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Chile Exchange-Rate Policy and the Balance of Payments
https://photius.com/countries/chile/economy/chile_economy_exchange_rate_policy~461.html
Sources: The Library of Congress Country Studies; CIA World Factbook
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    Monkey-puzzle trees (Araucaria araucana) of the pine family, valued for their beautifully veined hardwood and plentiful resin, near Temuco in southern Chile
    Courtesy Embassy of Chile, Washington

    There was broad agreement that the implementation of an exchange-rate policy aimed at encouraging exports had been at the center of Chile's economic success. Since at least 1985, the members of the Chilean economic team had understood that avoiding exchange-rate overvaluation was crucial to the promotion of growth and prosperity. As a result, it was decided that a policy based on small daily adjustments of the nominal exchange rate would be adopted. In this way, exporters would be compensated for any increase in their domestic costs stemming from inflation.

    Although the basic elements of this "crawling peg" exchangerate policy were maintained during the 1985-92 period, the system went through a number of changes. The first important innovation was to center the "reference" exchange rate set by the Central Bank within a 6 percent band. Market participants were allowed to transact freely within the band. A second important change was to widen the band to 10 percent and to adjust the reference rate downward. Finally, in 1992 the Central Bank decided to alter the method used to calculate the daily adjustment of the reference rate by using a basket of currencies made up of the dollar, the German mark, and the Japanese yen in a 50-30-20 ratio, instead of only the dollar.

    In early 1990, Chile started to receive increasing amounts of foreign financial flows. This generated an overabundance of foreign exchange, which tended to make the exchange rate appreciate. From a practical point of view, the increased capital inflows were reflected in the fact that the exchange rate moved to the "floor" of the band, reducing the amount of real Chilean pesos that each exporter received per United States dollar exported. This development affected the profitability of a number of export projects, reducing the overall competitiveness of the Chilean economy. Also, the real appreciation of the exchange rate affected local industries that competed with imported goods, including the agricultural sector. Not too surprisingly, exporters have tried to persuade the government to alter its exchange-rate policy in a way that would increase their profits.

    In 1991 the pressure of capital inflows subsided somewhat. However, this did not end the overabundance of foreign exchange, nor did it put an end to the tendency toward real exchange-rate appreciation. That year the current account of the balance of payments experienced a remarkable turnaround of almost US$1 billion (see table 31, Appendix). Consequently, during 1991 the overall result was that external accounts were once again positive, with the Central Bank accumulating more than US$1.2 billion, as compared with US$2.4 billion in 1990.

    Chilean balance of payments trends for 1990-92 generally were positive, despite a current account deficit in 1992-93. Although the capital account experienced a reversal in 1991, moving from a large surplus in 1990 to a modest deficit, in 1992 this tendency appeared to be reversing itself once again, with capital inflows exceeding outflows. An important aspect of the balance of payments data for the early 1990s is the large positive figure for "errors and omissions," which was US$161 million in 1991. However, there is evidence suggesting that the government's figure represents "reversed capital flight" entering the country in an illegal fashion. Some observers have claimed that illegal drug-related monies were moving toward Chile in the early 1990s (see Incidence of Crime , ch. 5).

    Data as of March 1994


    NOTE: The information regarding Chile on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of Chile Exchange-Rate Policy and the Balance of Payments information contained here. All suggestions for corrections of any errors about Chile Exchange-Rate Policy and the Balance of Payments should be addressed to the Library of Congress and the CIA.

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