Chile’s New Short-term Liquidity Line to Support Resilience and Recovery

IMF News, May 20, 2022

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Canonical URL: Chile’s New Short-term Liquidity Line to Support Resilience and Recovery

Chile’s economy recovered very fast from the pandemic driven by:
- an extensive vaccination campaign and an effective economic policy response that was "swift and comprehensive, and anchored in very strong policy and institutional frameworks."
- significant buffers bolstered by its access to the Flexible Credit Line (FCL).
- the government’s multi-year fiscal package which "has helped to safeguard health, protect incomes and jobs, support credit, and buttress the recovery."
Central Bank measures to support liquidity:
- monetary stimulus and unconventional measures.
- adjustments to financial sector policies to facilitate the flow of credit, especially to households and small and medium-sized enterprises.

Chile began preparing an exit strategy from the FCL "ever since it gained access in May 2020."
As part of the strategy, the Central Bank of Chile purchased international reserves for a total of US$7.4 bn.
Additional measures that strengthened Chile’s external position:
- the IMF’s general allocation of Special Drawing Rights.
- the central bank joining the Fondo Latinoamericano de Reservas (FLAR).
- the country’s access to the US Federal Reserve’s REPO FIMA.
Considering these tools, the normalization of exceptional pandemic measures, and lower perceived public health risks, the central bank decided to access the Short-term Liquidity Line (SLL) to complement sources of external liquidity.

Facility design and intent:
- The SLL "is designed to be a liquidity backstop for members with very strong policy frameworks and fundamentals that face potential, moderate, short-term balance of payments needs."
- It is "an innovative instrument that provides predictable, revolving, and renewable liquidity support in foreign exchange."
- The SLL was created in April 2020.
Why Chile is a suitable candidate:
- Chile has "very strong economic fundamentals and institutional policy frameworks" and "has shown a sustained track record of implementing very strong policies."
- Policy anchors include:
- a well-established structural fiscal balance rule,
- credible inflation targeting with a free-floating exchange rate,
- a sound financial system supported by effective regulation and supervision.
- These features have "sustained Chile’s resilience even in the face of very large shocks."
Expected contributions of the SLL:
- complement existing buffers and make available predictable and revolving liquidity support.
- serve as a signal of confidence in Chile’s very strong fundamentals and policies.
- support Chile’s resilience and capacity to respond to shocks, helping "maintain macroeconomic stability and lay the foundations for sustained and green growth to the benefit of the Chilean people."

US$7.4 bn — international reserves purchased by the Central Bank of Chile as part of the FCL exit strategy.
May 2020 — when Chile gained access to the FCL.
April 2020 — creation of the SLL.
May 20, 2022 — publication date of the page.

Source: Chile’s New Short-term Liquidity Line to Support Resilience and Recovery — May 20, 2022, International Monetary Fund.