## IMF Concludes 2002 Article IV Consultation with Chile

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### Background
- Executive Board conclusion date: July 19, 2002.
- Recent shocks affecting Chile: world economic slowdown, a further terms of trade decline, and spillovers from Argentina.
- Real GDP growth: 2.8 percent in 2001; projected 2.6 percent for 2002.
- External current account deficit: about 2 percent of GDP in 2001.
- Inflation performance: inflation kept within the target band of 2 to 4 percent; change in consumer prices (end of period) was 2.6 percent in 2001 and projected 2.5 percent in 2002.
- Unemployment: remained elevated around 9 percent in 2001, compared to 6 percent before the 1998–99 recession.
- Policy framework: exchange rate flexibility, inflation targeting, and a structural fiscal surplus target; central bank intervened in foreign exchange markets only in exceptional circumstances, “leaning against the wind” but not targeting the exchange rate.
- Fiscal stance in 2001: central government actual deficit of about 1 percent of GDP while achieving the new ongoing target for the structural balance.
- Monetary policy: central bank eased policy early in 2001, paused after midyear due to external pressures, then reduced interest rates since early 2002 as inflation risks subsided and demand weakened.
- Structural and institutional reforms in 2001: elimination of remaining restrictions on external capital flows, measures to develop domestic capital markets, tax administration and tax law changes to reduce tax evasion and tax avoidance, adoption of an unemployment insurance scheme, and a wide-ranging package of labor law changes.
- Trade policy: uniform external tariff rate reduced unilaterally to 7 percent; a WTO panel viewed critically the price-bands system for certain agricultural imports; free trade agreement with the European Union expected to be soon ratified; negotiations with the United States expected to advance.
- Medium-term growth initiatives: encourage development of venture capital, strengthen framework for resolution of anti-monopoly cases and other economic disputes, adjust regulation in several sectors.

### Executive Board Assessment
- Directors commended adherence to a sound and consistent policy framework based on exchange rate flexibility, inflation targeting, and achievement of a structural fiscal surplus.
- Directors considered authorities’ objectives to promote a recovery of domestic demand and moderate output growth broadly appropriate given high unemployment and the output gap.
- Fiscal policy: Directors supported resisting pressures for stimulus and holding the central government structural surplus to safeguard public finances while allowing automatic stabilizers.
- Fiscal transparency: Directors welcomed planned participation in a fiscal Report on the Observance of Standards and Codes (ROSC); some Directors recommended capitalization of the central bank and a more comprehensive definition of the fiscal balance incorporating the rest of general government.
- Monetary policy: Directors noted the inflation-targeting framework with a floating exchange rate continues to serve Chile well; they supported the lowering of the policy interest rate given subdued inflation and the output gap, while stressing readiness to adjust policy if inflationary pressures emerge.
- Monetary instruments: Directors welcomed steps to enhance instruments and urged caution in possible use of foreign exchange swaps for liquidity management.
- Foreign exchange intervention: Directors stressed importance of adhering to policy of intervening only in exceptional circumstances.
- Financial sector: banking system indicators appear sound; stress tests conducted by staff supported this. Some Directors suggested scope for increased bank competition to lower interest spreads, welcomed progress on consolidated supervision of financial conglomerates, efforts to strengthen anti-money laundering legislation, and the authorities’ request for a Financial Sector Assessment Program. Some Directors recommended strengthening the supervisory framework with proper legal protection for bank supervisory agency staff.
- Growth and reform agenda: Directors welcomed government-private sector collaboration on pro-growth agenda; encouraged reforms to foster venture capital, strengthen dispute resolution frameworks, and improve regulation. A few Directors recommended considering bringing private capital into state-owned companies.
- Labor market: faster growth seen as key to reducing unemployment. Directors acknowledged temporary need for government-supported job programs but noted persistence of high unemployment suggests labor market rigidities; recommendations included greater focus on education and job training for low-skilled workers and enhancing labor market flexibility. Several Directors expressed concern over the cumulative increase in the minimum wage and possible higher labor costs from recent labor reform package; other Directors viewed wage and labor developments as adequate in social and economic context.
- Trade policy: Directors commended open trade regime and unilateral tariff reductions; some recommended reevaluation of tariff-based price bands for certain agricultural goods and noted phasing them out would be assisted by elimination of distortions in agricultural policies of some industrial countries.
- Data and statistics: Directors noted data are timely and broadly adequate for surveillance, recalling positive overall assessment in last year’s ROSC data module; urged authorities to widen coverage of fiscal and external statistics in forthcoming ROSC on fiscal transparency.

### Outlook and Policy Stance
- 2002 macroeconomic projections:
  - Real GDP growth: 2.6 percent.
  - Inflation: expected to remain inside the 2 to 4 percent target band (projected change in consumer prices, end of period: 2.5 percent).
  - Central bank readiness: continue to be ready to adjust the policy interest rate, if needed, in either direction to keep inflation in 2003 also in the target band.
  - Fiscal policy: geared to achieving a structural surplus of 1 percent of GDP for the central government.
  - External vulnerability: external account deficit and other indicators envisaged to remain at comfortable levels.
- Assumptions behind projections: domestic demand will strengthen fairly soon in response to easing of monetary policy, ending of inventory decumulation, greater investment expenditures of certain public enterprises, and some further improvement in the external environment.
- Risks: regional uncertainties and global factors could adversely affect the outturn; Chile considered well-placed to adjust to new adverse shocks in an orderly fashion.

### Policy Recommendations and Reform Priorities (as reflected in Directors’ views)
- Maintain structural fiscal surplus target and resist pressures for fiscal stimulus.
- Enhance fiscal transparency (participate in fiscal ROSC; consider capitalization of the central bank; consider broader fiscal balance definitions).
- Continue inflation-targeting with floating exchange rate; be prepared to adjust monetary stance if inflationary pressures emerge.
- Proceed cautiously with new monetary instruments such as foreign exchange swaps.
- Strengthen bank supervision and consider measures to increase bank competition to reduce spreads, especially for small business loans; provide legal protection for supervisory staff.
- Continue efforts on anti-money laundering legislation and request Financial Sector Assessment Program.
- Advance microeconomic reforms to boost medium-term growth: develop venture capital, improve dispute resolution frameworks, adjust sectoral regulation, and consider private participation in state-owned enterprises where appropriate.
- Address labor market rigidities via education and job training for low-skilled workers and measures to enhance labor market flexibility; monitor effects of minimum wage increases and labor law changes.
- Reevaluate tariff-based price bands for agricultural products and continue trade liberalization initiatives.

### Selected Economic Indicators (from table)
- Real GDP growth: 1997 6.6; 1998 3.2; 1999 -1.0; 2000 4.4; 2001 2.8; 2002 (Proj.) 2.6.
- Unemployment (in percent): 1997 6.1; 1998 6.2; 1999 9.7; 2000 9.2; 2001 9.1; 2002 ... .
- Change in consumer prices (end of period): 1997 6.0; 1998 4.7; 1999 2.3; 2000 4.5; 2001 2.6; 2002 (Proj.) 2.5.
- Broad money (M3) year-end percentage change: 1997 13.0; 1998 8.5; 1999 5.1; 2000 5.1; 2001 5.4; 2002 (Proj.) 5.7.
- Bank credit to the private sector (year-end percentage change): 1997 18.0; 1998 11.2; 1999 3.0; 2000 10.7; 2001 6.7; 2002 (Proj.) 7.9.
- Three-month interest rate (yield on 90-day central bank paper, period average): 1997 13.4; 1998 16.4; 1999 10.7; 2000 10.8; 2001 7.2; 2002 ... .
- Trade balance (in percent of GDP): 1997 -1.7; 1998 -2.5; 1999 3.4; 2000 2.9; 2001 3.2; 2002 (Proj.) 3.2.
- Current account balance (in percent of GDP): 1997 -4.4; 1998 -5.1; 1999 -0.4; 2000 -1.4; 2001 -1.9; 2002 (Proj.) -2.1.
- Capital account balance (including errors and omissions, in percent of GDP): 1997 8.3; 1998 2.5; 1999 -0.5; 2000 1.7; 2001 1.3; 2002 (Proj.) 3.3.
- Overall balance of payments (in percent of GDP): 1997 3.9; 1998 -2.6; 1999 -0.9; 2000 0.3; 2001 -0.6; 2002 (Proj.) 1.2.
- Gross official reserves (in percent of short-term external debt): 1997 496.4; 1998 385.2; 1999 367.8; 2000 230.3; 2001 220.1; 2002 (Proj.) 206.0.
- External debt (in percent of GDP): 1997 32.3; 1998 40.0; 1999 46.8; 2000 49.2; 2001 56.9; 2002 (Proj.) 57.8.
- Real effective exchange rate (end of period, percent change): 1997 9.8; 1998 -6.1; 1999 -6.2; 2000 2.5; 2001 -9.5; 2002 ... .
- Terms of trade (annual percentage change): 1997 1.9; 1998 -4.7; 1999 5.7; 2000 5.5; 2001 -7.6; 2002 (Proj.) 0.3.
- Copper price (U.S. cents per pound): 1997 103.2; 1998 75.0; 1999 71.3; 2000 82.3; 2001 71.7; 2002 (Proj.) 73.8.
- Central government balance (in percent of GDP): 1997 1.9; 1998 -0.1; 1999 -2.2; 2000 -0.9; 2001 -0.9; 2002 (Proj.) -1.5.
- State-owned enterprise balance (in percent of GDP): 1997 -1.0; 1998 -1.0; 1999 -0.1; 2000 -0.7; 2001 -0.4; 2002 (Proj.) -0.8.
- Central bank balance (in percent of GDP): 1997 -0.9; 1998 -1.0; 1999 -1.1; 2000 -0.9; 2001 -0.9; 2002 (Proj.) -1.1.
- Memorandum items:
  - Central government balance (official presentation): 1997 1.8; 1998 0.4; 1999 -1.4; 2000 0.1; 2001 -0.3; 2002 (Proj.) -0.9.
  - Structural balance (official presentation): 1997 0.9; 1998 0.3; 1999 -0.8; 2000 0.0; 2001 1.0; 2002 (Proj.) 0.7.

*Public Information Notice (PIN) No. 02/78, July 31, 2002.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2002/_cr02155.pdf_