IMF Executive Board Concludes 2022 Article IV Consultation with Chile
IMF News, January 20, 2023
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- Published: January 20, 2023
Overview
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chile.
- After an impressive recovery from the COVID-19 pandemic, the Chilean economy is undergoing a necessary transition towards sustainable growth amid a challenging external environment.
- Economic activity is rapidly cooling down, while inflation seems to have peaked in August.
- The current account deficit remains elevated, as adverse terms of trade have counteracted the ongoing adjustment of domestic demand.
- Policy implementation remains very strong, geared towards correcting macroeconomic imbalances that built up during the pandemic, while protecting the most vulnerable and advancing structural reforms.
- The Central Bank of Chile’s monetary policy response has been forceful and fully in line with the inflation targeting framework.
- The 2022 fiscal position is projected to be markedly stronger than the target in the authorities’ medium-term fiscal consolidation plan.
- The 2023 budget envisions higher social spending and public investment within a sustainable medium-term path.
Macroeconomic Outlook and Projections
- GDP growth on a y/y basis is expected to continue to slow in the last quarter of 2022 and recover by the last quarter of 2023.
- Given monetary tightening and a negative output gap, inflation is projected to converge to target by end-2024.
- The current account deficit is expected to gradually revert to the historical average of about 3 percent of GDP, supported by the authorities’ adequate structural fiscal consolidation plan and the flexible exchange rate.
Risks, External Position, and Buffers
- Downside risks persist, but very strong fundamentals and policies underpin Chile’s resilience.
- External risks include:
- a possible abrupt global slowdown,
- sharply tighter global financial conditions,
- commodity price shocks,
- an intensification of spillovers from Russia’s war in Ukraine.
- Domestic risks include:
- high inflation persisting for longer than expected,
- social discontent over high food and energy prices,
- slow progress to meet social demands.
- The constitutional reform process will continue but uncertainty over possible outcomes has narrowed.
- Low public debt, a sustainable external position, and very strong policies and institutional policy frameworks continue to support Chile’s resilience and capacity to respond to shocks.
- The two-year FCL, approved in August, provides additional external buffers on a precautionary basis and substantial insurance against tail risk scenarios.
Executive Board Assessment
- Executive Directors broadly agreed with the thrust of the staff appraisal.
- They commended the authorities’ very strong policies geared towards correcting macroeconomic imbalances built up during the pandemic, while protecting the most vulnerable and advancing reforms.
- Directors emphasized that while risks remain elevated, low public debt and a sustainable external position also supported by the precautionary FCL arrangement, and very strong policies and institutional policy frameworks continue to support Chile’s resilience.
- Directors recognized that, after an impressive recovery from the COVID-19 pandemic, the Chilean economy is undergoing a necessary transition towards sustainable growth in a challenging external environment.
- Directors welcomed the strong fiscal overperformance in 2022.
- They noted that the 2023 Budget’s focus on social spending and public investment is appropriate amid a negative output gap.
- Directors observed that tax and spending reforms should be sequenced conditional on revenue performance to preserve fiscal sustainability.
- They encouraged the authorities to save any revenue overperformance and wait to disburse unallocated funds to support disinflation and external convergence.
- They emphasized that the commitment to achieve a broadly balanced structural fiscal position over the next five years and keep public debt below a prudent ceiling of 45 percent of GDP is essential for preserving fiscal sustainability.
- They welcomed ongoing refinements to Chile’s already very strong fiscal framework.
- Directors commended the central bank’s decisive monetary policy tightening consistent with the highly credible inflation targeting framework and welcomed the commitment to maintain a tight monetary stance until price pressures and inflation expectations are on a firm downward trend.
- Directors noted that the flexible exchange rate should continue to play its role as a shock absorber, while a substantial reserve accumulation program is desirable when conditions are conducive.
- Directors noted that the financial sector remains resilient and welcomed efforts to closely monitor pockets of vulnerability, regulate fintech activities, and address FSAP recommendations.
- Continuing to strengthen the AML/CFT framework is also important.
- Directors supported plans to implement far-reaching reforms within a sustainable macroeconomic framework.
- They emphasized that new pension withdrawals should be avoided, while reforms to improve pension adequacy, labor market formalization, and savings should be carefully designed and managed.
- They encouraged the authorities to calibrate the pension reforms to also foster capital market deepening.
- Directors commended Chile’s leadership in the region on climate change initiatives and agreed that a gradual increase of the carbon price, calibrated taking into consideration potential use of other mitigation tools, would contribute to achieving the country’s climate goals.
IMF Press Release No. 23/10 — January 20, 2023