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IMF sees Chile’s economy accelerating next year, welcomes reforms

IMF sees Chile’s economy accelerating next year, welcomes reforms

Posted by Juan Gavasa on July 24, 2014

The International Monetary Fund on Tuesday projected Chile’s economic growth will pick up pace in 2015 and broadly welcomed President Michelle Bachelet’s ambitious tax and education reforms.

Gross domestic product in the world’s top copper exporter is seen expanding by 3.2 per cent this year and 4.1 per cent in 2015, the IMF said in a report. Chile’s economy grew by 4.1 per cent last year.

“Growth is expected to bottom out in 2014 and gradually return to trend. Growth will reach 3.2 per cent in 2014 and recover to its potential level by 2016, supported by monetary easing, the peso depreciation, and recovery in the global economy,” the IMF said.

Chile’s central bank has cut its benchmark interest rate by 125 basis points since October in an attempt to stimulate the economy, as investment, particularly in the key mining sector, and consumption have cooled.

“The end of the copper price boom and the normalisation of global monetary conditions pose challenges to the growth outlook,” the IMF said, adding that “Chile, with its strong fundamentals and policy frameworks, including a floating exchange rate, is well-placed to cope with these challenges.”

Tax restructuring

The IMF also drew attention to Chile’s income inequality, the worst among the Organisation for Economic Co-operation and Development’s 34 member states. That inequality was reflected in unequal access to quality education, blocking social mobility, it said.

Bachelet, a centre-left politician who took office in March, has vowed to address the problem. To that end, her government is pursuing tax changes aimed at funding an overhaul to the education system.

The government says the changes, which include a gradual increase in corporate taxes to 27 per cent by 2017 from the current 20 per cent, also will pay for improved health care and reduce the fiscal structural deficit to zero by 2018.

“Improving access to high-quality education will help improve both Chile’s long-term growth prospects and reduce Chile’s skewed income distribution. And eliminating the structural fiscal deficit will help preserve Chile’s strong public finances and fiscal buffers,” the IMF said.

It said the government’s agenda “focuses on the right areas,” but added that many details remained to be worked out and greater clarity is needed regarding how the new tax regime will be implemented to evaluate its potential impact on growth and investment.

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