Making Chile’s Economy More Dynamic, Greener, and Inclusive

IMF News, February 15, 2024

Source details

Chile has successfully brought down high inflation and reduced the large current account deficit that emerged during the pandemic.
Increases in social benefits have provided some relief in response to discontent over inequality.
Investment and growth remain tepid and social gaps remain high.
Chile is the world’s largest copper producer, second largest lithium producer, and richly endowed with solar and wind resources.

Electricity generated from solar and wind increased from 1 to 23 percent of total electricity supply during 2010–22.
Replacing coal with renewable energy, along the lines of the authorities’ plans to decommission coal-fired power plants by 2040, could boost economic activity by at least 1 percent over the long term.
Such a shift in the energy mix would imply a nearly 30 percent cost reduction in electricity generation, in addition to benefits from lower carbon emissions and air pollution.
A shift in the energy mix would significantly strengthen the economy’s resilience against future coal and fuel price shocks.
Development of the green hydrogen industry could offer additional growth prospects, conditional on further reductions in the production and transportation costs.
The geographic mismatch between power generation and consumption is a main bottleneck: areas rich in solar and wind in the northern and southern parts of Chile are more than 1,000 miles away from its economic hub in the central area.
Upgrading the transmission network, including through the new Kimal-Lo Aguirre transmission line set to become operational in 2029, could help resolve this bottleneck.

Greater use of lithium for energy storage in batteries presents an opportunity for Chile to play a role in global efforts to reduce carbon emissions.
Higher global demand for lithium offers prospects to expand Chile’s lithium production and related industries along the value chain, while balancing social and environmental objectives.
Lithium has become an important source of exports and fiscal revenue for Chile in recent years when the lithium price surged.
The country is planning to expand its lithium production through public-private partnerships.
Providing a clear institutional framework for investors that can be swiftly implemented as global demand ramps up will be an important factor to further develop the industry.

Chile’s economy is projected to resume growth in 2024, but its average real economic growth rate has been declining for many years alongside negative productivity growth.
Strengthening investment is critical to sustainably raise and diversify economic activity.
Investment approvals have become more complicated, uncertain, and lengthier over the years, reflecting more complex safeguards for the environment, health, safety, social concerns, and a larger number of stakeholders.
The government’s ongoing efforts to streamline and improve coordination of permitting processes, while maintaining high environmental standards, could contribute to lifting much-needed investment and bring meaningful growth dividends.

Advance the planned decommissioning of coal-fired power plants by 2040 and accelerate the replacement of coal with renewable energy to realize at least 1 percent long-term economic gains and a nearly 30 percent reduction in electricity generation costs.
Invest in transmission upgrades (including the Kimal-Lo Aguirre line becoming operational in 2029) to address the more-than-1,000 miles geographic mismatch between generation and consumption centers.
Support cost reductions in green hydrogen production and transportation to unlock additional growth prospects.
Develop a clear, implementable institutional framework for lithium investment and expansion, prioritizing public-private partnerships while balancing social and environmental objectives.
Streamline permitting and coordination processes to reduce delays and uncertainty for investment, while upholding high environmental, health, safety, and social standards.

IMF News — February 15, 2024. Authors: Luiza Antoun de Almeida, Si Guo, and Andrea Schaechter.