Chile’s Finance Minister Felipe Larrain yesterday outlined measures to finance reconstruction after the massive earthquake that struck the country in late February.
President Sebastian Piñera’s government estimates that damage to infrastructure, loss of production and clean up from the 8.8-magnitude earthquake will cost approximately $30 billion, i.e. roughly 20% of the country’s 2009 GDP.
Larrain, speaking to reporters in Cancun, estimated that reconstruction would take around three years, but the government will do what it can to work more rapidly.
The first measure, announced on Friday, is to cut the budgets of all ministries, to channel $700 million into a new reconstruction fund.
There may be a tax increase, but it would be moderate and “would not be the central component for reconstruction”. Larrain said. “We are going to make sure it does not affect economic growth.”
In tandem with a tax increase, but not mentioned by Larrain in Cancun, the government is also studying an increase in the royalty paid by copper companies. Chile is the world’s largest copper producer.
Larrain said a combination of mechanisms would be used to raise money. The elements under study include incurring debt internationally and in pesos, as well as issuing sovereign bonds. He also said that some of the $12 billion saved during the boom years of the last decade in a sovereign wealth fund could be used for reconstruction.
“We are likely going to have a mix of these different forms of financing to avoid, for example, a massive influx of dollars that would affect the exchange rate,” he said.
The Piñera government is keen on getting the private sector involved in the reconstruction and Larrain, as with other ministers, stress that the $30 billion in losses are both private and public.
The government will assist some in the private sector, but would like to do this through public-private partnerships and other mechanisms that combine resources and technology.
Larrain said that the government is committed to reaching its macro-economic targets, such as balancing the budget, but called for patience. “The earthquake has changed our short-term plans, but we are not going to step back from our long-term goals.”
He said the fiscal deficit was 4.5% of GDP and that this would decline, but did not want to offer specifics. “We have been in government for 10 days, but because of the crisis people are talking as if it has been a year.”