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CHILE Renewed Credit Line Underscores Chile’s Strong Fundamentals

(Credit: Tamara Merino/IMF Photo)  español Chile's Flexible Credit Line (FCL) with the IMF has recently been renewed for another two years at a reduced amount of about $11.8 billion. In an interview with IMF Country Focus, incoming mission chief Bikas Joshi discusses how the country increased its resilience, the risks facing a major commodity exporter, and how AI-driven demand for copper and additional reforms could support future growth.   Why does Chile need another Flexible Credit Line? And why has it been reduced?   Bikas Joshi: The Flexible Credit Line is essentially an insurance policy, designed for countries like Chile that have an exemplary track record of very strong economic policies and institutions. It provides unconditional access to financing during periods of uncertainty. As a small and open commodity exporter deeply integrated into global capital markets, Chile remains vulnerable in a world where external shocks have become more frequent. The FCL supports countries while they implement measures to become even more resilient.   In providing this insurance, the FCL considers the strength of economic policy frameworks as well as domestic and external risks, with the chosen level appropriate for a broad range of scenarios. Over the years, Chile has developed stronger buffers against shocks, including from the central bank’s ongoing reserve purchase program. We measure access to IMF resources in multiples of the country’s capital contribution to the IMF, the so-called quota. Chile started with 1000 percent of the quota, in 2020, and has reduced steadily since, now bringing it down to 500 percent (equivalent to around $11.8 billion). This progressive reduction is part of Chile’s exit strategy and in line with the intended use of this credit line. Copper prices are at record highs and demand is strong. This sounds like good news. Why does the IMF report call it a vulnerability?   Joshi: As we noted in a report in July, as part of our annual review of the Chilean economy, high copper prices have definitely helped the Chilean economy: they have boosted exports and mining revenue and could support higher medium-term growth if the factors driving global demand for it—the energy transition and the rapid growth of AI—persist.   However, high dependence on commodities can be a vulnerability due to their volatile prices. Production can also disappoint. For example, copper production fell after a serious earthquake and mining accident in July 2025. Also, as mines get depleted, the quality of ore from which copper can be extracted declines, increasing production costs.   The policy implication is straightforward: use the good times to rebuild fiscal and external reserves, keep the exchange rate as the shock absorber, and avoid expanding permanent spending based on revenue that may prove temporary.   How is the war in the Middle East affecting Chile? And what other global developments should Chileans pay most attention to?   Joshi: Chile imports oil, so the main impact has been through higher oil prices. Rising fuel and transportation costs pushed headline inflation from 2.4 percent in February to 4.3 percent in June, although the underlying inflation pressures remain contained.  Financial conditions have become more restrictive, and the peso has since lost value. The shock also carried a fiscal cost through the oil price stabilization mechanism, which the government quickly, and rightly, capped.   Beyond that, Chile remains exposed to various factors: growth in the United States and China, U.S. long-term interest rates and global financial conditions, as well as tariffs and other trade tensions. AI-related investments around the world, which influence both copper demand and global market sentiment, could also affect the outlook for Chile.   The Fund once said that the high growth Chile enjoyed in the 1990s won’t return. Growth is projected to slow even further this year. What can the country do?   Joshi: Cross-country evidence suggests trend growth of around 2 percent is realistic for an economy at Chile's income level under current demographics. But that is a benchmark, not a ceiling, and Chile should aim higher.   We see the current slowdown as largely temporary, reflecting temporarily weaker copper output, and we do project a recovery in 2027. Chile can grow close to 3 percent a year over the medium term if copper prices stay high and reforms are delivered.   Raising trend growth is hard and takes time, especially with an aging population. The most promising levers are regulatory reforms, including faster permitting. Chile is seeking to address these issues through its National Reconstruction Plan, which aims to stimulate investment by reducing corporate income tax and providing other incentives. Better trade and logistics, closing skill gaps, and developing stronger university-business research links could also help. Addressing demographic challenges will also be critical, for example, by helping more women to join the labor force, including by reforming the childcare system.   Can Chile cut taxes, deregulate, and reduce public spending all at the same time?   Joshi: Yes, and in fact we see these as complementary rather than competing measures. The tax cuts and deregulation are more aimed at the medium term: boosting competitiveness, reviving investment, and ultimately lifting Chile's potential growth. But those gains take time to materialize. So, in the near term, rationalizing public spending and improving its efficiency to maintain fiscal sustainability is indeed the right approach.

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Peter Walker  Managing Editor | IMF Country Focus  pwalker@IMF.org

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