Article

Country Briefs: Copper Windfall Brightens Chile’s Outlook but Must be Managed Prudently

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
October 2006
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For the past 15 years, structural reforms and prudent policies have helped anchor Chile’s successful economic performance. In recent years, a fiscal policy rule, inflation targeting, trade liberalization, and an open capital account have yielded strong economic growth and low inflation.

Under the fiscal rule, the central government aims to maintain a structural surplus of 1 percent of GDP after adjusting for cyclical developments and changes in copper prices. High copper prices enabled the central government to register surpluses averaging 3½ percent of GDP in 2004–05, and a surplus of 6 percent of GDP is projected for 2006. The ratio of Chile’s net public sector debt fell from 13 percent of GDP in 2003 to 7½ percent in 2005.

The central bank is managing monetary policy prudently. Since September 2004, it has gradually raised its policy rate in response to the economic recovery and the closing of the output gap. Inflation expectations have remained well anchored near the middle of the central bank’s 2–4 percent inflation target range.

According to the IMF’s latest economic review, Chile’s outlook is positive, reflecting strong prospects for copper and robust domestic demand. Sustained growth has encouraged more workers to return to the labor market, and unemployment has gradually edged down.

IMF Executive Directors commended the authorities for their implementation of sound macroeconomic policies, which have yielded substantial benefits, including low inflation, sustained economic growth, a significant reduction in poverty, and strengthened resilience to external shocks. They welcomed the authorities’ adherence to the fiscal rule and commended them for keeping spending growth in check. Directors also highlighted the success of Chile’s inflation targeting framework.

Chile
Proj.
2003200420052006
(percent change)
Real GDP3.96.26.35-5.5
Consumer prices (end-period)1.12.53.73.4
Unemployment rate (annual average)8.58.88.07.7
Total domestic demand4.98.111.47.1
Copper exports
Billion dollars7.814.518.328.1
Percent of total exports36.145.045.153.8
Data: Central Bank of Chile and Ministry of Finance; Haver Analytics; and IMF staff estimates.

Directors supported the medium-term emphasis on promoting sustained growth and reducing income inequality. They welcomed reforms to improve school coverage, increase funding for education, and promote research and development. Directors encouraged the authorities to improve labor market flexibility, to help increase employment opportunities and address the still-high unemployment rate, especially among the young. Progress in these areas should help enhance productivity and support further economic diversification.

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