected)
- Output and labor:
  - Real GDP: 2022 = 2.4; 2023 = 0.0; 2024 = 1.9; 2025 = 2.5; 2026 = 2.4
  - Output gap (in percent): 2022 = 2.7; 2023 = 0.2; 2024 = -0.3; 2025 = -0.1; 2026 = 0.0
  - Unemployment rate (annual average): 2022 = 7.9; 2023 = 8.8; 2024 = 8.9; 2025 = 8.4; 2026 = 7.7
- Prices:
  - GDP deflator: 2022 = 6.6; 2023 = 6.5; 2024 = 3.9; 2025 = 3.6; 2026 = 3.4
  - Change of CPI (end of period): 2022 = 12.8; 2023 = 3.9; 2024 = 3.0; 2025 = 3.0; 2026 = 3.0
  - Change of CPI (period average): 2022 = 11.6; 2023 = 7.6; 2024 = 3.3; 2025 = 3.0; 2026 = 3.0
- Public sector finances (percent of GDP):
  - Central government revenue: 2022 = 26.1; 2023 = 23.1; 2024 = 23.8; 2025 = 24.0; 2026 = 24.0
  - Central government expenditure: 2022 = 25.0; 2023 = 25.6; 2024 = 25.9; 2025 = 25.4; 2026 = 24.5
  - Central government fiscal balance: 2022 = 1.1; 2023 = -2.5; 2024 = -2.1; 2025 = -1.4; 2026 = -0.5
  - Central government gross debt: 2022 = 38.0; 2023 = 39.2; 2024 = 40.5; 2025 = 40.7; 2026 = 41.1
  - Public sector gross debt 1/: 2022 = 67.3; 2023 = 68.5; 2024 = 69.8; 2025 = 70.0; 2026 = 70.4
- Money and credit:
  - M2 (Annual percentage change): 2022 = 4.0; 2023 = 5.3; 2024 = 4.8; 2025 = 6.2; 2026 = 5.8
  - Credit to the private sector (Annual percentage change): 2022 = 10.0; 2023 = 2.8; 2024 = 5.0; 2025 = 7.1; 2026 = 6.7
- Balance of payments (percent of GDP):
  - Current account balance (% of GDP) 2/: 2022 = -9.0; 2023 = -3.2; 2024 = -3.4; 2025 = -3.3; 2026 = -3.2
  - Foreign direct investment net flows (% of GDP) 2/: 2022 = -2.7; 2023 = -1.8; 2024 = -2.2; 2025 = -2.2; 2026 = -2.1
  - Gross external debt (% of GDP) 3/: 2022 = 77.6; 2023 = 73.1; 2024 = 74.4; 2025 = 74.1; 2026 = 74.2

### External position and reserves
- Current account and reserves:
  - Four-quarter moving average current account deficit: narrowed to 3.4 percent of GDP in 2023Q3 (after temporarily widening to 9 percent of GDP in 2022).
  - Annual current account deficit (expected): reverted to 3.2 percent of GDP in 2023.
  - CLP movement: Chilean peso weakened by about 10 percent against the U.S. dollar between July and December 2023; heightened sensitivity to news and greater volatility observed.
  - BCCh FX operations:
    - April 2023: began gradually unwinding FX forward operations from the 2022 intervention program.
    - June 2023: started a twelve-month reserve accumulation program aiming to increase FX reserves by US$10 billion.
    - October 2023: both programs suspended due to heightened tensions in global financial markets.
    - Reserves accumulated during June–October 2023: totaled US$3.7 billion.
  - Gross international reserves at end-December 2023: US$46.3 billion, equivalent to 86.2 percent of the Fund’s ARA metric (reported elsewhere as 83.5 percent average over 2021–23).
  - Government’s usable liquid FX assets as of November 2023: US$6.2 billion (equivalent to an improvement in reserve coverage of up to 11.5 percentage points).
- External position assessment:
  - 2023 external position assessed as moderately weaker than the level implied by medium-term fundamentals and desirable policies.
  - Average REER in 2023: close to its equilibrium level; staff estimate REER gap between -5 and 5 percent.

### Financial sector resilience and vulnerabilities (selected metrics)
- Liquidity Coverage Ratio (Sept 2023): approximately 250 percent (regulatory requirement: 100 percent).
- Non-performing loan (NPL) ratios: increased to 2.1 percent as of November 2023.
- Nominal credit growth (Dec 2023): 2.6 percent (yoy).
- Banking sector exposures: construction and real estate sector accounts for "30 percent" of banks' commercial loans.
- Countercyclical capital buffer (CCyB):
  - A "0.5 percentage point" increase in the CCyB to take effect in "May 2024" adopted as a precautionary measure.
  - Recommendation: calibrate the neutral CCyB level swiftly to provide banks with planning certainty.

### Outlook and risks (selected projections and cautions)
- Growth:
  - Quarterly growth projected to return to potential pace of 2-2.5 percent annualized in 2024.
  - Annual growth implied to pick up to close to 2 percent in 2024.
- Real credit growth: projected to rebound modestly in 2024.
- Inflation: projected to converge to the 3 percent target in 2024H2.
- Current account deficit forecast:
  - 2024: set to reach around 3½ percent of GDP.
  - Medium term: converge to 3 percent of GDP.
- External risks: main external risk is uncertainty around a potentially higher-for-longer U.S. interest rate environment; other risks include slowdown in China and intensification of regional conflicts.
- Domestic risks: political polarization, social discontent, and Isapres solvency uncertainty.
- Policy advice in adverse scenarios:
  - Allow the exchange rate to act as a shock absorber.
  - Use existing policy space to support the economy and protect the most vulnerable in a global recession scenario, consistent with inflation targeting and fiscal sustainability.

### Fiscal policy, fiscal pact, and public debt
- 2024 budget headline deficit (authorities): 1.9 percent of GDP.
- Staff projection for 2024 headline deficit: 2.1 percent of GDP.
- Real spending growth in 2024: expected to grow by about 3.5 percent.
- Financing of 2024 spending: partly financed by higher revenues from the new mining royalty.
- Adjustment needed for medium-term plan:
  - Fiscal deficit reduction of about 1½ percentage points of GDP in 2025–26 is needed to reach broadly balanced position by 2026.
- Fiscal Pact details and financing:
  - Priority spending tied to the pact: higher minimum guaranteed pensions, the health system, the national system of care and childcare, and security, totaling about 2.7 percent of GDP.
  - Planned additional revenue from tax compliance efforts: cumulatively 1.5 percent of GDP by 2028.
  - Expert committee estimates pro-growth measures could raise fiscal revenues by 0.5 percent of GDP by 2028.
  - OECD report: potential 0.1 percent of GDP gain from increased spending efficiency.
  - If fully implemented, additional average financing needs of 0.6 percent of GDP would still remain in 2025-28; government aims to fill this with a revised tax reform proposal expected to be announced in March 2024.
  - Note: the fiscal pact is not included in the baseline.
- Debt dynamics and risks:
  - Central government debt rose from 4 to 38 percent of GDP during 2008-22; Treasury assets declined from 14 to 6 percent of GDP during 2008-22.
  - Under the baseline, central government debt projected to remain below the authorities’ prudent debt ceiling of 45 percent of GDP.
  - Under broadly unchanged fiscal policies (headline fiscal deficit of 2 percent of GDP and below-the-line operations of about 2 percent of GDP), debt would continue to rise and could breach the prudent debt ceiling by 2027.
- Fiscal framework improvements recommended:
  - Adoption of a prudent debt ceiling in 2022.
  - Introduction of annual fiscal targets along the medium-term path starting in 2024.
  - Proposed escape clause under consideration in Congress.
  - Refine the simplified formula for determining structural lithium revenue over time.
  - Secure more resources for the Autonomous Fiscal Council (CFA) to broaden its role.

### Social policy, labor market, and pensions (selected)
- Household subsidies nearly doubled in real terms during "2017-22"; poverty rate fell from 8.5 to 6.5 percent between 2017-22.
- PGU (minimum pension) introduced in 2022 lifted average gross replacement rate from "19 percent" to "above 60 percent".
- Government’s proposed hike in the contribution rate by "6 percentage points" would be essential to lift replacement rates.
- PGU represents a sizable net fiscal cost; costs with solidarity pensions could double to "4 percent of GDP between 2023 and 2050".
- Minimum wage: increased by "about 15 percent" from early "2019" to end-"2023" and another "8.7 percent" nominal rise announced until "July 2024".
- Gender and labor:
  - Women’s mean labor earnings were 19 percent lower than men’s in 2017 among full-time prime-age workers with permanent contracts.
  - Policy options to raise female labor force participation: childcare, flexible work arrangements, and expanded access to education and workforce training aligned with digital requirements.

### FX intervention, reserves strategy, and policy recommendations
- BCCh 2022 intervention:
  - FX spot and NDF sales began on July 18th, 2022; spot transactions totaled US$6.15 billion; NDF sales reached a stock of US$9.95 billion in early September 2022.
  - Markets improved after intervention announcement: CLP volatility declined, bid-ask spreads declined, and local bond spreads narrowed.
- Reserve adequacy and recommendation:
  - Reserves accumulated June–October 2023: US$3.7 billion.
  - Recommendation: resume BCCh’s suspended reserve accumulation program when market conditions are conducive to strengthen external buffers and adapt BCCh’s international reserve strategy to new risks from rising external exposures.

### Implementation and supervision priorities (FSAP and regulatory)
- Progress on 2021 FSAP recommendations ongoing; Basel III implementation and Financial Market Resilience Law (October 2023) and Fintech Law enacted to promote market resilience and innovation.
- Key FSAP implementation items:
  - Adoption and phased implementation of Basel III solvency and liquidity requirements (full implementation by 2025).
  - Development of a new bank resolution and deposit insurance framework; a draft bill and policy papers under preparation.
  - Strengthening AML/CFT regulations across banks, cooperatives, payment card issuers, and insurance companies.
  - Enhancements to stress testing, liquidity frameworks (ILAAP/LSAR), and corporate governance proposals.
  - Need to strengthen CMF budget/resources to attract specialized talent for supervision.

### Risk assessment highlights (Annex II and III syntheses)
- External risks prioritized: commodity price volatility (Likelihood: High, Impact: High), deepening geoeconomic fragmentation (Likelihood: High, Impact: Medium), abrupt global slowdown (Likelihood: Medium, Impact: High), systemic financial instability (Likelihood: Medium, Impact: Medium), cyberthreats (Likelihood: Medium, Impact: Medium).
- Domestic risk: social discontent (Likelihood: Medium, Impact: Medium).
- Policy advice for risks: allow exchange rate flexibility, targeted fiscal support to vulnerable groups in negative shocks, save stronger-than-projected revenues in positive shocks, strengthen legal and regulatory frameworks, diversify trade markets and supply chains, and advance structural reforms.

*Source: CHILE STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (January 17, 2024).*

### 2023. The headline fiscal balance is estimated to decline to about -2.5 percent of GDP in 2023

### 1chlea2024001 - 2023. The headline fiscal balance is estimated to decline to about -2.5 percent of GDP in 2023

### Overview
- The headline fiscal balance is estimated to decline to about -2.5 percent of GDP in 2023 due to weaker tax revenues amid an economic slowdown, lower copper prices, and other transitory factors.
- The 2024 budget envisions a moderate deficit reduction within a medium-term fiscal plan to a broadly balanced fiscal position by 2026.
- The ongoing implementation of the countercyclical capital buffer will strengthen financial resilience in periods of stress.

### Macroeconomic outlook and risks
- The economy is transitioning to trend growth and targeted inflation but faces significant risks:
  - External risks: uncertainties around potentially higher-for-longer interest rates in advanced economies, a growth slowdown in major trading partners, and intensification of regional conflicts.
  - Domestic risks: political polarization and fragmentation could lead to continued reform gridlock; social discontent over inequality and security; uncertainty related to the solvency of private health insurance companies.
  - Upside opportunity: benefits from the global green transition given Chile’s endowment in copper, lithium, and renewable energy.

### Fiscal developments and projections
- Fiscal trajectory and targets:
  - The 2024 budget envisages a path to a broadly balanced fiscal position by 2026.
  - Authorities commit to keeping debt below the prudent debt ceiling of 45 percent of GDP.
- Drivers of the 2023 fiscal deterioration:
  - Weaker tax revenues amid the economic slowdown.
  - Lower copper prices.
  - The fading of one-off effects and higher spending related to health care, forest fires and floods, and the Pan American Games.
- Policy guidance:
  - A bit more frontloading of the deficit reduction would facilitate meeting the medium-term fiscal target.
  - Permanent spending measures should be conditioned on structural revenue performance to preserve fiscal sustainability.
  - Refinements to Chile’s fiscal framework would enhance resilience, including in the context of proposed gradual decentralization.
  - Strengthen tax compliance and enhance spending efficiency; additional measures will be needed to finance social needs and security priorities.

### Monetary and financial policy
- Monetary policy:
  - Disinflation accelerated; headline inflation declined to 3.9 percent (yoy) in December 2023 from a peak of 14.1 percent in August 2022.
  - The BCCh lowered its monetary policy rate from 11.25 percent to 8.25 percent between July and December 2023.
  - The pace of further monetary easing should remain data dependent; real rates will likely need to remain above their neutral levels for the near future.
  - The central bank should resume the accumulation of international reserves, when market conditions are conducive, and develop a longer-term international reserve strategy.
- Financial sector resilience:
  - The financial sector remains resilient.
  - Ongoing implementation of Basel III capital and liquidity requirements and activation of the countercyclical buffer are welcomed.
  - Continued monitoring of vulnerabilities in construction and real estate sectors is important.
  - Calibrating the neutral level of the countercyclical capital buffer swiftly is important to provide banks with planning certainty.
  - Progress with 2021 FSAP recommendations and adaptation of regulation and supervision to digitalization will enhance resilience.
  - Efforts to establish an industry-funded deposit insurance and a new bank resolution framework are underway.

### Structural reforms and social policy
- Policy priorities: make the economy more dynamic, inclusive, and greener.
- Key reform areas:
  - Promote investment and streamline permitting processes.
  - Develop renewable energy and lithium industries within a clear and balanced institutional framework.
  - Advance tax reforms to sustainably finance social needs, security priorities, and green infrastructure.
  - Raise pension contribution rates to ensure adequacy of self-financed pensions and sustainability of the pension system.
  - Improve pension adequacy for low-income pensioners (noting improvement following the higher minimum pension).
  - Continue efforts to narrow labor market gender gaps and refine gender equality policies.

### Key statistics and projections (selected, as reported)
- Output and labor:
  - Real GDP: 2022 = 2.4; 2023 = 0.0; 2024 = 1.9; 2025 = 2.5; 2026 = 2.4
  - Output gap (in percent): 2022 = 2.7; 2023 = 0.2; 2024 = -0.3; 2025 = -0.1; 2026 = 0.0
  - Unemployment rate (annual average): 2022 = 7.9; 2023 = 8.8; 2024 = 8.9; 2025 = 8.4; 2026 = 7.7
- Prices:
  - GDP deflator: 2022 = 6.6; 2023 = 6.5; 2024 = 3.9; 2025 = 3.6; 2026 = 3.4
  - Change of CPI (end of period): 2022 = 12.8; 2023 = 3.9; 2024 = 3.0; 2025 = 3.0; 2026 = 3.0
  - Change of CPI (period average): 2022 = 11.6; 2023 = 7.6; 2024 = 3.3; 2025 = 3.0; 2026 = 3.0
- Public sector finances (In percent of GDP):
  - Central government revenue: 2022 = 26.1; 2023 = 23.1; 2024 = 23.8; 2025 = 24.0; 2026 = 24.0
  - Central government expenditure: 2022 = 25.0; 2023 = 25.6; 2024 = 25.9; 2025 = 25.4; 2026 = 24.5
  - Central government fiscal balance: 2022 = 1.1; 2023 = -2.5; 2024 = -2.1; 2025 = -1.4; 2026 = -0.5
  - Central government gross debt: 2022 = 38.0; 2023 = 39.2; 2024 = 40.5; 2025 = 40.7; 2026 = 41.1
  - Public sector gross debt 1/: 2022 = 67.3; 2023 = 68.5; 2024 = 69.8; 2025 = 70.0; 2026 = 70.4
- Money and credit:
  - M2 (Annual percentage change): 2022 = 4.0; 2023 = 5.3; 2024 = 4.8; 2025 = 6.2; 2026 = 5.8
  - Credit to the private sector (Annual percentage change): 2022 = 10.0; 2023 = 2.8; 2024 = 5.0; 2025 = 7.1; 2026 = 6.7
- Balance of payments (In percent of GDP):
  - Current account balance (% of GDP) 2/: 2022 = -9.0; 2023 = -3.2; 2024 = -3.4; 2025 = -3.3; 2026 = -3.2
  - Foreign direct investment net flows (% of GDP) 2/: 2022 = -2.7; 2023 = -1.8; 2024 = -2.2; 2025 = -2.2; 2026 = -2.1
  - Gross external debt (% of GDP) 3/: 2022 = 77.6; 2023 = 73.1; 2024 = 74.4; 2025 = 74.1; 2026 = 74.2

*Source: CHILE STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION (January 17, 2024).*

### 7.      The current account deficit narrowed sharply in 2023 and the BCCh accumulated

### 7.      The current account deficit narrowed sharply in 2023 and the BCCh accumulated international reserves between June and October

### External position and reserves
- Four-quarter moving average current account deficit: narrowed to 3.4 percent of GDP in 2023Q3 (after temporarily widening to 9 percent of GDP in 2022).
- Annual current account deficit (expected): reverted to 3.2 percent of GDP in 2023.
- Chilean peso (CLP): weakened by about 10 percent against the U.S. dollar between July and December 2023; behavior characterized by heightened sensitivity to news and greater volatility.
- BCCh FX operations and reserve accumulation:
  - April 2023: began to gradually unwind FX forward operations from the 2022 intervention program.
  - June 2023: started a twelve-month reserve accumulation program aiming to increase FX reserves by US$10 billion.
  - October 2023: both programs suspended due to heightened tensions in global financial markets.
  - Reserves accumulated during June–October 2023: totaled US$3.7 billion.
- External position assessment for 2023: moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- Average real effective exchange rate (REER) in 2023: close to its equilibrium level.

*Authorities’ view*
- Authorities noted transportation costs in 2023 remained above pre-pandemic levels, contributing to the current account deficit.
- Authorities assessed current copper prices as broadly in line with long-term prices, potentially implying an underestimate of the Fund’s cyclically-adjusted current account balance.
- Authorities highlighted that foreign direct investment has historically financed a large fraction of the current account deficit, reducing risks of abrupt capital outflows.

### Financial sector resilience and vulnerabilities
- Impact of global rates: episode of rising long-term U.S. interest rates (June to October) spilled into higher long-term rates in Chile, particularly mortgage rates.
- CLP depreciation contributor: narrowing short-term interest rate differential with the U.S. amid BCCh monetary policy rate cuts.
- Financial stability: risks appear contained despite tight global financial conditions.
- Banking sector metrics and vulnerabilities:
  - Liquidity Coverage Ratio for the Chilean banking system (as of September 2023): approximately 250 percent (regulatory requirement: 100 percent).
  - Non-performing loan (NPL) ratios: increased to 2.1 percent as of November 2023, around pre-pandemic levels and backed by adequate provision coverages.
  - Nominal credit growth (December 2023): 2.6 percent (yoy).
  - Profitability: around pre-pandemic levels.
  - Noted vulnerabilities: construction and real estate sectors, smaller firms with government-guaranteed loans (FOGAPE-Covid and FOGAPE-Reactiva), and low-income indebted households.
- Cybersecurity: exposure increasing with digitalization; banks appear resilient but ensuring adequate human resources for effective supervision is warranted.

### Outlook and risks
- Growth projections:
  - Quarterly growth projected to return to potential pace of 2-2.5 percent annualized in 2024.
  - Annual growth: implies a pick-up to close to 2 percent in 2024, considering carryover from 2023.
- Real credit growth: projected to rebound modestly in 2024.
- Inflation: projected to converge to the 3 percent target in 2024H2.
- Current account deficit forecast:
  - 2024: set to reach around 3½ percent of GDP.
  - Medium term: converge to 3 percent of GDP.
- External risks:
  - Main external risk: uncertainty around a potentially higher-for-longer interest rate environment in the U.S., which could raise Chile’s borrowing costs, reduce capital inflows, and increase financial market volatility.
  - Other external risks: slowdown in China and other key trading partners; intensification of regional conflicts leading to lower commodity export prices and/or higher oil prices.
- Domestic risks:
  - Political polarization and fragmentation could lead to continued reform gridlock.
  - Social discontent over inequality and security remains prevalent.
  - Uncertainty related to the solvency of private health insurance companies.
- Upside opportunity: global transition to greener technologies could increase demand for copper, lithium, and renewable energy, benefiting Chile.

*Authorities’ view*
- BCCh growth outlook for 2024: 1¼-2¼ percent (similar to staff).
- Ministry of Finance growth forecast for 2024: 2.5 percent.
- BCCh and authorities agree inflation should return to 3 percent in 2024, with caution on risks from oil prices and the exchange rate.

### Monetary policy stance and reserve buffers
- Monetary easing in 2023: monetary policy rate (MPR) reduced by 300 basis points in 2023.
- Near-term stance: easing should continue as inflation pressures subdue, but real rates likely need to remain above neutral levels to bring inflation back to target; pace of easing remains data-dependent.
- BCCh neutral rate estimate (recent): raised to 0.6-1.5 percent (from 0.5-1.1 percent in 2022).
- Reserve adequacy:
  - Gross international reserves at end-December 2023: stood at 86.2 percent of the Fund’s reserve adequacy (ARA) metric (below recommended thresholds).
  - Government’s usable liquid FX assets as of November 2023: US$6.2 billion (equivalent to an improvement in reserve coverage of up to 11.5 percentage points).
  - Recommendation: resuming the BCCh’s suspended reserve accumulation program when market conditions are conducive to strengthen external buffers.
  - Consideration: adapt BCCh’s international reserve strategy to new risks from rising external exposures for long-term adequacy.
- BCCh positions:
  - Future easing path dependent on macro developments including external factors; further policy rate cuts likely but real rates probably remain above neutral in the immediate future.
  - Strong commitment to a flexible exchange rate as a shock absorber.
  - Intention to resume reserve accumulation to replenish buffers when market conditions are conducive and to treat the FCL as precautionary.

### Fiscal policy, fiscal pact, and public debt
- 2024 budget headline deficit (authorities): 1.9 percent of GDP.
- Staff projection for 2024 headline deficit: 2.1 percent of GDP.
- Real spending growth in 2024: expected to grow by about 3.5 percent.
- Financing of 2024 spending: partly financed by higher revenues from the new mining royalty.
- Adjustment needed to meet medium-term fiscal plan (broadly balanced fiscal position by 2026):
  - Fiscal deficit reduction of about 1½ percentage points of GDP in 2025–26 is needed.
- Fiscal Pact (“Fiscal Pact” / Box 1):
  - Priority spending tied to the pact: higher minimum guaranteed pensions, the health system, the national system of care and childcare, and security, totaling about 2.7 percent of GDP.
  - Key financing sources: anti-tax evasion measures, other tax reforms, dividends from pro-growth measures, and higher spending efficiency.
  - Planned additional revenue from tax compliance efforts: cumulatively 1.5 percent of GDP by 2028.
  - Expert committee estimates pro-growth measures could raise fiscal revenues by 0.5 percent of GDP by 2028.
  - OECD report: potential 0.1 percent of GDP gain from increased spending efficiency.
  - If fully implemented, additional average financing needs of 0.6 percent of GDP would still remain in 2025-28; government aims to fill this with a revised tax reform proposal expected to be announced in March 2024.
  - Note: the fiscal pact is not included in the baseline.
- Recommendations on fiscal design:
  - Permanent spending measures should be conditioned on structural revenue performance.
  - Caution against relying heavily on expected yields from tax evasion measures until strong evidence they can materialize.
  - To fill remaining financing needs, consider lowering the PIT exemption threshold and increasing tax rates for low- and middle-income tax brackets in a way compatible with higher progressivity.
  - Upcoming proposal to adjust corrective taxes (including carbon taxes) could yield another 0.4 percent of GDP revenue.
- Public debt and fiscal buffers:
  - Central government debt rose from 4 to 38 percent of GDP during 2008-22.
  - Treasury assets declined from 14 to 6 percent of GDP during 2008-22.
  - Under the baseline, central government debt projected to remain below the authorities’ prudent debt ceiling of 45 percent of GDP.
  - Under broadly unchanged fiscal policies (headline fiscal deficit of 2 percent of GDP and below-the-line operations of about 2 percent of GDP), debt would continue to rise and could breach the prudent debt ceiling by 2027.
- Fiscal framework improvements recommended:
  - Adoption of a prudent debt ceiling in 2022, introduction of annual fiscal targets along the medium-term path starting in 2024, and the proposed escape clause strengthen the framework.
  - Refine the simplified formula for determining structural lithium revenue over time (e.g., include contribution of lithium to general income taxes; reassess structural nature of lithium revenue).
  - Secure more resources for the Autonomous Fiscal Council (CFA) to broaden its role, including evaluating sub-national fiscal rules.
  - Link fiscal decentralization with measures to strengthen regional public investment management, governance controls, and regional fiscal transparency and accountability.

*Authorities’ view*
- Authorities broadly concurred with staff on the need to preserve fiscal sustainability and condition permanent spending on structural revenue increases; emphasized the fiscal pact’s link between spending and revenue measures.

*Italic: Source: IMF country report chapter content provided.*

### 22.      The authorities emphasized their strong track record and resolute commitment to the

### 22.      The authorities emphasized their strong track record and resolute commitment to the

### Fiscal consolidation and pledges
- Authorities emphasize a medium-term fiscal consolidation plan and a "resolute commitment" to it.
- Fiscal adjustment is described as "evenly distributed" based on authorities' estimate of the structural fiscal balance.
- Recent setting of annual fiscal targets intended to ensure the adjustment "will not be backloaded."
- Permanent spending measures should be conditioned on structural revenue performance to preserve fiscal sustainability.
- Authorities committed to reach a political agreement to approve the fiscal pact and welcomed the approval of the mining royalty in 2023.

### Strengthening financial sector resilience — findings and measures
- Banks have accumulated capital and provisions to prepare for future increases in credit costs.
- Concern: banks’ ability to support economic activity could weaken if loan quality further deteriorates in vulnerable sectors, in particular construction and real estate.
- The construction and real estate sector represents "30 percent" of banks' commercial loans and is a relatively large exposure for insurance companies.
- Residential real estate: home sales declined, house prices stagnant, concerns about excess supply of new houses.
- Commercial real estate: office vacancy rates increased since the pandemic with recent signs of leveling out.
- A "0.5 percentage point" increase in the countercyclical capital buffer (CCyB) to take effect in "May 2024" is adopted as a precautionary measure.
- Recommendation: calibrate the neutral CCyB level swiftly to provide banks with planning certainty.
- Continued monitoring of banks’ preparedness for unwinding the extraordinary pandemic liquidity measures (FCIC) is warranted, given lower liquidity in local capital markets after pension withdrawals.
- FCIC details: FCIC will expire in "March and July 2024 (corresponding to 5 and 3   percent of total bank liabilities, respectively)". The BCCh rolled out a collateral substitution program from "November 2022" and announced issuance of liquidity deposits in "September 2023" to facilitate repayment.

### Selected recent enhancements to Chile’s fiscal framework (2019–23) — Box 2 (findings)
Fiscal Rule
- Introduction of a dual fiscal target ("2022"): prudent debt ceiling alongside a structural fiscal balance path.
- Setting of annual structural fiscal targets ("2023") to increase transparency and accountability and ensure consolidation is not postponed.
- Introduction of an escape clause (proposal under consideration by Congress since "2022") to provide transparent flexibility from "2026".
- Introduction of a lithium cyclical adjustment ("2023") to save transitory revenue windfalls from lithium rental contracts; it does not consider lithium's contribution to general income taxes.
- Use of a multivariate filter to estimate output gaps ("2023") to enhance accuracy and address prior biases; earlier methods consistently estimated negative output gaps permitting higher spending ceteris paribus.

Fiscal transparency and risk management
- Creation of an Autonomous Fiscal Council ("2019") with a decisive role in accountability and methodological recommendations.
- Publication of Quarterly Public Finance Reports ("2019") updating 5-year fiscal projections and increasing transparency.
- Risk analysis of fiscal forecasts ("2021") with downside and upside scenarios; further enhancements suggested (quantitative assessment of other macro risks and asset-liability management).

### Completing FSAP recommendations and regulatory progress
- Completing progress on the 2021 FSAP recommendations remains important to enhance resilience.
- CMF and BCCh are implementing the Basel III framework smoothly.
- Financial Market Resilience Law approved in "October 2023" aims to:
  - facilitate development of the interbank repo market,
  - enhance BCCh’s ability to respond to financial distress,
  - strengthen mutual fund liquidity management.
- Authorities drafting a new bill on bank resolution and deposit insurance (building on January "2023" white paper) and issued a policy paper on consolidated supervision of financial conglomerates.
- AML/CFT: implementation of updated AML/CFT regulations for banks, cooperatives, and payment card issuers and a proposed new AML/CFT framework for insurance companies will enhance risk-based supervision and preventive measures (customer due diligence, beneficial ownership).

### Financial digitalization, fintech, cybersecurity, and CBDC
- Fintech Law aims to promote innovation in financial services, enhance financial inclusion and financial integrity.
- Authorities should assess and mitigate cyberattack risks by:
  - prioritizing recruitment of cybersecurity experts,
  - adopting new supervisory exercises (e.g., bottom-up cybersecurity stress tests),
  - creating cyber maps of financial networks and third-party dependencies.
- BCCh published its first evaluation report in "May 2022" exploring benefits and costs of a retail CBDC; BCCh plans to publish a follow-up CBDC report in "2024".
- Authorities are committed to implementing the Fintech and Market Resilience Laws and strengthening preparedness for cybersecurity risks.

### Authorities’ views on the financial sector
- Authorities find the financial system "to remain resilient" and stress proactive adoption of FSAP recommendations and digitalization efforts.
- BCCh’s latest stress tests indicate the banking sector can withstand a range of shocks.
- Authorities agree vulnerabilities in some sectors should be monitored closely.
- Authorities plan to offer more detailed communication on the neutral CCyB level following internal analysis.
- Authorities appreciate Fund technical assistance and reiterate commitment to implement FSAP recommendations: Basel III implementation, a new bank resolution and deposit insurance scheme, consolidated supervision of financial conglomerates, Fintech and Market Resilience Laws, and cybersecurity measures.
- BCCh is working on a comprehensive agenda for digital payments.

### Policies for a more dynamic, inclusive, and greener economy — strategy and priorities
- Authorities advancing structural reforms to achieve a more dynamic, inclusive, and greener economy amid "timid potential growth" and social equality gaps.
- Strategy highlights: remove obstacles to investment and develop green industries (lithium, green hydrogen), negotiate multilateral and bilateral trade agreements (e.g., Comprehensive and Progressive Agreement for Trans-Pacific Partnership starting "February 2023"), and expand access to high-quality education and workforce training while addressing labor market informality.
- Authorities have increased basic pensions and minimum wages and intend to further increase social spending and reform the pension system.

### Permitting bottlenecks and investment
- Business permitting processes have become more complicated, uncertain, and lengthier due to more complex safeguards (environment, health, national security, social concerns).
- Government identified "bottleneck" permit requirements and is working to streamline the permit system, create a risk-based profile of applications, reduce processing time, and provide greater certainty through legislative and regulatory changes.

### Lithium, downstream industries, and institutional framework
- Chile is the second-largest lithium producer but production concentrates on raw mineral extraction with limited downstream spillovers.
- National Lithium Strategy announced in "April 2023" includes greater state participation to increase production sustainably and develop related industries (Annex V).
- Recent Memorandum of Understanding with the largest lithium producer foresees a public-private partnership with "50 percent plus one share" state-ownership and an increase in production.
- Staff analysis: current fiscal regime on lithium (corporate income tax, dividend tax, contractual payments) has served Chile well in terms of revenue.
- Emphasis: an institutional framework balancing state objectives and private investor interests that can be swiftly implemented as global demand ramps up is important.

### Renewable energy, transmission bottlenecks, and economic benefits
- Chile’s solar and wind endowment gives comparative advantage; electricity generation costs lower for solar and wind than fossil fuels.
- Electricity from solar and wind increased from "1 to 20 percent" of total electricity supply during "2010–21".
- Authorities committed to decommission coal-fired plants by "2040" and achieving carbon neutrality by "2050".
- Staff estimates replacing coal with renewable energy could lift the GDP level by "at least 1 percentage point" over the long term, implying a "nearly 30 percent" positive productivity shock in electricity generation.
- Main bottleneck: geographic mismatch between power generation and consumption, resolvable by upgrading the transmission network; staff analysis suggests state support for transmission could create aggregate net economic benefits.

### Role of mining in the economy — selected figures
- Chile: The Role of Lithium and Copper in the Economy (In percent) — selected entries for "2020 2021 2022":
  - Copper
    - Exports as share in total goods exports: "52.0 55.7 45.3"
    - Exports as share in GDP: "15.1 16.7 14.8"
    - Fiscal revenue to GDP: "1.2 3.0 2.3"
  - Lithium
    - Exports as share in total goods exports: "0.8 1.3 8.2"
    - Exports as share in GDP: "0.2 0.4 2.7"
    - Fiscal revenue to GDP (rental income): "0.0 0.0 1.0"
  - Mining and quarrying
    - Employment share: "2.6 2.7 3.1"

### Carbon tax, ESG issuance, and climate-related policy
- Chile implemented a carbon tax "US$5 per ton of CO2" in "2017", mainly applied to the power sector.
- The tax will be expanded in "2024" to additional sectors (e.g., cement and glass manufacturing).
- Staff simulations suggest increasing the carbon tax to "US$60" and extending it to more sectors (e.g., transportation), coupled with complementary measures, is needed to reach Nationally Determined Contributions goals.
- Chile is a global leader in ESG bonds: "one-third" of its debt labeled ESG; pioneered sovereign sustainability-linked bond tied to greenhouse gas emission and corporate board gender quota targets.

### Social policy, labor market, and minimum wage
- Household subsidies almost doubled in real terms during "2017-22"; planned consolidation of fragmented social programs and a one-stop window are needed to increase efficacy.
- Social programs could focus more on families with children, who currently observe higher poverty rates.
- Real minimum wage surge since "2019": increased by "about 15 percent" from early "2019" to end-"2023" and another "8.7   percent" nominal rise was announced until "July 2024".
- Caution advised against excessive reliance on minimum wage increases beyond current plans due to potential adverse consequences on formal employment.
- Consideration: adopt a minimum wage setting mechanism delinked from the government cycle or condition announcements on the unemployment rate.
- Increase female labor force participation via childcare, flexible work arrangements, and expanded access to education and workforce training aligned with digital requirements.

### Pensions and fiscal sustainability
- Chile’s full-capitalization pension system has low replacement rates from low contribution rates and density, declining returns, and rising life expectancy; pension withdrawals over "2020–21" worsened the situation.
- Government’s proposed hike in the contribution rate by "6 percentage points" would be essential to lift replacement rates; political disagreement over solidarity pension shares has stalled reform for over a decade.
- Introduction of the minimum pension (PGU) in "2022" lifted the average "19 percent" gross replacement rate of the capitalization system to "above 60 percent" (compared to an OECD average of "about 50 percent") and largely closed the pension gender gap.
- PGU represents a sizable net fiscal cost; costs with solidarity pensions could double to "4 percent of GDP between 2023 and 2050" due to population aging (Annex VII).
- Footnote alternative projection: assuming the real value of solidarity pensions stays constant, authorities estimate fiscal costs to increase to "3.0 percent of GDP by 2052".

### Health sector risks and Isapres ruling
- Chile’s Supreme Court ruled in "November 2022" that Isapres should return discriminatory excess charges to patients; uncertainty remains on the debt amount and implementation.
- The ruling threatens solvency of many Isapres and could strain health-care providers and the public health system (Fonasa), which has experienced a massive migration of affiliates.
- Absorption of new members by the public system and government plans to reduce waiting times are likely to increase fiscal costs and could require an increase in health contribution rates, especially as health costs are expected to rise over the long term due to aging (Annex VIII).

*Source: IMF staff report excerpt.*

### 35.      The authorities see structural reforms as priorities in their agenda to foster growth and

### 1chlea2024001 - 35.      The authorities see structural reforms as priorities in their agenda to foster growth and

### Authorities' priorities and measures
- Streamlining the permitting process is viewed as a priority and, together with other measures in the fiscal pact, is expected to yield a material growth dividend and additional fiscal revenues to be used for higher social spending.
- National Lithium Strategy aims to lift and diversify growth while preserving environmental and social goals.
- The renewable energy sector is seen as having strong potential; electricity transmission improvements are important to realize this potential.
- Timeline for raising the carbon price should be aligned with the development and broad availability of renewable energy options.
- Approving a pension reform is important to improve the replacement rates of the contributory pension system and foster solidarity; PGU costs are likely to increase due to population aging.
- Addressing the private health insurance crisis is important to ensure uninterrupted delivery of health services to the public.
- Beyond the scheduled July 2024 increase, no further real minimum wage hikes are planned in the remainder of the administration.
- Target to achieve, by 2031, 40 percent female representation on the boards of directors at companies supervised by the CMF.

### Staff appraisal — macroeconomic outlook and external position
- Chile’s economy is approaching the end of its adjustment cycle towards trend growth and targeted inflation.
- Real GDP growth is expected to pick up in 2024, led by private consumption and mining exports.
- Inflation has come down significantly and is expected to return to the 3 percent target in 2024.
- The current account deficit narrowed in 2023; the external position is assessed as moderately weaker than the level implied by medium-term fundamentals and desirable policies.
- Achieving a broadly balanced structural fiscal position alongside exchange rate flexibility should support external rebalancing over the medium term.

### Risks and resilience
- Elevated external risks: tighter global financial conditions and a possible abrupt global slowdown could lead to volatile capital inflows and commodity export prices.
- Offsetting strengths: relatively low public debt ratio, a sustainable external position, a well-capitalized financial sector, inflation-targeting monetary policy framework, flexible exchange rate, effective financial regulation and supervision, and the fiscal rule.
- The conclusion of the constitutional referendum will further reduce domestic uncertainty.

### Structural reforms and green transition
- Strengthening investment is critical; streamlining permitting processes could bring meaningful growth dividends.
- Higher global demand for lithium offers prospects to expand production while balancing social and environmental objectives; a clear institutional framework balancing state strategic objectives and private investors’ interests will be important.
- Chile’s endowment in solar and wind provides a comparative advantage in renewable energy production.
- Addressing geographic mismatch between power generation and consumption—such as by improving the transmission network—is critical to reap payoffs.

### Monetary policy
- Monetary policy is on track to bring inflation back to the 3 percent target.
- Inflation rates have fallen substantially since late 2022 in the context of tight policy, and inflation expectations are well anchored.
- The pace of further monetary easing should continue to be data-dependent.
- Real rates will likely need to remain above the estimated neutral levels in the near term, considering still high core inflation and higher global interest rates.

### International reserves
- Rebuilding international reserve buffers is important to enhance resilience to external shocks.
- Flexible exchange rate acts as a shock absorber; international reserves can provide a shield in a shock-prone global economy.
- Recommendation: resume international reserve accumulation when market conditions are conducive and develop a longer-term reserve strategy.

### Fiscal policy and fiscal framework
- Proposed 2024 budget is a welcome step toward lowering the deficit but implies significant spending restraint in outer years absent political support for new tax measures or without partial redirection of expected new revenue mobilization.
- A somewhat more front-loaded deficit reduction and smoother spending profile could facilitate meeting the government’s medium-term fiscal target while providing greater flexibility to react to new shocks.
- Permanent spending measures should be conditioned on structural revenue performance to preserve fiscal sustainability.
- The proposed fiscal pact can contribute toward a more equitable and dynamic economy, but caution is warranted against relying too heavily on expected yields from measures against tax evasion until strong evidence of realization exists.
- Additional revenue options could be considered, such as adjustments to corrective taxes (including carbon taxes) and personal income taxes.
- Refinements to the fiscal framework that would enhance resilience:
  - Adoption of a prudent debt ceiling in 2022.
  - Introduction of annual fiscal targets along the medium-term path starting in 2024.
  - Proposed escape clause under consideration in Congress.
  - New simplified formula for determining structural lithium revenue is a welcome upgrade that could be refined over time.
  - Securing more resources to the Autonomous Fiscal Council (CFA) would allow broadening its role.

### Social policy
- Social policy reforms are important to increase inclusiveness.
- The higher minimum pension (PGU) has greatly improved replacement rates for lower-income pensioners but comes at significant fiscal cost likely to rise with population aging.
- The proposed pension contribution hike would significantly improve the sustainability of the system.
- Despite a large rise in female labor participation over the past three decades, gender gaps in wages and employment rates remain significant.
- Ensuring sufficient childcare and more flexible work arrangements would help narrow the gender gap in labor market outcomes.

### Financial sector resilience and supervision
- Banks’ capital adequacy and liquidity ratios stand comfortably above regulatory requirements and profitability is around pre-pandemic levels.
- Vulnerabilities persist in the construction and real estate sectors, smaller firms with government-guaranteed loans, and low-income indebted households; these risks require continued close monitoring, including banks’ preparation for the unwinding of pandemic liquidity measures.
- Financial regulation and supervision actions recommended:
  - Continue implementation of Basel III capital and liquidity requirements and maintain the activated countercyclical capital buffer (CCyB).
  - Swiftly calibrate the neutral level of the CCyB to provide banks with planning certainty.
  - Actively assess and mitigate risks from cyberattacks; strengthen capabilities and preparedness.
  - Continue progress implementing key 2021 FSAP recommendations to further enhance financial sector resilience.

*Source: IMF staff appraisal and authorities’ statement as presented in the provided content.*

### 47.      Staff recommends that the next Article IV consultation take place on the standard 12-

### 47. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle.

### Economic activity
- After three consecutive quarters of negative (y/y) growth, the economy has shown signs of stabilization.
- The level of private consumption and investment has come down significantly, closer to its historical trend.
- Employment growth has moderated and the unemployment rate has edged up.
- The mining sector continues to operate below its 2019 level, due to production capacity constraints.
- The adjustment of consumption has been more pronounced for goods sectors.
- Monthly Economic Activity Index (IMACEC) reference: (February 2020=100, S.A.).
- Contributions to Private Consumption Growth and to Real GDP Growth shown across 2016Q1–2023Q3 in figures.

### Labor market
- Participation rate and unemployment rate shown (3 month ma, N.S.A.) across Sep-15–Sep-23.
- Contributions to Employment Growth by sector (Private sector, Public sector, Self-employed, Other) across Sep-15–Sep-23.

### External sector
- Real Effective Exchange Rate: index avg. 1996-2019=100; Chile vs LA6 and commodity exporters shown across 2013M11–2023M11.
- The REER's prolonged period of appreciation has reversed in 2023 amid a narrowing interest rate differential with the U.S. and global uncertainty.
- The net IIP registered -15.9 percent of GDP in 2023Q3 and has increased since end-2022.
- Gross international reserves increased in 2023; gross international reserves (in billions of U.S. dollars): 40.7, 39.2, 51.3, 39.2, 46.3 (shown in tables and series).
- The current account deficit narrowed in 2023, largely owing to an increase in the balance of goods amid a broad-based import compression.
- Savings, investment, and current account series shown (percent of quarterly GDP) across 2013Q1–2023Q3.
- Government Liquid FX Assets (Economic and social stabilization fund, U.S. dollar cash) series up to Nov-23.

### Inflation and monetary policy
- Inflation rates have been rapidly falling; disinflation more pronounced for volatile and goods items due to lower import prices; disinflation for services is slower due to service price indexation and wage increases.
- Headline and Core (excluding volatiles) inflation series (yoy) across Dec-15–Dec-23.
- Monetary policy rate and commercial lending rate (>1 year, local currency) series across Dec-15–Dec-23.
- The BCCh has cut its policy rate, and banks' lending rates have started to fall.
- Inflation expectations at 1 and 2 years have been converging to BCCh's inflation target.
- Real Interbank Swap Lending Rate series (1-year, 5-year) and Real Wage Index (Hourly Remuneration Index - S.A., Oct 2019=100) shown.

### Financial markets
- Peso interest rate swaps (3-month in pesos, 2-year in pesos, 2-year in UFs, 10-year in pesos, 10-year in UFs) shown across 2008–2024.
- Equity indices: IGPA general / IPSA series (Index, 2008=100).
- The dollar funding premium has declined in 2023.
- Short-term Peso funding costs have declined with recent interest rate cuts, while long-term costs are little changed.
- The CLP depreciated by about 10 percent against the USD between July and end-December 2023.
- Global fund flows to Chile (ETF and Mutual Fund) 12-week moving average (million U.S. dollars) show equity and bond fund outflows during summer and fall 2023.
- Bond indices and EMBIG spread series across 2008–2024.

### Financial sector
- Major banks' capital ratios and liquidity ratios are comfortably above the current regulatory requirement (regulatory requirement details as of September 2023).
- Nominal credit growth moderated, with a growth rate of 2.6 percent in December 2023.
- Lending rates rose with monetary tightening and only commercial and consumer loan rates have started to fall.
- Assets of money market funds have rebounded since 2022 whereas those of longer-term fixed income funds remain unchanged.
- Basel III Capital and Liquidity Ratios of D-SIBs (Common Equity Tier 1 Ratio, Tier 1 Ratio, Capital Adequacy Ratio) series in percent; Net Stable Funding Ratio and Liquidity Coverage Ratio series.
- Structure of mutual funds (percent of GDP) across 2008–2023.
- Assets of pension funds (Trillion CLP-LHS, Percent of GDP-RHS) and assets of insurers (Trillion CLP-LHS, Percent of GDP-RHS) across 2008–2023.
- Insurers have continued to increase their assets. Pension funds have recovered their asset size while the asset to GDP ratio remains below the pre-pandemic level.

### Real estate sector
- Stock of new homes for sale (thousands of units) and national stock series across 2009–2023.
- Vacancy rates of commercial real estate (Offices, Strip center, Warehouses) across 2011–2023; after a surge during the pandemic, rates remain high but appear to have stabilized.
- Housing loans make up about 30 percent of bank loans; the real estate and construction sector accounts for around one third of banks' commercial loans.
- Structure of real estate funds (contributors, types) and new development focus in 2022 was on the industrial segment (e.g., warehouses).
- Total home sales index (2008=100) and Housing Price Indices (Total, New houses, Used houses, New apartments, Used apartments) show house prices fell since 2021 and appear to have recently stabilized; stock of new homes has been increasing.

### Selected social and economic indicators (Table 1 highlights)
- GDP (2022), in billions of pesos: 263
- GDP (2022), in billions of U.S. dollars: 301
- Per capita (2022), U.S. dollars: 15,166
- Population (2022), in millions: 19.8
- Poverty rate (2022): 6.5
- Gini coefficient (2022): 47.0
- Main export: Copper; Key export markets: China, Euro area, U.S.; Literacy rate (2021): 97.0
- Real GDP annual change series (2019–2028): 0.7, -6.1, 11.7, 2.4, 0.0, 1.9, 2.5, 2.4, 2.3, 2.3
- Unemployment rate (annual average) series (2019–2028): 10.8, 8.9, 7.9, 8.8, 8.9, 8.4, 7.7, 7.5, 7.5
- Change of CPI (end of period) series (2019–2028): 3.0, 7.2, 12.8, 3.9, 3.0, 3.0, 3.0, 3.0, 3.0
- Central government gross debt series (2019–2028): 28.3, 32.4, 36.3, 38.0, 39.2, 40.5, 40.7, 41.1, 41.4, 41.5
- Gross international reserves (in bn of USD) series (2019–2028): 40.7, 39.2, 51.3, 39.2, 46.3, 46.3, 46.3, 46.3, 46.3

### Central government operations (Table 2 highlights)
- Revenues (percent of GDP) series (2019–2028): 21.7, 19.9, 24.1, 26.1, 23.1, 23.8, 24.0, 24.0, 24.0, 24.0
- Expenditures (percent of GDP) series (2019–2028): 24.6, 27.2, 31.8, 25.0, 25.6, 25.9, 25.4, 24.5, 24.3, 24.2
- Net Lending/Borrowing (percent of GDP) series (2019–2028): -2.9, -7.3, -7.7, 1.1, -2.5, -2.1, -1.4, -0.5, -0.3, -0.2
- Primary balance series (percent of GDP): -2.5, -6.7, -7.1, 1.6, -2.0, -1.3, -0.5, 0.4, 0.6, 0.8
- Central government gross debt (percent of GDP) series (2019–2028): 28.3, 32.4, 36.3, 38.0, 39.2, 40.5, 40.7, 41.1, 41.4, 41.5
- Nominal GDP (trillions of pesos) series (2019–2028): 196, 201, 240, 263, 280, 296, 314, 333, 352, 370

### Balance of payments (Table 3 highlights)
- Current Account (US$ billions) series (2019–2028): -14.5, -5.0, -23.2, -27.1, -10.6, -11.5, -11.9, -12.0, -12.2, -12.6
- Trade balance (US$ billions) series (2019–2028): 3.0, 18.9, 10.5, 3.8, 15.5, 15.6, 17.9, 19.2, 19.8, 20.3
- Exports (US$ billions) series (2019–2028): 68.8, 74.0, 94.8, 98.5, 94.9, 100.4, 107.1, 112.7, 117.8, 121.8
- Imports (US$ billions) series (2019–2028): 65.8, 55.1, 84.3, 94.7, 79.4, 84.8, 89.2, 93.5, 98.0, 101.5
- Net income (US$ billions) series (2019–2028): -10.4, -15.9, -18.5, -16.5, -15.9, -17.6, -19.7, -20.5, -21.1, -21.2
- Gross international reserves (in billions of USD) series: 40.7, 39.2, 51.3, 39.2, 46.3, 46.3, 46.3, 46.3, 46.3, 46.3
- Copper price (WEO; U.S. cents per pound) series (mem. items): 273, 280, 423, 401, 380, 387, 397, 405, 413, 422

### Monetary survey (Table 4 highlights)
- Central Bank net international reserves (in millions of US$) series (2018–2022): 39,861; 40,657; 39,200; 51,330; 39,154
- Banking system credit to the private sector (percent change and levels) series shown; Money and private quasi-money series (2018–2022) with Money and Quasi-money breakdowns.

### Medium-term macroeconomic framework (Table 5 highlights)
- Real GDP series (2019–2028): 0.7, -6.1, 11.7, 2.4, 0.0, 1.9, 2.5, 2.4, 2.3, 2.3
- Change of CPI (end of period) series repeated: 3.0, 3.0, 7.2, 12.8, 3.9, 3.0, 3.0, 3.0, 3.0, 3.0
- Current account (percent of GDP) series: -5.2, -1.9, -7.3, -9.0, -3.2, -3.4, -3.3, -3.2, -3.1, -3.0
- Gross external debt (percent of GDP) series: 66.7, 76.9, 72.0, 77.6, 73.1, 74.4, 74.4, 74.2, 73.4, 72.9
- Gross int. reserves (in billions of U.S. dollars) repeated: 40.7, 39.2, 51.3, 39.2, 46.3, 46.3, 46.3, 46.3, 46.3, 46.3

### Financial soundness indicators (Table 6 highlights)
- Total assets (In billions of Chilean pesos) series (2016–2023): 207,144; 215,432; 232,963; 264,803; 323,610; 335,326; 382,768; 397,8155/
- Total loans (In billions of Chilean pesos) series: 152,932; 159,249; 180,957; 197,834; 204,342; 225,485; 248,093; 253,2575/
- Regulatory capital to risk-weighted assets series (2016–2023): 13.8, 13.8, 13.3, 12.8, 14.7, 14.8, 15.6, 15.4/7
- NPLs to gross loans series (2016–2023): 1.8, 1.9, 1.9, 2.1, 1.6, 1.2, 1.7, 1.95/
- Return on assets (before tax) series (2016–2023): 1.2, 1.3, 1.4, 1.3, 0.5, 1.5, 1.7, 1.55/
- Liquidity and leverage indicators and memorandum items (household debt to GDP, pension fund asset to GDP, etc.) shown with reference dates (e.g., As of August 2023, As of the second quarter in 2023, As of November 2023, As of the third quarter in 2023).

### Indicators of external vulnerabilities (Table 7 highlights)
- M3 (percent change) series (2015–2022): 12.4, 8.7, 4.8, 11.0, 10.9, 3.1, 14.7, 3.3
- Private sector credit to GDP series: 82.5, 81.6, 80.4, 83.8, 89.0, 89.0, 89.3, 82.3, 82.9 (select years)
- Share of foreign currency deposits in total deposits series (2015–2022): 15.4, 15.2, 13.0, 12.8, 14.9, 14.8, 18.8, 17.5
- Current account balance (percent of GDP) series (2015–2022): -2.7, -2.6, -2.8, -4.5, -5.2, -1.9, -7.3, -9.0
- Gross official reserves (in billions of U.S. dollars) series (2015–2022): 38.6, 40.5, 39.0, 39.9, 40.7, 39.2, 51.3, 39.2
- Gross official reserves (percent of ARA metric) series (2015–2022): 107.1, 102.1, 85.5, 86.8, 82.8, 81.7, 92.5, 71.8
- Total external debt (percent of GDP) series (2015–2022): 65.4, 65.6, 62.5, 59.4, 66.7, 76.9, 72.0, 77.6

*Sources: Central Bank of Chile, Ministry of Finance, INE, DIPRES, CMF, Haver Analytics, CEIC, EPFR Global, JP Morgan, S&P Global, ACAFI, CBRE, Colliers, Chilean Construction Chamber, GPS, Internal Revenue Service, and IMF staff calculations.*

### Annex I. Recommendations of 2022 Article IV Consultation and

### Annex I. Recommendations of 2022 Article IV Consultation and Authorities’ Actions

### Monetary Policy
- Fund recommendation: "A tight monetary stance should prevail until price pressures and inflation expectations are on a firm downward trend."
- Authorities’ action: "The BCCh started to lower the monetary policy rate in July 2023,    in the context of disinflation acceleration and the return of two-year-ahead inflation expectations to target."
- Fund recommendation: "A reserve accumulation program is desirable to replenish buffers when conditions are conducive."
- Authorities’ action: "The authorities started a twelve-month reserve accumulation program in June 2023 and suspended it in October 2023 due to escalating tensions in global financial markets."

### Fiscal Policy
- Fund recommendation: "To continue supporting the contractionary monetary stance, and the convergence of inflation and the current account, it would be advisable to save any stronger than projected revenues and wait to disburse unallocated funds, aiming to achieve a broadly neutral fiscal stance, while continuing to target support for vulnerable households."
- Authorities’ action: "The fiscal stance in 2023 is estimated to be expansionary as the budget focuses on social spending, including higher mandated spending on minimum pensions."
- Fund recommendation: "Tax and social spending reforms should be sequenced conditional on revenue performance to preserve fiscal sustainability."
- Authorities’ action: "The authorities have remained strongly committed to fiscal sustainability by conditioning spending reforms on revenue performance. The authorities are negotiating a fiscal pact that would link revenue reforms with plans for higher social and security spending."

### Structural Reforms
- Fund recommendation: "Pension reform remains a priority to deliver on better pensions and redistribution goals. New pension withdrawals should be avoided."
- Authorities’ action: "The authorities’ proposed pension reform, which envisages an increase in pension contributions   and a   revamp of the pension system’s industrial organization,  is currently being discussed by Congress. A proposal for a new pension withdrawal was rejected in Congress."

### Financial Sector
- Fund recommendation: "Continuing to monitor closely pockets of vulnerability is critical to safeguard financial stability and prevent disorderly consequences."
- Authorities’ action: "The authorities have closely monitored financial sector vulnerabilities while reinforcing an already sound regulatory framework, including by addressing FSAP recommendations ( see Annex IX), updating AML/CFT regulation, an  d introducing new initiatives (Financial Market Resilience Law and Fintech Law)."

*Italic line omitted per pipeline instructions.*

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### Annex II. Risk Assessment Matrix (selected risks, likelihood, impact, and policy advice)

- External risks
  - Abrupt global slowdown or recession
    - Likelihood: Medium
    - Impact: High
    - Impact on Chile: "The impact on Chile would be mainly through weaker copper and lithium demand."
    - Policy advice: "In a global recession scenario, use existing policy space to support the economy and protect the most vulnerable, consistent with the inflation targeting framework and fiscal sustainability. The strength and mix of the monetary and fiscal response would depend on Chile's cyclical position and the impact of shocks. Allow the exchange rate to play its role as a shock absorber."
  - Commodity price volatility
    - Likelihood: High
    - Impact: High
    - Impact on Chile: "Chile would benefit from higher copper and lithium prices but would be negatively impacted from higher oil prices."
    - Policy advice: "Allow the exchange rate to play its role as a shock absorber. In response to negative shocks to Chile (e.g., higher oil prices), provide targeted fiscal support to vulnerable groups and continue to advance reforms to address social demands. In the event of positive shocks to Chile (e.g., higher lithium prices), stronger than projected fiscal revenues should be saved."
  - Systemic financial instability
    - Likelihood: Medium
    - Impact: Medium
    - Impact on Chile: "Chile could experience capital outflows, exchange rate fluctuations, and higher financing costs."
    - Policy advice: "Closely monitor emerging vulnerabilities and early signs of stress. Continue to strengthen the legal and regulatory framework and operational capacity to increase the resilience of the financial system."
  - Cyberthreats
    - Likelihood: Medium
    - Impact: Medium
    - Impact on Chile: "The financial sector's exposure to cybersecurity risk is increasing in Chile as the sector becomes more digitalized."
    - Policy advice: "Actively assess and mitigate risks from cyberattacks, in particular by continuing to prioritize the recruitment of cybersecurity experts and adopting new supervisory exercises."
  - Deepening geoeconomic fragmentation
    - Likelihood: High
    - Impact: Medium
    - Impact on Chile: "Depending on the specific scenarios and the consequential distortions to commodity trade patterns, Chile's export prices of copper and lithium could be lower if the geoeconomic fragmentation deepens."
    - Policy advice: "Continue the progress on reducing trade and investment barriers. Diversify trade markets and supply chains. Advance structural reforms to boost productivity growth."

- Domestic risks
  - Social discontent
    - Likelihood: Medium
    - Impact: Medium
    - Impact on Chile: "Social unrest could negatively affect business confidence and investment, dampening potential growth."
    - Policy advice: "Advance reforms to tackle social demands, anchored on broad political support. Continue with policies to achieve the inflation target and maintain fiscal sustainability, while providing targeted support to the most vulnerable."

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### Annex III. External Sector Assessment — Key findings and indicators

- Overall assessment: "Chile’s estimated external position in 2023 was moderately weaker than the level implied by fundamentals and desirable policy settings, based on the IMF’s EBA current account (CA) model."
- Current account and NIIP dynamics
  - "The CA deficit narrowed swiftly in 2023 driven by a reduction of private sector imbalances amid a broad-based decline in imports. The net international investment position improved in 2023."
  - "After declining to -18.4 percent of GDP in 2022 (from -11.8 percent on average over 2019–21) amid a large current account deficit, Chile’s net international investment position (NIIP) increased in 2023, registering -15.9 percent of GDP in 2023Q3."
  - Drivers of NIIP improvement: "valuation effects of assets—reflecting the strong performance of international stock markets and the impact of international exchange rate dynamics—which compensated for the increase in liabilities due to the appreciation of the Chilean peso vis-à-vis the U.S. dollar at the beginning of the year."
  - Sectoral contributions to NIIP change: "increase in the NIIP of non-financial corporations (NFCs) and banks by 2.9 and 1 percent of GDP respectively relative to 2022Q4."
- External debt composition (as of 2023Q3)
  - External debt: 70.4 percent of GDP
  - NFCs: 29.6 percent of GDP
  - FDI (liabilities): 15.9 percent of GDP
  - General government: 13.1 percent of GDP
- Assessment: "Chile has large gross external liabilities, but these are largely offset by gross foreign assets. ... FDI is comfortably the largest type of liability by instrument, representing 55.5 percent of gross liabilities as of 2023Q3."
- 2023 (Q3) balance-sheet snapshot (% GDP)
  - NIIP: -15.9
  - Gross Assets: 139.3
  - Reserve Assets: 12.6
  - Gross Liab.: 155.2
  - Debt Liab.: 70.4
- Current Account (2023)
  - "The four-quarter moving average CA deficit reverted to 3.4 percent of GDP in 2023Q3 and is expected to have narrowed to 3.2 percent at the end of the year, driven by a broad-based decline in imports."
  - IMF staff medium-term projection: "the CA deficit will converge to about 3 percent of GDP, supported by the ongoing structural fiscal consolidation and the flexible exchange rate."
  - EBA model comparisons (2023, % of GDP)
    - Actual CA (E): -3.2
    - Cycl.-Adj. CA (E): -4.1
    - EBA CA Norm: -0.9
    - EBA CA gap: -3.2
    - Adjustors: 1.8
    - Adj. CA gap: -1.4
  - Assessment: "On this basis, Chile’s 2023 external position was moderately weaker than the level implied by medium-term fundamentals and desirable policy settings."
- Real Exchange Rate (REER)
  - Background: "Following a period of appreciation over 2022Q4–2023Q2, the REER began to depreciate in 2023Q3 but remains around its long-run (2013–22) average."
  - EBA signals: "The EBA REER index and level models suggest a REER undervaluation of 5 and 13.9 percent, respectively. In contrast, the EBA CA model implies an overvaluation of 5.6 percent (applying an estimated elasticity of 0.25)."
  - Staff estimate: "Considering the recent depreciation of the REER, leading to a REER which was in the first eleven months of 2023 on average close to its long-term average (1.1 percent weaker), staff estimates that the REER gap is between -5 and 5 percent."
- Capital and financial accounts — flows (first three quarters of 2023)
  - Net capital inflows: US$6.7 billion
  - Net FDI inflows: US$10 billion
  - Net portfolio outflows: US$1.5 billion
  - Increase in international reserves: US$2.3 billion
  - Non-residents were net sellers of Chilean assets (gross inflows totaled minus US$0.8 billion)
  - Residents were net sellers of foreign assets (gross outflows totaled minus US$7.5 billion)
- Assessment: "Chile has demonstrated ample capacity to absorb short-term capital flow volatility. Chile’s government has a sizeable stock of usable liquid FX assets that limit financial market risks."

### FX Intervention and Reserves Level
- FX intervention background and reserve accumulation
  - "The peso is floating, and FX interventions have been limited to preventing disorderly market conditions."
  - "In April 2023, the BCCh began to gradually unwind the FX forward operations from the 2022 intervention program and in June, to rebuild buffers through a reserve accumulation program which involved the purchase of US$3.7 billion in reserve assets over June–October 2023. Both programs were suspended on October 26 amid heightened CLP volatility and sensitivity to global financial markets."
  - "At end-December, gross international reserves stood at US$46.3 billion."
- Reserve adequacy and mitigating factors
  - "Gross international reserves amounted to 83.5 percent of the IMF’s reserve adequacy metric (ARA) on average over 2021–23 and 86.2 percent at end-December 2023."
  - Mitigating factors listed by staff:
    - "The government has usable liquid FX assets (US$6.2 billion as of November), including US$5.9 billion in the economic and social stabilization fund (FEES) and US$0.3 billion cash (equivalent to an improvement in reserve coverage of up to 11.5 percentage points)."
    - "More than one-fifth of short-term debt represents intercompany loans for foreign direct investors to local firms. These loans are a very stable source of funding with a low probability to result in FX funding needs."
    - "77 percent of banks’ short-term external debt (US$18.5 billion at end-2023Q3) is covered by banks’ liquid foreign assets (US$14.3 billion at end-2023Q3) which significantly reduces banks’ potential short-term FX funding needs."
    - "Reserves are complemented with two FX liquidity lines totaling US$8.5 billion: a credit line with FLAR (US$1.3 billion) and a bilateral swap facility with the PBOC (US$7.2 billion). The BCCh is also a subscriber of the Fed’s FIMA repo facility, which allows for the temporary exchange of U.S. Treasury securities held with the Fed for U.S. dollars (US$26 billion)."
    - "The authorities remain strongly committed to a flexible exchange rate."

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### Annex IV. 2022 FX Intervention: Role of the NDF Market — Key points

- Historical interventions and program design
  - "Since the adoption of the flexible exchange rate regime in 1999, the BCCh intervened to sell FX on only four occasions (2001, 2002, 2019, and 2022)."
  - "Most recently, in November 2019 and July 2022, the BCCh announced on each occasion an FX intervention program that included sales of up to US$10 billion in the non-deliverable forwards (NDF) market and sales of up to US$10 billion in the spot market."
  - Program start dates noted in source: "The 2019 program started on December 2nd. The 2022 program started on July 18th."
- NDF market functioning and participants
  - "Unlike traditional forwards, NDFs settle in Chilean pesos (CLP) at maturity."
  - Typical positions:
    - "Market participants with short dollar positions (mainly non-resident agents like foreign corporations and investors seeking to profit from carry trade operations) tend to purchase NDFs to hedge their currency exposure."
    - "Those with long dollar positions (mainly Chilean pensions funds) tend to sell NDFs."
  - "Historically, NDF flows from pension funds have served as a counterbalance to the non-resident sector, maintaining the economy’s FX position relatively balanced."
- Market disruption in July 2022
  - "Due to a combination of domestic and international events, the NDF market became severely imbalanced, triggering disorderly market conditions, in July 2022."
  - Domestic drivers: "Following three private pension fund withdrawals during 2020-21, discussions about potential additional withdrawals resurfaced in 2022, putting into question the future of the capitalized pension system. Moreover, political sentiment shifted in 2022 when the proposed new constitution was rejected by a large majority."
  - International drivers: "Higher-than-expected inflation, especially in the U.S. and Europe, and a worse-than-anticipated slowdown in China prompted tighter financial conditions and fears of a global recession. This was followed by a large drop in commodity prices, including copper, mainly due to the expected impact of China’s extended lockdown."
  - Market outcome: "These events triggered a risk-off episode with a sudden increase in demand for NDFs by non-residents to offset long CLP positions. During this period, pension funds were less active in the market mainly due to their lower investment coverage needs resulting from the pension withdrawals. The market struggled to absorb the sharp movements triggered by non-residents, and the price formation in the Chilean FX market weakened, resulting in unusually high volatility and high bid-ask spreads. The abrupt deterioration in the functioning of the FX market also increased financial stability risks through contagion to other market segments, including sovereign and corporate bond markets which experienced a sharp increase in spreads over U.S. Treasuries."

*Source: Annexes I–IV of the IMF staff report chapter provided in the source PDF.*

### 4.      The BCCh’s intervention aimed at addressing disorderly market conditions by

### 4.      The BCCh’s intervention aimed at addressing disorderly market conditions by 

### FX intervention design and implementation
- On Wednesday, July 14th, 2022, the BCCh announced the decision to intervene in the FX market.
- The BCCh published each Friday operational details for the intervention in the coming week.
- FX spot and NDF sales began on July 18th, 2022.
- At the beginning, BCCh FX sales represented a non-negligible share of daily flows:
  - 8 percent of NDF market sales (on average in July).
  - 15 percent of spot market sales (on average in July).
- Spot market sales schedule and amounts:
  - Sales in the spot market were gradually reduced from US$200 million daily in mid-July to US$50 million daily by end-September 2022.
  - Total spot transactions amounted to US$6.15 billion, representing about 60 percent of BCCh’s announced cap.
- NDF sales schedule and amounts:
  - NDF sales reached a stock of US$9.95 billion in early September 2022.
  - These sales were set for a 30-day term and were rolled over upon maturity.
  - In April 2023, the BCCh announced the gradual unwinding of its existing NDF position as of that date, with an average daily reduction of US$50 million over ten months.

### Market outcomes and empirical evidence
- FX market conditions improved following the intervention announcement:
  - CLP volatility declined.
  - Bid-ask spreads declined.
  - Local bond spreads narrowed.
- Empirical evidence on the effectiveness of FXI in Chile suggests that the 2022 intervention had a significant impact on lowering the level and volatility of the CLP exchange rate.
- The cited study finds:
  - The impact of intervention announcements was larger than the impact of intervention sales.
  - No evidence was found that the effect of the intervention in the NDF market was statistically different from the effect of the intervention in the spot market (noted as an area for future research).

*Italicized sources in original: Central Bank of Chile and IMF staff calculations; see referenced BCCh Working Paper N. 983 (Arenas and Griffith-Jones, June 2023) as cited in the text.*

### Annex V. National Lithium Strategy — objectives and elements
- Strategy aim:
  - Upgrade the lithium industry and lithium value chain in a socially and environmentally sustainable way while maximizing fiscal revenue.
  - Key element: increase production and development of new projects through public-private partnerships to enhance technological and organizational capacity.
- Background and market context:
  - Increased demand for lithium from the global green transition presents a growth opportunity.
  - Chile is the second-largest lithium exporter in the world.
  - Due to higher prices of lithium, Chile’s annual value of lithium exports increased from an average of 0.3 percent of GDP during 2019–21 to 2.7 percent in 2022.
  - Current industry characteristics:
    - Only a few market players.
    - Production concentrates on extraction of raw minerals with limited spillover to downstream industries.
    - Institutional framework dates to a 1979 law classifying lithium as a non-concessional strategic resource; companies require special government permits and specific production quotas.
    - Owners of mining properties with lithium rights before 1979 can explore and exploit directly (example: Corfo owns rights in Salar de Atacama; current production comes from two companies, SQM and Albemarle, that started operations before 1979 through special leasing contracts).
    - Contracts will expire in 2030 and 2043, respectively.
    - Chile’s participation in the battery value chain concentrates on upstream mineral extraction, with some refining and a small footprint in electrochemical and battery manufacturing.
- Main objectives of the strategy:
  - Reach lithium production potential sustainably by increasing existing production in the Salar de Atacama and starting production in other salt flats.
  - Update standards and regulations to safeguard long-term environmental and social sustainability.
  - Promote technological development of lithium and downstream industries (e.g., materials, battery production) to avoid an enclave economy.
  - Maximize lithium revenue contributions for the state budget.
  - Attract diverse industry participants to develop a competitive and more diverse sector, enhancing resilience and growth potential.
- Implementation approach:
  - Attract new investors across the lithium value chain via public-private partnerships.
  - In Salar de Atacama and any salt flats defined as strategic, the state would maintain a majority share in public-private partnerships; operational details on the state’s role are yet to be spelled out.
  - Promote lithium refining processes, development of battery precursor materials, and initial stages of the battery value chain to stimulate mining and metals sectors crucial for battery production.
- Knowledge, capacity building, and environmental/social frameworks:
  - Create a public technology and research institute to generate and internalize knowledge on salt flats, lithium, and the lithium value chain to support technological development, regulation, and state decision-making (including contract negotiation).
  - Restructure the framework (including regulations) for lithium and salt flats to enable industry development with minimum environmental impact and full engagement with local communities and indigenous people.

### Annex V. National Lithium Strategy — timeline and recent developments
- Implementation status:
  - Codelco, the state-owned copper company, agreed in December 2023 (on behalf of the government) with SQM (whose current contract expires in 2030) on a memorandum of understanding (MoU) about a public-private partnership.
  - The MoU foresees creation of a new company in 2025 jointly owned by Codelco (50 percent plus one share) and SQM (50 percent minus one share).
  - The new company will operate lithium production on the properties that SQM currently manages in Salar de Atacama.
  - The MoU also plans for an increase in the lithium production quota to be authorized by the Chilean authorities.
  - Engagement with other stakeholders to disseminate the strategy has started.
  - The rest of the strategy is expected to be implemented starting in 2024, including:
    - The auction for lithium production in salt flats.
    - The creation of a protected group of salt flats.
  - The government is committed to an open, transparent, and internationally competitive selection of new developers or partners.

### Annex VI. Gender Pay Gap — summary and key findings
- Overview:
  - Employment rate of women in Chile has increased notably over the past two decades but remains relatively low.
  - The gender gap in labor earnings of employed workers has changed little.
  - Women’s mean labor earnings were 19 percent lower than men’s in 2017 among full-time prime-age workers with permanent contracts.
  - The gender pay gap cannot be explained by usual labor characteristics such as education attainment alone.
- Employment rate trends and comparisons:
  - Around 64 percent of prime-age (25–54) women were employed in 2017 compared to 53 percent in 2009, narrowing the difference between employment rates of women and men from 33 to 22 percentage points.
  - For working age population (15 years and older), the difference between employment rates of women and men declined from 25 percentage points in 2011 to 19 percentage points in 2022.
  - The gender gap in employment rates remains higher than the OECD average (15 percentage points for population aged 15 years and older in 2021).
- Measurement caveats:
  - Different measurement choices yield different policy implications (example: OECD (2021) median hourly gender pay gap for Chile ranges between 4 to 17 percent; ILO (2018) estimates 12–21 percent) — differences mainly due to exclusion/inclusion of part-time workers.
- Data and methodology (Box 1):
  - Data source: Luxemburg Income Study (LIS) Database; Chile data compiled from Chile’s National Socio-Economic Characterization Survey, covering over 200,000 participants in 2017.
  - Labor earnings variable: monthly pre-tax nominal earnings in local currency (LIS code “pilabour”).
  - Method: Oaxaca-Blinder decomposition separating male-female differences in log labor earnings into:
    - Component explained by labor quality (A_m(X_m-X_f)).
    - Unexplained component interpreted as unequal pay for same labor quality (X_f(A_m-A_f)).
  - Regression controls: age, education level, disability, rural/urban residency, and a constant term.
- Decomposition results and interpretation (prime-age, full-time, permanent contracts, 2017):
  - Women’s mean (and log) labor earnings were 19 (and 17) percentage points lower than men’s.
  - Women had higher education attainment: 43 percent of full-time female workers with permanent contracts have a tertiary education, compared to 33 percent of male workers.
  - Women are more likely to work in occupations with higher average earnings (e.g., professionals).
  - Oaxaca-Blinder decomposition (in log percentage points):
    - Total Gender pay gap (A+B): 17
    - A. Gap in labor characteristics, A_m(X_m-X_f): -7
      - Age, education, rural/urban: -3
      - Occupation distribution: -7
      - Industry distribution: 3
    - B. Gap in return rates from age, education, occupation and industry choices, X_f(A_m-A_f): 24
      - Return from age and education: 11
      - Return from occupation: 16
      - Return from industry choices: 0
      - Others: -4
  - Interpretation:
    - Differences in labor and job characteristics would predict males’ log earnings to be 7 percent lower than females (i.e., females have more favorable observable characteristics).
    - Lower returns to age, education, and occupation for females contribute 24 percentage points to the gender gap in log labor earnings — interpreted as unequal pay after controlling for observable characteristics.
    - Some unexplained unequal pay could reflect omitted labor characteristics not available in the data (e.g., STEM major enrollment differences).
- Broader sample results (including part-time, temporary, family workers):
  - Share of female workers aged 25–54 under formal, full-time, permanent contracts: 65 percent.
  - Share of male workers aged 25–54 under formal, full-time, permanent contracts: 72 percent.
  - When including all job types, women’s mean labor earnings are 24 percent less than men’s in 2017.
- Role of employment and labor participation:
  - For workers aged 25–54, female employment rate 64 percent vs. 86 percent for men in 2017.
  - Labor participation: 70 percent for women vs. 93 percent for men.
  - Unemployment rate: 8.2 percent for women vs. 6.9 percent for men in 2017.
  - Considering all populations aged 25–54 (including those outside the labor force), women’s mean labor earnings are 44 percent lower than men’s.
  - Gap larger at 49 percent among ages 25–70, reflecting larger employment discrepancies for ages 55–70 (partly due to women’s lower legal retirement age of 60 years compared to 65 for men).
- Old-age income and pensions:
  - For ages 65–80, average labor earnings for men are about four times as much as women, mainly explained by higher employment rates for men (37 percent vs. 14 percent for women).
  - Gap in pension income is partially mitigated by the non-contributory pension.
  - Women’s average income from public contributory pension is 45 percent lower than men’s, consistent with the gender labor earnings gap for prime-age workers.
  - Chile: Mean Income for Population Aged 65-80 (1,000 pesos per month, 2017):
    - Labor Earnings: Men 2,560; Women 628; Gap 75%
    - Pension Income: Men 2,541; Women 1,753; Gap 31%
      - Public, non-contributory: Men 499; Women 638; -28%
      - Public, contributory: Men 1,995; Women 1,102; 45%
      - Private pension: Men 471; Women 372; 7%
    - Total: Men 5,101; Women 2,381; Gap 53%
- Changes over time (2009–17):
  - For employed prime-age workers, gender gap in labor earnings edged down from 21 to 19 percent.
  - For all employed prime-age workers (including part-time, temporary, informal), gap decreased from 29 to 25 percent.
  - For full population prime-age workers (inside and outside labor force), gender gap in labor earnings dropped from 56 percent in 2009 to 44 percent in 2017, associated with the increase in employment rates for women from 53 to 64 percent during 2009–17.
- Summary table of driving factors (2017):
  - A. Full-time, permanent contract, age 25-54: 19% — Female workers have (i) more favorable labor and job characteristics (-7%) but (ii) lower return rates from age, education and occupations.
  - B. All workers, age 25-54: 24% — Above + female workers are more likely to work in part-time, temporary, or unpaid jobs.
  - C. All population, age 25-54: 44% — Above + females have lower labor participation rates and higher unemployment rates.
  - D. All population, age 25-70: 49% — Above + lower employment rates for female age 55-70 possibly due to earlier retirement age.

*Prepared by Si Guo. Data source: Luxemburg Income Study (LIS) and IMF staff calculations; Chile’s National Socio-Economic Characterization Survey (2017).*

### Annex VII. The Impact of Increased Household Benefits on

### Annex VII. The Impact of Increased Household Benefits on Poverty

### Recent expansion of household subsidies and context
- Household subsidies (including solidarity pensions) almost doubled in real terms between 2017 and 2022 to an average of about US$78 per month.
- The 2019 social unrest and the COVID pandemic triggered adoption of new measures; COVID responses were timebound.
- The increase in household subsidies is broadly equally attributed to higher average solidarity pensions (including the guaranteed universal pension, PGU) and new and temporary household subsidies (e.g., Aporte Canasta Basica de Alimentos, Bono Chile Apoya Inverno, IFE Laboral).
- The increase in household subsidies was a key driver of the reduction in the poverty rate from 8.5 to 6.5 percent during 2017-22, as autonomous income remained broadly constant.

### Concentration of benefits and program fragmentation
- Solidarity pensions and the six largest non-pension subsidies represented about four fifths of household subsidies in 2022 in monetary terms: 56 and 23 percent, respectively.
- In 2022 the largest household subsidies by number of beneficiaries were:
  - Bono Chile Apoya del Invierno: 5.1 mn
  - Subsidio Unico Familiar (SUF): 2.1 mn
  - Guaranteed universal pension PGU: 1.5 mn
  - Aporte Familiar Permanente: 1.5 mn
  - Aporte Canasta Basica de Alimentos: 1.4 mn
- The government provided nearly 480 other social programs in 2022, many with small budgets and limited coverage.
- Only about 30 percent of the social programs costed more than CLP 10 bn (~USD 11 mn) in 2022.

### Measured impact of subsidies on poverty and inequality
- Estimates suggest social benefits were associated with 3.5 percentage points lower poverty rates in 2017 and about 4.5 percentage points in 2022.
- Solidarity pensions and non-pension subsidies each account for about 2 percentage points of the poverty reduction.
- In 2022, a household in the lowest income decile received on average CLP 160,000 per month in subsidies; a household in the fifth income decile received about CLP 70,000 per month.
- When including subsidies, the household income ratio of the richest decile to the poorest decile falls by a factor of 2.7; the drop in the income ratio after subsidies between the richest decile and the fourth decile was 1.3.
- The CASEN survey shows poverty declined from 8.5 to 6.5 percent between 2017-22, while the Gini coefficient declined marginally from 0.484 to 0.470.
- The difference in the Gini coefficient before and after subsidies is only 0.021 points, indicating household subsidies have little impact on overall inequality.

### Differential effects across household types
- Households with at least one person 65 years or older receive government subsidies almost three times as large as households with a child younger than 18 years: CLP 170,000 for the former compared to about CLP 60,000 for the latter.
- After subsidies, the poverty rate of households with a senior person is one third of those including at least one child: 3 and 9 percent, respectively.
- Higher poverty rates among families with children highlight a need to revisit household subsidies to better protect this vulnerable group.

### Fiscal costs, sustainability, and policy design
- Government spending on solidarity pensions and related measures more than doubled from 0.8 to 1.7 percent of GDP between 2018-22.
- The IFE (Emergency Family Income) covered 90 percent of households at a fiscal cost of 6.5 percent of GDP in 2021 and was removed in 2022.
- Fiscal costs of the new and temporary household subsidies (Aporte Canasta Basica de Alimentos, Bono Chile Apoya Inverno, and IFE Laboral) amounted to 0.6 percent of GDP in 2022.
- The fiscal costs of the 20 largest household subsidies featured in the CASEN survey (including solidarity pensions) was about 3.0 percent of GDP in 2022.
- Total spending on the 484 social programs amounted to 10.6 percent of GDP in 2022, including:
  - education: 4.3 percent of GDP
  - labor, income, and social security: 3.7 percent of GDP
  - cities, transportation, and housing: 1.0 percent of GDP
- The largest permanent household program in 2022, the SUF, costed 0.1 percent of GDP.

### Key program design and eligibility highlights (selected from CASEN-featured programs)
- Pension Garantizada Universal, PGU:
  - Eligibility: Persons 65 years old or older, belonging to the 90 percent poorest households (RSH), pension lower than CLP 1,114,446, lived in Chile at least 20 years.
  - Monthly amount: CLP 206,173 until a pension up to CLP 702,101, then benefit declines until CLP 1,114,446.
  - Number of beneficiaries: 1,544,840
  - Fiscal costs: 1.3 (percent of GDP)
- Subsidio Unico Familiar, SUF:
  - Eligibility: Persons belonging to the 60 percent poorest households (RSH) without income and social contributions.
  - Monthly amount: CLP 20,328 (CLP 40,656 for persons with disabilities)
  - Number of beneficiaries: 2,098,558
  - Fiscal costs: 0.1 (percent of GDP)
- Bono Chile Apoya del Invierno:
  - Single extraordinary payment of CLP 120,000 (per year)
  - Number of beneficiaries: 5,129,181
  - Fiscal costs: 0.3 (percent of GDP)
- Aporte Canasta Básica de Alimentos:
  - Effective May 2022-April 2023 (replaced by Bosillo Familiar Electronico)
  - Amount ranged between CLP 7,342-14,061 between May 2022 and April 2023.
  - Number of beneficiaries: 1,350,768
  - Fiscal costs: 0.1 (percent of GDP)
- Ingresso Familiar de Emergencia (IFE) Labour:
  - Effective July 2022-June 2023
  - Benefit: 25 percent of gross monthly income with a cap of CLP 100,000 for men 24-55; 60 percent of gross monthly income with a cap of CLP 300,000 for women and persons 18-24 or above 55.
  - Number of beneficiaries: 1,092,708
  - Fiscal costs: 0.2 (percent of GDP)
- Ingresso Familiar de Emergencia (IFE):
  - Effective May 2020-November 2021
  - For households without formal income: CLP 100,000 per household member until 4 members (amount declining after the 5th member).
  - Number of beneficiaries: 16,737,359
  - Fiscal costs reported in table: 0.2 (percent of GDP)

### Policy implications and government initiatives
- The government’s plans to consolidate the fragmented social programs and create a one-stop window aim to facilitate access, broaden coverage, and enhance efficacy.
- Consolidation is welcomed given the high number (484) of social programs and the concentration of spending in a subset of programs.
- Complementary policies, such as sufficient unemployment benefits, are important to protect households in the middle of the distribution who may be vulnerable to shocks.

*Prepared by IMF staff based on the CASEN 2022 survey and data from the Ministry of Social Development and Family and Dipres.*

### 5. Debt consolidation across sectors:

### 5. Debt consolidation across sectors

### Public debt structure and features
- Residual maturity: 11.4 years.
- Commentary: Chile has a well-diversified investor base with a large presence of domestic creditors. The share of foreign currency debt increased in 2021 due to the pension withdrawals but is still relatively small and expected to return to historical levels. Most debt is traded on secondary markets.

### Baseline scenario projections (Table 4)
- Public debt (percent of GDP):
  - Actual 2022: 38.0
  - 2023: 39.2
  - 2024: 40.5
  - 2025: 40.7
  - 2026: 41.1
  - 2027: 41.4
  - 2028: 41.5
  - 2029: 41.3
  - 2030: 41.1
  - 2031: 40.9
  - 2032: 40.7
- Change in public debt (percent of GDP): 1.7 (2022), 1.2 (2023), 1.4 (2024), 0.1 (2025), 0.4 (2026), 0.3 (2027), 0.1 (2028), -0.2 (2029), -0.2 (2030), -0.2 (2031), -0.2 (2032).
- Contribution of identified flows (percent of GDP): 1.3 (2022), 0.6 (2023), 1.5 (2024), -0.2 (2025), 0.1 (2026), 0.0 (2027), -0.2 (2028), -0.4 (2029), -0.4 (2030), -0.4 (2031), -0.4 (2032).
- Primary deficit (percent of GDP): -1/ -1.6 (2022), 2.0 (2023), 1.3 (2024), 0.5 (2025), -0.4 (2026), -0.6 (2027), -0.8 (2028), -0.8 (2029), -0.8 (2030), -0.8 (2031), -0.8 (2032).
  - Note: "1/ Lithium income is no longer considered income on assets (interest income) and is thus no longer subtracted from the primary balance."
- Noninterest revenues (percent of GDP): 25.6 (2022), 22.5 (2023), 23.3 (2024), 23.6 (2025), 23.6 (2026), 23.6 (2027), 23.6 (2028), 23.6 (2029), 23.7 (2030), 23.7 (2031), 23.7 (2032).
- Noninterest expenditures (percent of GDP): 24.0 (2022), 24.5 (2023), 24.6 (2024), 24.1 (2025), 23.2 (2026), 23.0 (2027), 22.9 (2028), 22.8 (2029), 22.8 (2030), 22.9 (2031), 22.9 (2032).
- Automatic debt dynamics (percent of GDP): -0.2 (2022), -0.8 (2023), -0.6 (2024), -0.8 (2025), -0.8 (2026), -0.7 (2027), -0.6 (2028), -0.6 (2029), -0.6 (2030), -0.6 (2031), -0.6 (2032).
- Real interest rate and relative inflation (percent): -1.2 (2022), -0.9 (2023), 0.1 (2024), 0.2 (2025), 0.2 (2026), 0.2 (2027), 0.3 (2028), 0.3 (2029), 0.3 (2030), 0.3 (2031), 0.3 (2032).
  - Real interest rate (percent): -1.1 (2022), -1.2 (2023), -0.1 (2024), -0.1 (2025), 0.0 (2026), 0.0 (2027), 0.2 (2028), 0.2 (2029), 0.2 (2030), 0.2 (2031), 0.2 (2032).
  - Relative inflation (percent): 0.00 (2022), 0.3 (2023), 0.2 (2024), 0.2 (2025), 0.2 (2026), 0.2 (2027), 0.1 (2028), 0.1 (2029), 0.1 (2030), 0.1 (2031), 0.1 (2032).
- (minus) Interest Revenues (percent of GDP): -0.5 (2022), -0.6 (2023), -0.5 (2024), -0.4 (2025), -0.4 (2026), -0.4 (2027), -0.4 (2028), -0.4 (2029), -0.4 (2030), -0.4 (2031), -0.4 (2032).
- Other transactions (percent of GDP): 3.6 (2022), 0.1 (2023), 1.3 (2024), 0.6 (2025), 1.6 (2026), 1.7 (2027), 1.6 (2028), 1.4 (2029), 1.4 (2030), 1.4 (2031), 1.4 (2032).
- Contribution of residual (percent of GDP): 0.4 (2022), 0.6 (2023), -0.2 (2024), 0.3 (2025), 0.3 (2026), 0.3 (2027), 0.3 (2028), 0.2 (2029), 0.2 (2030), 0.2 (2031), 0.2 (2032).
- Gross financing needs (percent of GDP): 0.7 (2022), 5.7 (2023), 3.6 (2024), 5.2 (2025), 5.8 (2026), 2.4 (2027), 3.3 (2028), 2.0 (2029), 3.8 (2030), 2.1 (2031), 1.3 (2032).
  - of which: debt service (percent of GDP): 2.9 (2022), 4.4 (2023), 2.9 (2024), 5.1 (2025), 6.6 (2026), 3.5 (2027), 4.5 (2028), 3.2 (2029), 5.0 (2030), 3.3 (2031), 2.5 (2032).
  - Local currency (percent of GDP): 2.1 (2022), 3.0 (2023), 1.8 (2024), 2.7 (2025), 2.7 (2026), 1.3 (2027), 2.4 (2028), 1.5 (2029), 2.6 (2030), 1.4 (2031), 1.5 (2032).
  - Foreign currency (percent of GDP): 0.5 (2022), 0.6 (2023), 0.7 (2024), 1.2 (2025), 1.1 (2026), 1.3 (2027), 1.2 (2028), 1.1 (2029), 0.9 (2030), 1.4 (2031), 0.8 (2032).
- Memo:
  - Real GDP growth (percent): 2.4 (2022), 0.0 (2023), 1.9 (2024), 2.5 (2025), 2.4 (2026), 2.3 (2027), 2.3 (2028), 2.3 (2029), 2.3 (2030), 2.3 (2031), 2.3 (2032).
  - Inflation (GDP deflator; percent): 6.7 (2022), 6.6 (2023), 3.8 (2024), 3.6 (2025), 3.4 (2026), 3.3 (2027), 3.0 (2028), 3.0 (2029), 3.0 (2030), 3.0 (2031), 3.0 (2032).
- Commentary: Public debt is expected to peak in 2028 and then gradually fall until 2032 under the assumption that the government adheres to its medium-term target of a broadly balanced fiscal position.

### Realism of baseline assumptions (Table 5)
- Commentary: The realism analysis does not point to major concerns, and the forecast track record does not reveal any systematic bias. The projected fiscal consolidation is reasonable, when considering Chile’s history and other country experiences.
- Growth in 2023 is expected to be lower than implied by standard fiscal multipliers, as it is largely driven by the normalization of households' liquidity position after the exhaustion of the pension withdrawals.

### Medium-term risk analysis (Table 6)
- Debt fanchart module:
  - Fanchart width: 33.8 (percent of GDP)
  - Debt fanchart index (DFI): 1.0
  - Risk signal: Low
  - Probability of debt non-stabilization (percent): 15.1
- Gross Financing Needs (GFN) module:
  - Average baseline GFN: 4.4 (percent of GDP)
  - GFN financeability index (GFI): 4.2
  - Risk signal: Low
- Banking sector exposures:
  - Banks' claims on the general government (pct bank assets): 6.7
  - Change in banks' claims in stress (pct bank assets): 1.6
- Medium-term index: Low risk
- Final assessment:
  - Prob. of missed crisis, 2023-2028, if stress not predicted: 0.0 pct.
  - Prob. of false alarms, 2023-2028, if stress predicted: 71.6 pct.
- Commentary: Low level of risk underpinned by the government's commitment to keeping debt below a prudent ceiling of 45 percent of GDP, moderate gross financing needs, and the ability of the banking sector to act as a residual creditor under a stress scenario. Medium-term analysis also indicates low risk under a natural disaster shock of 4.5 percent of GDP and a commodity price shock.

### Long-term risk analysis — overall (Tables 7–9)
- Overall long-run risk indicator: Low.
- Commentary: The long-run amortization module does not trigger an overall risk indication. Under the baseline, debt stabilizes over the long term, reflecting a primary balance around the debt-stabilizing one.
- Alternative simulation: If historical 10-year averages are used, debt could rise from around 40 percent to almost 130 percent of GDP by 2050; this reflects historically elevated gross financing needs, including the impact of the COVID-19 pandemic.

### Long-term risk analysis — pensions (Table 8)
- Demographics: Pension financing needs increase fiscal costs of solidarity pensions (including mainly the PGU).
- Key outcomes:
  - PGU costs (percent of GDP) scenarios:
    - 30 years: 4.1
    - 50 years: 5.5
    - Until 2100: 6.3
  - Commentary: Demographic dynamics would increase the fiscal costs of solidarity pensions from about 2 to 4 percent of GDP between 2023 and 2052 under the assumption that solidarity pensions increase in real terms in line with real GDP growth.
  - If available financing through general taxes for solidarity pensions remains at 2 percent of GDP throughout the forecast period, debt would increase to about 70 percent of GDP by 2050 (about 30 ppts of GDP higher than in the baseline).
  - Authorities' projections:
    - Solidarity pensions to increase to 4.1 percent of GDP in 30 years if adjusted in real terms in line with real wage growth.
    - Solidarity pensions to increase to 3.0 percent of GDP if the value is kept constant in real terms as foreseen by law.

### Long-term risk analysis — health (Table 9)
- Commentary: Higher health costs due to demographic dynamics and excess cost growth of health (ECG) would increase debt to about 70 percent of GDP by 2050.
- Scenarios shown:
  - Baseline: Extension of fifth projection year.
  - Health (Demographics).
  - Health (Demographics + ECG*).
  - *ECG: Excess Cost Growth of Health.

### Long-term risk analysis — natural resources (Table 9)
- Commentary: One source of risk is lower copper revenue due to lower production.
  - Authorities' central scenario: copper production should increase on average 1.5 percent annually between 2024-2035 and an annual production of 5 million tonnes is assumed thereafter.
  - Copper revenues: around 1.5 percent of GDP in 2023.
  - Assumption: copper prices grow in line with US inflation at 2 percent, lower than Chile's GDP nominal growth.
  - Impact: Taking changes in copper revenues into account, debt would be about 70 instead of 40 (baseline) percent of GDP by 2050, and the GFN-to-GDP ratio would be about 5 percentage points of GDP higher than under the baseline by 2050.

*Source: 1chlea2024001 - 5. Debt consolidation across sectors (PDF chapter).*

### Annex IX. Implementation Status of 2021 FSAP Key Recommendation

### Annex IX. Implementation Status of 2021 FSAP Key Recommendation

### A. Bank Solvency and Liquidity
- Recommendation 1: Ensure banks transition to Basel III-compliant capital structures and complete announced plans for capital raises in a timely manner. — Status: NT
  - The Basel III solvency requirements have been adopted with full implementation to be completed by 2025.
  - From March 2021, the capital adequacy ratio considers credit, market, and operational risks with some of the standards for the calculation of credit and market risks still being developed.
  - Capital Conservation buffer, AT1 requirement, and capital discounts (e.g., goodwill, deferred tax assets) are being phased in from December 2021 to December 2025.
  - Since May 2022, the BCCh has held Financial Policy Meetings twice a year to determine the need to activate the Counter Cyclical Buffer (CCyB), setting its level and deadline for compliance, in coordination with CMF. In May 2023, the BCCh activated the counter-cyclical capital buffer, setting the charge at 0.5% of risk-weighted assets, to be complied with within a year. BCCh announced a review and update of its CCyB framework, including the definition of the neutral level.
  - In March 2021, March 2022, and March 2023, the CMF identified and defined additional capital charges for systemically important banks (D-SIBs), which are gradually implemented until December 2025 (currently only 25 percent of the capital charge must be completed). In November 2023, the CMF published its proposal for improving the quality of information and lowering threshold scores for determining D-SIBs, which would be applied to the identification process in March 2024.
  - In April 2023, banks submitted the third Effective Equity Self-Assessment Report (IAPE), the first full assessment report for all risks, to the CMF as the process of Internal Capital Adequacy Assessment Process (ICAAP). In July 2023, the CMF published "Guidelines on Stress Testing in Banking Institutions" for IAPE.
  - In April 2023, information disclosure requirements for banks under the Pillar 3 of Basel III were introduced. In November 2023, the CMF published its proposal to clarify the requirements.

- Recommendation 2: Improve the collateral valuation and reporting framework. — Status: NT
  - In August 2022, the CMF published its proposal to apply a standard provision model for consumer loans for consultation.
  - After comments and technical workshops in April 2023, a revised retail loan loss reserves standard model was published for consultation in October 2023.
  - In August 2023, the CMF published its proposal for a new reporting framework of foreclosures and liquidation cash flows and complementary instructions in case of early interventions.
  - The CMF’s review of the collateral valuation is ongoing; first proposals have been shared internally for comments.

- Recommendation 3: Define and communicate clear criteria regarding conditions for the future unwinding of extraordinary liquidity support measures (FCIC and LCL). — Status: I
  - In November 2022, the BCCh established a plan to standardize eligible collateral, replacing the current stock of pledged credit portfolio with eligible financial instruments in the Central Securities Depository.
  - In April 2023, banks submitted their plans for the expiration of FCIC/LCL to the CMF as the first Liquidity Self-Assessment Report (LSAR) of the Internal Liquidity Adequacy Assessment Process (ILAAP).
  - In September 2023, the BCCh started offering banks liquidity deposits aimed exclusively at guaranteeing and operationally supporting the payment of the FCIC.

- Recommendation 4: Introduce liquidity stress tests for prudential and stability monitoring. — Status: NT
  - In April 2023, the ILAAP became effective, and banks submitted their first LSAR to the CMF.
  - Starting in 2025, the liquidity regulation issued by the BCCh will allow the CMF to impose additional High Quality Liquid Assets (HQLA) requirements applicable to specific institutions, depending on the outcome of the ILAAP.
  - Before 2025, the LSAR will be based exclusively on funding plans carried out by banks for different economic scenarios provided by the CMF. For 2024, stress tests will be based on their own internal estimates.
  - In July 2023, the CMF published "Guidelines on Stress Testing in Banking Institutions" for LSAR.

### B. Banking Supervision
- Recommendation 1: Ensure sufficient budget resources (of the CMF) to attract and retain specialized talent. — Status: I
  - There are no changes towards CMF’s budget independence.
  - Since 2019, CMF’s budget has been continuously reduced with increments only to afford new legal changes (e.g., Fintech Law implementation and to improve cybersecurity risk supervision).

- Recommendation 2: Strengthen credit risk management and asset classification, including provisioning and treatment of restructured loans. — Status: I, NT
  - In January 2023, the first proposal for asset classification and treatment of restructured loans was presented internally. It will be published for consultation early 2024.

- Recommendation 3: Establish an integrated risk management framework and enhance corporate governance standards and supervision. — Status: NT
  - An integrated risk review is considered in the Pillar 2 framework.
  - In August 2023, the CMF published regulatory proposals on corporate governance and integrated risk management requirements for securities market entities.
  - An internal proposal for regulatory/legal changes for banks was generated and is under internal review.

- Recommendation 4: Strengthen the legal framework for licensing to ensure banks’ shareholders are fit, proper and financially strong. — Status: NT
  - The CMF is drafting an internal proposal to address necessary legal/regulatory changes.

- Recommendation 5: Improve the corrective actions framework. — Status: NT
  - In October 2023, a draft bill was circulated to the Joint working group for banking resolution (technical staff of the CMF, the BCCh, and the Ministry of Finance), which intends to finalize its work to present it to their authorities by first semester 2024.

- Recommendation 6: Improve consolidated supervision by enhancing the legal framework, supervision practices and organizational arrangements. — Status: NT
  - In August 2023, the CMF published “Guidelines for a Financial Conglomerates Act in Chile,” proposing inclusion of financial conglomerates under the CMF's prudential supervision and a supervisory legal framework.

### C. Pension Funds
- Recommendation 1: Avoid further pension withdrawals and ensure that the pension system continues to support deep and liquid long-term capital markets. — Status: I
  - No additional pension fund withdrawals have been approved since April 2021.
  - The CMF, the BCCh, and the CEF (Financial Stability Council) delivered several opinions and reports against this measure, including presentations in Congress hearings and Financial Stability Reports.
  - Legal pension reform is under review in Congress. The CEF created an ad hoc task force to evaluate the effects of such reform on capital markets and financial stability.

- Recommendation 2: Improve pension fund regulation and investment options to promote long-term investment and minimize excessive switching. — Status: NT
  - Legal pension reform is under review in Congress. The CEF created an ad hoc task force to evaluate the effects of such reform on capital markets and financial stability.

### D. Insurance
- Recommendation 1: Halt any further liquidations of life annuities. — Status: I
  - No additional liquidations of life annuities since April 2021.
  - The CMF, the BCCh, and the CEF delivered several opinions and reports against this measure.

- Recommendation 2: Implement a modern risk-based capital framework in insurance with due regard to the impact of introducing IFRS 17 and IFRS 9. — Status: NT
  - The Ministry of Finance plans to reactivate the debate on adopting a risk-based capital requirements and supervision scheme for the insurance industry during 2024.

### E. Mutual Funds
- Recommendation 1: Strengthen the mutual fund liquidity management framework. — Status: NT
  - In January 2024, the “Financial Markets Resilience” law has been enacted. The law empowers the CMF to establish a minimum investment requirement for the fund in liquid assets, as well as the power to establish the definition of liquid assets.

### F. Crisis Management and Bank Resolution
- Recommendation 1: Establish a statutory bank resolution authority with a comprehensive range of crisis management and resolution tools. — Status: I
  - In January 2023, the CMF published a policy paper titled "Guidelines for a new bank resolution and deposit insurance framework in Chile" describing legal and regulatory gaps and proposing measures for future legal amendments.
  - In August 2023, the CMF published its proposal on establishing complementary instructions on early regularization and compulsory liquidation; in November 2023, the CMF published the regulation based on the proposal.
  - In November 2023, the CMF had a closed meeting with the industry to address comments on the policy paper.
  - A working group of technical staff of the CMF, the BCCh, and the MoF is drafting a new bill based on the white paper. A first consensus draft should be presented to the relevant authorities by first semester of 2024.

- Recommendation 2: Establish and implement recovery and resolution planning and set a loss-absorbing capacity requirement for systemically important banks. — Status: I

- Recommendation 3: Establish a new industry funded deposit protection scheme. — Status: NT

### G. Systemic Liquidity
- Recommendation 1: Facilitate the development of the interbank repo market. — Status: NT
  - In January 2023, a working group of CMF, BCCh, SP, and MoF held meetings with repo market participants and CMF surveyed supervised entities to understand market frictions and development opportunities.
  - In October 2023, the “Financial Markets Resilience” bill was approved by the Congress. The new law clarifies which repo transactions are eligible for special compensation mechanisms in the event of default and provides a framework for exceptional BCCh repo offers to market segments in case of financial distress.

- Recommendation 2: Enhance the risk management function of the BCCh through higher haircuts and a stricter approach to unsecured bank bonds. — Status: I
  - In 2021, the BCCh reviewed and updated the margin and haircut scheme applied to liquidity provision operations.
  - Internal task force to review and update the BCCh collateral framework is ongoing.
  - In August 2023, the BCCh published a regulatory proposal that incorporates self-securitized instruments as a new collateral alternative for liquidity operations.

- Recommendation 3: Finalize the Emergency Liquidity Assistance (ELA) framework. — Status: NT
  - In August 2023, the BCCh and the CMF signed a Memorandum of Understanding (MoU) to enhance coordination and exchange of information regarding liquidity situation and viability of a troubled financial institution.
  - In January 2024, the “Financial Markets Resilience” law was enacted, authorizing the BCCh, in exceptional circumstances, to extend ELA to banks that temporarily cease to comply with certain capital requirements while they implement a recovery plan, based on a viability opinion granted by the CMF. The law also makes ELA possible for systemic credit unions and Central Counter Parties.
  - Development of a specific ELA framework is ongoing.

### H. Macro-prudential Framework and Tools
- Recommendation 1: Increasing CEF secretariat resources and consider annual publication of official CEF views on macroprudential risks. — Status: NT
  - In 2023, the members of the CEF and the BCCh signed an interinstitutional MoU to enhance coordination, exchange of information, and to address communication issues regarding critical situations that may affect financial stability.

- Recommendation 2: Enhance interagency coordination on the use of the macroprudential toolkit. — Status: NT
  - Most interagency coordination is implemented at the CEF.
  - There is close coordination between the BCCh and the CMF related to the CCyB.
  - The CMF and the BCCh signed a MoU focused particularly on coordination in critical situations that may arise in the local banking and financial system.

- Recommendation 3: Establish a consolidated and comprehensive public credit registry. — Status: NT
  - In September 2023, the “Consolidated Debt Registry” bill was approved by the congress. The congress also established a board of advisors to study technical aspects and compile indications. The bill proposes consolidation of financial obligations in a common registry and a substantial increase in coverage of positive and negative information including non-bank credit lenders in the consumer and mortgage segments.

### I. AML/CFT
- Recommendation 1: Ensure a swift implementation of the 2021 AML/CFT Mutual Evaluation Report (MER) recommendations. — Status: NT
  - In November 2022, the CMF issued an updated regulation on the prevention of money laundering, financing of terrorist activities, and non-proliferation of weapons of mass destruction, applying to banks, saving and credit cooperatives, and payment card issuers, focusing on identification of final beneficiaries, customer due diligence determined under a risk-based approach, and prevention and detection of terrorist financing. It includes adjustments to strengthen definitions of standards related to the 40 FATF recommendations and also addresses some MER recommendations from the MER approved in July 2021 by GAFILAT.
  - In August 2023, the CMF published a consultation document about a regulatory proposal for the risk management system for insurance companies to incorporate an assessment of the risks of money laundering, financing of terrorist activities, and proliferation of weapons of mass destruction to insurance companies’ legal risks.

*Annex IX. Implementation Status of 2021 FSAP Key Recommendation (from 1chlea2024001 - Annex IX. Implementation Status of 2021 FSAP Key Recommendation).*

### 1.      The Central Bank of Chile (BCCh) lowered its monetary policy rate by

### The Central Bank of Chile (BCCh) lowered its monetary policy rate by 100 basis points to 7.25 percent on January 31

### Monetary policy, inflation, and exchange rate
- BCCh lowered the monetary policy rate by 100 basis points to 7.25 percent on January 31.
- BCCh reduced the monetary policy interest rate (MPR) by 400 basis points since mid-2021, bringing it to 7.25 percent, and views the rate as remaining above the neutral rate.
- The BCCh cited the faster-than-expected convergence of inflation to the target as the main driver for the rate reduction and communicated that future policy rate cuts would consider the evolution of the macroeconomic scenario and its implications for the trajectory of inflation.
- Headline inflation fell to 3.9 percent by end-2023; core inflation stood at 5.4 percent by end-2023.
- Two-year inflation expectations remain stable at the 3 percent target; short-term expectations indicate faster convergence than previously anticipated.
- BCCh expects a sustained decline in both headline and core inflation over the coming quarters, converging to 3 percent within this year.
- The authorities reaffirm commitment to a flexible exchange rate as a key shock absorber.
- The Flexible Credit Line (FCL) will be treated as a precautionary tool; authorities intend to gradually reduce access as external conditions improve and plan to resume reserve accumulation when market conditions are conducive.

### CPI methodology update
- INE is updating the CPI calculation methodology as part of the regular five-year CPI rebasing (from 2018=100 to 2023=100).
- New CPI basket weights, based on the latest Household Budget Survey, will become effective with the January 2024 CPI data released on February 8.
- Market analysts expect CPI inflation under the new methodology to be moderately below those of the current CPI basket.
- Staff’s inflation projections in the staff report do not reflect the ongoing update of the CPI methodology.

### Economic outlook and activity
- BCCh projects GDP growth at 1.25-2.25 percent in 2024 and expects potential growth of 2-3 percent by 2025.
- BCCh projects the economy grew close to zero in 2023.
- The positive output gap closed during last year and is expected to remain near zero in the near term.
- Current account deficit is expected to have moderated to 3.3 percent of GDP in 2023.
- Domestic demand is estimated to have declined by 4.6 percent in 2023.
- Private consumption began to recover in 3Q2023 and is expected to further improve in 2024 as disposable income increases due to lower inflation.
- Fixed investment is expected to recover more slowly, with a muted expansion in 2024 and more positive growth in 2025.
- Authorities and staff judge external developments as the primary source of uncertainty for growth and inflation; domestic risks have subsided markedly.
- The domestic economic uncertainty index (DEPUC) has notably declined.

### Fiscal policy and public finances
- Under the Fiscal Responsibility Law, the government is implementing a multi-year consolidation plan to achieve close to a structural balance by 2026 (-0.5 percent of GDP) and keep public debt below a prudent level of 45 percent of GDP.
- Overall fiscal position in 2023 is projected to have reached a deficit of 2.3 percent of GDP; the structural budget is estimated at a deficit of 2.6 percent of GDP.
- Gross public debt is expected to rise moderately to 38.2 percent of GDP in 2023.
- The 2024 budget sets a structural fiscal deficit target at 1.9 percent of GDP, with a 3.5 percent increase in real expenditures compared to 2023.
- Gross public debt is expected to reach 41.1 percent of GDP by the end of 2024 and is projected to stabilize around this level.
- Authorities have implemented methodological changes to refine output gap and structural revenue calculations, including saving temporary fiscal revenues linked to lithium exports.
- Starting in 2024, an annual structural fiscal target will be introduced.
- Amendments to the Fiscal Responsibility Law presented to Congress include formal escape clauses, enhanced accountability mechanisms, a prudent debt ceiling, and creation of a special fund for natural disasters.

### Pension and tax reform developments
- The government advanced the pension and tax compliance draft reform bills.
- On January 24, the Lower House approved the concept to legislate a pension reform but rejected some core articles; the draft bill advanced to the Senate for negotiations.
- The tax compliance draft bill centers on seven pillars: measures to control informality, modernize the tax administration, regularize tax obligations, and reduce tax crimes and aggressive tax planning.
- Authorities estimate the tax compliance bill to result in additional revenues of 0.6 percent of GDP in 2024 and 1.5 percent by 2027.
- Under the Pact for Growth, Social Progress, and Fiscal Responsibility, bills were presented to streamline permits and modernize the environmental evaluation system.
- Legislative proposals to improve tax compliance and reduce tax evasion are slated for discussion in March; authorities expect these initiatives to increase revenue by 1.5 percent of GDP by 2027.
- A more extensive discussion on comprehensive tax reform is anticipated to resume in March.
- Proposed pension reform changes include an increase in the contribution rate, enhancing the solidarity component, and industry-structure changes to promote competition and efficiency.

### Financial sector resilience and regulation
- Financial sector remains liquid, solvent, and well capitalized; banking system is healthy and resilient to stress scenarios.
- Authorities monitor vulnerabilities in construction and real estate sectors and loans to low-income households.
- Unwinding of extraordinary pandemic liquidity measures (FCIC) is proceeding as planned.
- Authorities and staff agree on importance of calibrating the counter-cyclical buffer (CCyB) swiftly to provide banks with planning certainty.
- In 2024, BCCh will revisit its CCyB policy framework, including defining a neutral level, aligning with international best practices and Basel III implementation.
- Significant regulatory reforms consistent with 2021 FSAP and Basel III have been adopted, including the Financial Markets Resilience Law and the Fintech Law.
- A bill to update the framework on risk-based capital and supervision for insurance companies will be sent to Congress in early 2024; a draft of the bank resolution and deposit insurance bill will be worked on during the year.
- Authorities are vigilantly monitoring cybersecurity risks related to fintech developments.

### Structural and climate-related policies
- Authorities pursue an ambitious structural reform agenda to foster inclusive, sustainable, and dynamic growth: simplifying and expediting investment project approvals, boosting productivity, and deepening capital markets.
- Priorities include the Pact for Growth, Social Progress, and Fiscal Responsibility, and the pension reform.
- New law enabling flexible work schedules for unpaid caregiving and establishment of a National Care System aim to reduce labor-market gender gaps.
- Chile remains committed to climate action under the Climate Change Framework Law and to meeting National Determined Contributions (NDC).
- Ministry of Finance is updating the Financial Strategy to include biodiversity and other sustainability goals.
- Current strategy elements include: a framework for measuring climate-related spending; issuance of ESG bonds; creation of a taxonomy for environmentally sustainable activities; natural capital committee work to include biodiversity; and the Public-Private Green Finance Roundtable.
- National Lithium Strategy and the National Hydrogen Action Plan 2023-2030 aim to develop industries while balancing environmental and social concerns.
- A World Bank loan is set to support Chile’s investment in green hydrogen and its pledge to carbon neutrality by 2050.

*Statement by Mr. Herrera, Executive Director for Chile and Ms. Mostajo, Advisor to Executive Director; January 31, 2024 and February 5, 2024.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1chlea2024001.pdf_