VI. Final comments

6.1 Positive aspects and advantages

The Chilean experience during the three governments of National Unity, between 1990 and 2005, is abundant in many successful reforms, some of them unsuccessful and also those that remain in an intermediate ground that apparently do not satisfy anyone.

It seems useful to systematize the experience using cases of complex reforms that are mainly related to social policies and to the modernization of Chile’s State during the 90’s and the period 2000-2005.

As a result of the unexpected fiscal surplus produced by the rise in the copper price in international markets, there have been several proposals regarding a proper use of the greater resources that will be available for the government.

In this regard, an option has been suggested related to the debt of the Treasury with the Central Bank of Chile (CBCH)59.

The CBCH shows a general balance sheet characterized by a long position in foreign currency, and in contrast, a short position in local currency.

The position in foreign currency is mainly due to the holding of international reserves while the position in local currency is due to the issuance of instruments.

This situation makes the general balance sheet be exposed to fluctuations of the exchange rate, inflation rate and the differential between the interest rates at which reserves are invested and the interest rates at which instruments are issued (the rate at which securities are effectively placed, not the nominal rate),

Additionally, CBCH’s operational expenses must be included.

Moreover, from the cash flow point of view, relevant variables are the net variance of reserves in foreign currency per net purchase of foreign currency, net interest paid and received, net amortization of internal assets or liabilities and operational expenses.

Foreign exchange fluctuations affect the profit and loss accounts, but they do not have an impact on cash flow.

From the CBCH’s point of view, there are two options to be considered: debt prepayment and/or capital contributions.

From the balance sheet’s point of view, it is more attractive to receive capital contributions because they generate positive net operational incomes.

The option of prepayment may be the less attractive if cash resources received are invested in instruments less profitable than the current net incomes, a situation that may be possible because the Treasury could be interested in prepaying the most expensive debt (yielding a LIBOR rate plus 0.5%)

The Treasury should pay the debt imposed arbitrarily on the Central Bank of Chile when it should have been absorbed by the Treasury. This debt is cheaper.

It should be noted that the aforementioned prepayment neither represents a significant change in the cash situation of the CBCH nor a great change in the general balance sheet because the net debt contracted with the Treasury, US$ 5,700 million as of December 31st, 2004, exceeds many times the available funds.

Nevertheless, the contribution as capital of the same resources would have a more beneficial effect on the Central Bank. This is true for the short term, but in the long run capital loss may be repeated if current wedges cannot be eliminated.

As it has been indicated, the Central Bank has to seek formulas to eliminate wedges. The need to do so is explained by the bond issuance in dollars, or readjustable in dollars, carried out by the Central Bank during recent years.

The payment of the fiscal debt would contribute to eliminate rate wedges.

In short, if fiscal surplus funds are used to pay off the Treasury’s debt with the Central Bank of Chile, it is more profitable to make this as capital contributions.