MercoPress. South Atlantic News Agency

IMF full of praise for the Chilean economy

The International Monetary Fund forecasted the Chilean economy would expand between 5,5 and 6% in 2005, a drop from the original estimate of 6,1%, although all the fundamentals of the economy remain “very robust”.

If the forecast is correct this will mean a decrease from last year's 6,1%, which was the highest recorded in the last seven years.

In its regular review of the economic and financial situation of different country members, IMF anticipated that Chile in 2005 have a fiscal surplus of 2,3% of GDP while the current account surplus will drop to 0,5% given the greater volume of imports, including hydrocarbons and capital investment.

IMF describes Chilean economic and financial policy as "sound and consistent" with a policy mix based "on fiscal prudence, a successful monetary policy based on an inflation targeting framework with a floating exchange rate, free trade, and an open capital account, within a sound financial regulatory and supervisory framework".

This has enabled Chile to grow steadily, with low inflation contributing to considerably reduce poverty. In the last seven years inflation in Chile has averaged 2,8% annually.

However the weak belly of the Chilean economy remains unemployment, which even when it has dropped considerably, it still remains high at a national average of 8%.

"Despite steady employment growth, the unemployment rate is still relatively high, at about 8 percent, as strong economic growth has encouraged more workers to return to the labour market", argues the IMF review.

A favourable global environment, continued strength of mineral prices, the ongoing rebound in private investment, and the pick up in domestic consumption are expected to contribute to strong economic growth in 2005 and 2006. Existing risks to the outlook appear manageable, and Directors commended the authorities for their prompt action to mitigate the impact of disruptions in the supply of gas from the region.

"Chile remains a model reformer and Directors look forward to its continued leadership role in building a strong political consensus in favour of a robust macroeconomic policy framework in the period ahead".

The report also underscores that the floating exchange rate regime has benefited the economy and allowed it to adjust smoothly to external shocks. The central bank's transparent policy framework, with no intervention in the foreign exchange market has been commendable and together with fiscal prudence has helped support competitiveness, as evidenced by the strong growth in non-traditional exports.

Nevertheless even when the Chilean banking sector is robust, IMF believes there's room for further progress on improving the financial system's efficiency and oversight. IMF also praised the strengthening of market risk regulations in the banking sector.

Further on the IMF supports Chile's high priority to reforms aimed at promoting sustained growth and further reducing income inequality and high unemployment over the medium term.

"Directors stressed that further improvements in labour market flexibility would be important to expand employment opportunities", and they also welcomed reforms to improve pre-school coverage for low income groups, provide education subsidies to low-income households, and enhance funding for tertiary education.

Finally, strong support for "Chile's leadership role in opening markets through comprehensive and sustained trade and financial market liberalization" and the implementation of recent bilateral trade agreements which have "encouraged the Chilean authorities to continue their efforts in supporting multilateral trade liberalization".