Journal Issue

IMF Executive Board Concludes 2008 Article IV Consultation with Chile

International Monetary Fund
Published Date:
July 2008
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On July 11, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chile.1


The Chilean economy has proved resilient in the face of strong economic and financial headwinds during the past year. Rising world prices for energy and food have been exacerbated by drought and a very tight domestic energy situation. Lower real incomes and tighter credit conditions have reduced consumption growth, while investment—particularly in the mining and energy sectors—has remained strong. Overall, the economy is expected to grow by 4¼ percent in 2008, followed by a gradual recovery in 2009.

Led by food and energy prices, inflation was close to 9 percent in the year to May. Although nominal wage growth has broadly kept pace with inflation, modest productivity gains have helped contain unit labor costs. The central bank has raised its monetary policy rate by 125 basis points between August 2007 and January 2008, and by 50 basis points each in June and July 2008. The peso appreciated sharply in the first quarter of 2008, but has since retreated from its highs and remains close to its long-term average value in real effective terms.

Chile’s external position has been stable. Notwithstanding the stronger peso, growth in non-copper export volumes has remained positive, although the current account surplus is expected to decline in 2008, partly as a result of continued strong import growth. The central bank has announced it would purchase $8 billion in foreign exchange reserves through the end of the year.

With expenditure contained by the structural surplus rule, continued high copper prices and strong tax revenues are expected to lead to a budget surplus of close to 8 percent of GDP in 2008. The government’s two sovereign wealth funds, the Pension Reserve Fund and the Fund for Economic and Social Stabilization, now hold a combined 12 percent of GDP in assets, all invested abroad.

The government continues to move forward with a bold structural agenda. In the financial sector, the authorities plan to introduce initiatives aimed at enhancing market access for small and medium-sized enterprises, increase market depth, and boost the internationalization of the peso. A Presidential Commission on Labor and Equity has proposed measures that include a reform of the unemployment insurance system and the introduction of a low-wage subsidy aimed at increasing labor participation in the formal economy.

Executive Board Assessment

Executive Directors commended Chile’s adherence to a prudent, rules-based macroeconomic policy framework, consisting of inflation targeting, a floating exchange rate, and a structural fiscal surplus rule. This framework has delivered important social and economic rewards and has been instrumental for managing the copper boom and several adverse shocks experienced over the past year. Directors commended the authorities’ over-arching objectives of eliminating poverty and closing the income gap with industrialized economies.

Directors observed that the Chilean economy has been remarkably resilient to the impact of global food and energy price shocks, which have been exacerbated by domestic energy shortfalls and a severe drought. The increased risks to the outlook, in particular from the recent rise of inflation, nevertheless require continued close monitoring. Directors considered that monetary policy has been appropriately geared toward returning inflation toward the 3-percent target over the two-year policy horizon. They supported the central bank’s readiness to tighten monetary policy further as needed to keep inflation expectations anchored to the target.

Directors considered that the external value of the peso is broadly in line with economic fundamentals, and that domestic policies remain consistent with external stability. They generally saw as prudent the central bank’s decision to augment foreign exchange reserves to provide additional cushion against external shocks, and welcomed the transparent and pre-announced modality of these foreign exchange purchases. Given the additional costs of sterilization, Directors encouraged the government to extend the current program to recapitalize the central bank in order to facilitate a more rapid return to positive net worth.

Directors commended the government’s strict adherence to the structural fiscal surplus rule, a cornerstone of Chile’s macroeconomic policy framework. The temporary fiscal measures to alleviate the impact of higher food and energy prices are being applied within the rule. Directors welcomed the government’s commitment to ensuring that future expenditure increases are consistent with macroeconomic stability. Going forward, they recommended keeping social relief measures targeted at the most vulnerable segments of the population.

Directors commended the authorities’ focus on improving the already high quality of public spending, increasing efficiency and strengthening governance in the public sector. They encouraged adoption of a formal medium-term expenditure framework.

Directors viewed as well placed the ongoing efforts to strengthen further the management of Chile’s Sovereign Wealth Funds. They endorsed plans to invest parts of the Pension Reserve Fund and the Fund for Economic and Social Stabilization into broader asset classes, including those with variable returns, and considered that an evaluation of Chile’s long-term copper wealth could be useful in formulating a long-term investment strategy. Directors welcomed Chile’s contributions to developing sound international principles and practices for the management of Sovereign Wealth Funds.

Directors welcomed ongoing initiatives to further modernize Chile’s capital markets, making them more efficient, competitive, and attractive to foreign investors. They recommended, in particular, steps to advance the internationalization of the peso, enhance market access for small and medium-sized enterprises, and increase market depth and liquidity by lowering regulatory and tax barriers for foreign investors, as well as consolidating public debt into fewer benchmark issues.

Directors observed that Chile’s domestic financial markets continued to function normally through the recent global financial turmoil. They commended the authorities for stepping up the monitoring of banks’ asset quality, liquidity, and risk management, as well as working toward strengthening the bank resolution framework. They suggested an IMF Financial Sector Assessment Program (FSAP) Update to review the scope for further market reforms and implications for financial sector stability and the supervisory and regulatory setup.

Directors encouraged the authorities to consider further labor market reforms, building on recent recommendations by a presidential commission. Well functioning labor markets will remain essential in helping the Chilean economy adjust and continue to achieve high rates of growth in a rapidly changing global economic environment.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Chile is also available.

Chile: Selected Economic Indicators 1/
(Annual percentage change, unless otherwise indicated)
Production and prices
Real GDP5.
Total domestic demand10.
Private fixed25.
Inventories (contributions to growth)-0.30.8-
Net exports (contributions to growth)-4.5-2.1-3.0-2.6-1.9-1.9-1.9-2.0-2.1
Real GDP (end of period)
Output gap 2/
Consumer prices
End of period3.
Unemployment rate (annual average)
Money and credit
Broad money11.911.415.2
Credit to the private sector (end of period)19.917.720.8
(Billions U.S. dollars, unless otherwise indicated)
Balance of Payments
Current account1.46.87.2-0.8-3.5-5.1-7.7-9.7-9.9
In percent of GDP1.24.74.4-0.5-2.0-2.8-4.1-4.8-4.6
Trade Balance10.822.623.712.35.5-1.4-8.3-10.4-11.6
Exports of Goods41.358.567.669.669.867.866.569.473.4
Non-Copper Exports22.325.830.135.037.739.241.745.649.7
Imports of Goods30.535.944.057.364.369.374.879.985.0
Non-Oil Imports26.931.339.248.654.159.064.770.375.9
(Annual percentage change, unless otherwise indicated)
Non-Copper Exports25.315.716.616.
Non-Oil Imports33.216.225.423.911.
Net FDI inflows (in percent of GDP)
Real effective exchange rate 3/11.9-5.28.4
Terms of trade11.131.63.2-27.6-13.6-10.3-10.8-4.4-1.5
(In percent of GDP)
Public sector finance
Central government balance4.
Gross public debt 4/34.925.724.121.920.920.119.317.415.8
Central government7.
Net public assets-
Excluding public enterprises-2.54.811.915.418.219.920.418.816.7
Saving and investment
Gross domestic investment22.220.521.122.423.624.625.726.026.0
Private fixed19.117.418.
Public investment2.
National saving23.425.225.521.921.721.821.621.321.4
Public 5/7.310.611.311.
External Debt
Gross external debt38.032.532.730.330.729.828.927.325.7
Sources: Central Bank of Chile, Ministry of Finance, Haver Analytics, and Fund staff estimates.

As of June 12, 2008

Defined as potential minus actual output, divided by potential output

End of period; INS definition of the real effective exchange rate. A decline indicates a depreciation of the peso

Gross consolidated debt of the public sector (central bank, non-financial public enterprises, and general government).

Gross saving of the general government sector, including the deficit of the central bank.

Sources: Central Bank of Chile, Ministry of Finance, Haver Analytics, and Fund staff estimates.

As of June 12, 2008

Defined as potential minus actual output, divided by potential output

End of period; INS definition of the real effective exchange rate. A decline indicates a depreciation of the peso

Gross consolidated debt of the public sector (central bank, non-financial public enterprises, and general government).

Gross saving of the general government sector, including the deficit of the central bank.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.

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