IMF Wraps Up 2023 Article IV Chile Consultation

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded on February 5, 2024, the Article IV consultation[1]with Chile.

Macroeconomic imbalances built during the pandemic have been largely resolved, supported by tighter macroeconomic policies deployed during late 2021-22. As domestic demand normalized, economic activity stabilized in the second half of 2023, yielding an estimated zero percent real GDP growth for the year. Inflation and current account deficits have significantly declined in 2023. The financial sector remains resilient despite the economic slowdown and tight financial conditions.

Growth is expected to pick up to close to 2 percent in 2024 and 2-2.5 percent in the medium term. Inflation is projected to converge to the 3-percent target in 2024. Key external risks are the uncertainties around the potentially higher-for-longer interest rates in advanced economies, a growth slowdown in major trading partners, and the intensification of regional conflicts in the world. Domestically, political polarization and fragmentation could lead to continued reform gridlock. Social discontent over inequality and the security situation remains prevalent. Uncertainty related to the solvency of private health insurance companies is also a concern. On the upside, the closure of the constitutional reform process is set to reduce near- and medium-term domestic uncertainty. Moreover, Chile can benefit from the global green transition given its rich endowment with copper, lithium, and renewable energy for which demand is set to rise.

Policies have supported macroeconomic stability. In the context of disinflation acceleration, the Central Bank of Chile lowered the monetary policy rate by 400 basis points since July 2023. The headline fiscal balance is estimated to decline to about -2.5 percent of GDP in 2023 due to weaker tax revenues amid an economic slowdown, lower copper prices, and other transitory factors. The 2024 budget envisions a moderate deficit reduction within a medium-term fiscal plan to a broadly balanced fiscal position by 2026. The ongoing implementation of the countercyclical capital buffer will strengthen financial resilience in periods of stress.

Executive Board Assessment[2]

Executive Directors expressed condolences about the tragic loss of life and devastation caused by the massive forest fires. Directors welcomed the authorities' very strong policies and policy frameworks, supported by the precautionary FCL arrangement, which were instrumental in resolving imbalances and steering the economy toward potential growth and targeted inflation in a challenging external environment. They commended the authorities' reform plans to raise investment and productivity, increase fiscal revenues for priority spending, reduce inequality, improve pension adequacy, and transition to a greener economy.

Directors welcomed the authorities' commitment to reach a broadly balanced fiscal position by 2026 and keep debt below the prudent debt ceiling of 45 percent of GDP. They welcomed the proposed reforms to strengthen tax compliance and enhance spending efficiency, and stressed that additional measures will be needed to achieve the authorities' medium‑term fiscal plan and finance social needs and security priorities. Directors noted the improved pension adequacy for low‑income pensioners following the higher minimum pension and emphasized that raising pension contribution rates is critical to ensure the adequacy of self‑financed pensions and the sustainability of the pension system. They also encouraged the authorities to continue to refine further their already strong fiscal framework.

Directors commended the central bank's robust policies that led to a decisive decline in inflation toward its target, emphasizing that the pace of further monetary easing should remain data dependent. They stressed that the flexible exchange rate remains paramount for absorbing shocks and called for resuming the international reserve accumulation, when market conditions are conducive, and developing a long‑term reserve strategy to further strengthen resilience against external shocks, while a few called for an earlier resumption of the accumulation strategy.

Directors agreed that the financial sector remains resilient. They welcomed the ongoing implementation of Basel III capital and liquidity requirements, the activation of the countercyclical buffer, and efforts to establish an industry‑funded deposit insurance and a new bank resolution framework, while calling for continued monitoring of the vulnerabilities in construction and real estate sectors. Directors stressed the importance of continuing to adapt financial regulation and supervision to the changing financial sector landscape.

Directors supported the authorities' reform plans for a more dynamic, greener, and inclusive economy. They underscored the need to foster investment and welcomed the efforts to streamline permitting processes. Directors commended Chile's progress and ambitions in developing renewable energy. They noted that the higher global demand for lithium and other critical minerals offers new economic opportunities for Chile and stressed the importance of swiftly implementing a clear and balanced institutional framework. Directors welcomed the improvements in gender equality and encouraged additional efforts to further narrow labor market gender gaps.