## Chile: Staff Concluding Statement of the 2021 Article IV Mission _IMF News, March 9, 2021_ ## Source details **Canonical URL:** [Chile: Staff Concluding Statement of the 2021 Article IV Mission](https://www.imf.org/en/news/articles/2021/03/09/mcs030921-chile-staff-concluding-statement-of-the-2021-article-iv-mission) ## Other formats - [Markdown version](/en/news/articles/2021/03/09/mcs030921-chile-staff-concluding-statement-of-the-2021-article-iv-mission/index.md) - [Structured JSON version](/en/news/articles/2021/03/09/mcs030921-chile-staff-concluding-statement-of-the-2021-article-iv-mission/index.json) - [Bundle manifest](/en/news/articles/2021/03/09/mcs030921-chile-staff-concluding-statement-of-the-2021-article-iv-mission/bundle-manifest.json) ## Bibliographic details - 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.* --- ## References - [Chile and the IMF](http://www.imf.org/external/country/CHL/index.htm) - [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [Mission Concluding Statements](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2021/03/09/mcs030921-chile-staff-concluding-statement-of-the-2021-article-iv-mission_