Chile requests flexible credit line from IMF

IMF’s Georgieva says she will recommend Chile receives access to $24 billion credit line
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Chile’s government has asked the International Monetary Fund for access to its Flexible Credit Line to boost its resources to deal with the Covid-19 crisis.

Chile requested the IMF provide an FCL worth 17.442 billion in special drawing rights, or around $23.8 billion. “Access to this line will complement international reserves and increase the availability of immediate access liquidity by more than 60%,” said the Central Bank of Chile in a statement on May 12. The country’s international reserves amounted to almost $36.8 billion at the end of the first quarter of 2020, according to official data.

The central bank said that access to the credit will help it “strengthen its instruments” if the economic damage caused by the pandemic worsened. The IMF said the Chilean authorities intend to treat the FCL as precautionary financing.

In response to the Covid-19 crisis, the central bank cut interest rates in March by 125 basis points to 0.5%. It also announced a range of policies aimed at supporting the country’s banking system.

It launched a six-month special funding facility providing loans for banks with up to four years of maturity at the monetary policy rate. The central bank added corporate bonds to the assets banks can post as collateral to access liquidity, and launched a $4 billion banking bond purchase programme.

In 2020, the Chilean peso has declined by around 9.6% against the US dollar to 821.1 per $1 today (May 14). Nonetheless, since April 1 the currency has partly recovered the hefty losses it experienced in the first quarter of the year, when it shed 14.7% of its value against the dollar.

From 2019 crisis to Covid-19

In the months leading up to the beginning of the Covid-19 crisis, Chile experienced an acute political and economic crisis. Weeks of mass protests against poor public services and inequality created an economic crisis, and contributed to a sharp depreciation of the peso.

In a bid to protect the currency, in late November 2019 the central bank launched an ambitious programme of foreign exchange interventions. It sold $20 billion dollars, almost half of the reserves portfolio, between December 2019 and May 2020.

These interventions succeeded in boosting the exchange rate in December. However, the currency started to fall again in January and the central bank abruptly halted the programme on January 13. Nonetheless, due to the Covid-19 crisis, it reactivated it in March, prolonging its schedule of foreign currency sales until January 2021.

IMF programme

The IMF created the FCL in 2009 “to reduce the perceived stigma of borrowing from the IMF and to encourage countries to ask for assistance before they face a full-blown crisis, says the fund on its website. Unlike other IMF programmes, the FCL does not entail any conditionality in the form of macroeconomic adjustment programmes.

The IMF says the programme is only available to countries with “very strong economic fundamentals and policy track records”. IMF managing director Kristalina Georgieva said she will recommend that the executive board approves giving Chile access to the FCL.

Since the creation of the FCL, only Mexico, Poland and Colombia have secured access to one. Currently, Mexico and Colombia are the only countries with running programmes. All of them have treated the FCL as precautionary financing and have not drawn on the funds it provides. On May 8, Peru requested access to an FCL for an amount to 8 billion in special drawing rights.

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