Chile: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, March 9, 2021
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- Published: March 9, 2021
Macroeconomic outlook and recent performance
- Economic activity contracted by 6 percent in 2020, with sharp declines in the second and third quarters, and a recovery picking up in the fourth quarter with annual growth estimated at close to zero.
- Economic activity is expected to expand by 6 percent in 2021, supported by an ambitious vaccination program.
- Over the medium term, growth is projected to converge to potential of 2.5 percent and the unemployment rate to gradually decline to about 7 percent.
- Annual headline inflation moderated in mid-2020 and has then hovered close to 3 percent, the policy target.
- The current account balance improved considerably in 2020 amid plummeting imports and resilient exports; it is expected to deteriorate in 2021-22 owing to strong import demand, before narrowing somewhat over the medium term.
Risks and resilience
- External risks: pandemic dynamics (mitigated by fast vaccination), possible reappearance of de-globalization demands reducing trade and growth opportunities, and large movements in the price of copper affecting exports, fiscal revenues, and investment prospects.
- Domestic risks: uncertain outcome of the New Constitution process and possible resurgence of unrest.
- Financial sector risks: a delay in recovery could increase delinquency rates, though bank capital appears adequate at present.
- Sources of resilience: large policy response, remaining fiscal space, very strong institutional policy settings, sound record of policy reaction, and low level of public debt by international standards.
Fiscal policy and public debt
- Chile’s public debt is 32 percent of GDP.
- The 2020 multi-year fiscal stimulus package has helped counteract the crisis.
- Staff views the fiscal policy stance in 2021 as broadly appropriate; additional stimulus might be needed if the pandemic is prolonged (e.g., targeted household transfers and extension of tax deferrals).
- Staff cautions against additional pension withdrawals: the July and December 2020 withdrawals support recovery but were poorly targeted, regressive, and have weakened the pension system.
- Authorities commit to gradual consolidation, reducing the structural deficit towards a target of 0.9 percent of GDP by 2025.
- Policy recommendations to strengthen the fiscal framework:
- Complement the structural balance rule with an explicit medium-term debt anchor that encompasses a debt ceiling and a debt buffer zone.
- Introduce a formal escape clause for temporary relaxation or suspension of the structural balance target, accompanied by an adjustment mechanism.
- Establish an autonomous fiscal council with own resources and a broader mandate (noted as an important step already taken).
Monetary and financial sector policy
- The Central Bank reduced the policy rate to its technical lower bound and implemented unconventional measures: funding-for-lending facilities, asset purchase programs, and an expanded collateral framework.
- The monetary stimulus is assessed as appropriate and should remain contingent on developments and risks, guided by the inflation targeting framework.
- Temporary emergency measures have been used to facilitate credit flow and support income; monitoring for early signs of stress remains critical.
- As normalcy returns, financial institutions should be encouraged to restructure loans prudently on a commercial basis while maintaining prudential lending standards and adequate reporting.
- Financial sector reform priorities:
- Implement regulations stemming from the new Banking Law in compliance with Basel III in line with the revised timeline.
- Broaden powers and tools for bank resolution and establish a national deposit-insurance scheme funded by member banks.
- Strengthen regulation of insurance companies and financial conglomerates.
- Enhance regulation and supervisory responses to FinTech expansion and cybersecurity threats.
- The 2021 Financial Sector Assessment Program (FSAP) will conduct a detailed analysis of financial stability policies and risks.
Structural and social reforms
- Rapidly reaching broad agreement on structural and social reforms while preserving macro stability would stimulate investment, productivity, confidence, and social convergence.
- Pension reform: finalizing reform is urgent to ensure adequate pension coverage. Recent 2020 legislation increased the solidarity pillar; government proposals to increase contribution rates and further strengthen the solidarity pillar are important. Key elements going forward:
- Adjust contribution rates, retirement age (especially for women), and solidarity parameters based on demographics, employability, economic developments, expected replacement rates, and expected returns on pension assets.
- Reduce informality to increase contribution density.
- Ensure competition in pension management to promote efficiency and contain costs.
- Health system reform priorities:
- Create a basic universal health plan pooling risks from public and private members.
- Eliminate discrimination based on pre-existing conditions in the private system.
- Improve efficiency in the public system, increase competition, and reduce out-of-pocket spending on medicines.
- Fiscal revenue and expenditure adjustments (when recovery is well-advanced) should include:
- Increasing direct taxation by revisiting exemptions, deductions, and special regimes, and strengthening tax administration.
- Gradually rationalizing indirect taxes.
- Raising green taxes.
- Sustain efforts to increase efficiency in spending.
- Broader medium-term structural agenda: enhance education quality, address labor market mismatches, promote labor market flexibility, reduce informality, strengthen competition, streamline bureaucracy, continue trade and financial integration, and support climate-related policy actions.
Selected economic indicators (Est., Proj.)
- Real GDP Growth (%): 2018 = 4.0; 2019 = 1.1; 2020 = -6.0; 2021 = 6.0; 2022 = 3.7
- Inflation (End of period, %): 2018 = 2.1; 2019 = 3.0; 2020 = 2.9
- Structural Fiscal Balance (% of GDP) 1/: 2018 = -1.5; 2019 = -1.7; 2020 = -2.7; 2021 = -4.2; 2022 = -3.9
- Overall Fiscal Balance (% of GDP) 1/: 2018 = -1.6; 2019 = -2.8; 2020 = -7.3; 2021 = -2.6; 2022 = -3.1
- Current Account (% of GDP): 2018 = -3.6; 2019 = -3.8; 2020 = 0.3; 2021 = -1.3
1/ Structural adjustment based on IMF Staff estimate.
Source: IMF staff concluding statement of the 2021 Article IV mission for Chile.