Press Release No. 23/10

IMF Executive Board Concludes 2022 Article IV Consultation with Chile

January 20, 2023

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] 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, while the 2023 budget envisions higher social spending and public investment within a sustainable medium-term path.

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.

Downside risks persist, but very strong fundamentals and policies underpin Chile’s resilience. On the external front, risks stem from a possible abrupt global slowdown, sharply tighter global financial conditions, commodity price shocks, or an intensification of spillovers from Russia’s war in Ukraine. Domestic risks stem mostly from high inflation persisting for longer than expected, social discontent over high food and energy prices, or 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 [2]

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, 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. They 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. In that context, they encouraged the authorities to save any revenue overperformance and wait to disburse unallocated funds to support disinflation and external convergence. They also 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 also 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. They 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 also 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 also encouraged the authorities to calibrate the pension reforms to also foster capital market deepening.

Directors also commended Chile’s leadership in the region on climate change initiatives. They 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.