News Brief: IMF Completes Final Review of Korea Program

August 23, 2000

The Executive Board of the International Monetary Fund (IMF) today completed the seventh and eighth reviews under the stand-by credit for Korea. Korea does not intend to draw the SDR 543.75 million (about US$720 million) that is available as a result of today’s decision.

Korea’s three-year stand-by credit was approved on December 4, 1997 in an amount equivalent to SDR 15.50 billion (about US$21 billion). Of the total SDR 14.4 billion (about US$19.5 billion) that Korea drew under the program, it has repaid SDR 9.95 billion (about US$13.5 billion). This includes advance repayments under the Supplemental Reserve Facility (SRF). The stand-by expires on December 3, 2000 and no further Executive Board reviews are scheduled.

At the conclusion of the Executive Board’s discussions on Korea, Mr. Stanley Fischer, First Deputy Managing Director and Acting Chairman stated:

“Directors commended the Korean authorities on the impressive recovery from the financial crisis and the deep recession that had ensued. The rebound has been made possible by a combination of factors: supportive macroeconomic policies and a competitive exchange rate; a wide range of structural reforms that addressed the weaknesses that contributed to the 1997 crisis and increased market orientation; a favorable external environment; and an improvement in confidence resulting from both the implementation of strong economic policies and the recovery and buildup in foreign exchange reserves.

“The short-term macroeconomic outlook is strong, with real GDP growth in 2000 forecast to be 8½ percent. There are indications that growth is moderating to a more sustainable pace and that inflation is under control. The current account surplus is projected to narrow to about 2 percent of GDP. Capital inflows have been heavy, albeit volatile. Gross reserves have increased to US$90 billion and external vulnerability has been significantly reduced. Looking ahead, real GDP growth is projected to average 6-6½ percent over the medium-term, in line with estimates of potential output growth. In contrast to the subdued inflation outlook for this year, inflationary pressures are likely to build progressively over the course of next year, as the output gap closes.

“The challenge for macroeconomic policies in the period ahead is to foster a sustainable output expansion while keeping inflation in check. The major part of the adjustment of the overall macroeconomic policy stance toward that end will continue to be on the side of fiscal policy. Indeed, with the strong fiscal performance in the first half of this year, it is probable that the fiscal deficit for the year as a whole will be considerably less than the budget forecast of 2½ percent of GDP. A further appreciation of the won would also reduce the burden on interest rate policy in dampening inflation pressures. In line with the principle that the exchange rate should be determined by market forces, intervention in the foreign exchange market should be limited to smoothing operations. The timing and size of interest rate increases to meet the inflation objectives will depend critically on the degree of fiscal consolidation and exchange rate developments.

“Although significant progress has been made in the implementation of structural reforms, it remains critical to tackle the remaining weaknesses in the financial and corporate sectors. The framework for restructuring is generally in place, and, looking ahead, the key issues are implementation and ensuring a stronger role for markets to drive the process.

“On the corporate restructuring front, creditor-led workout programs need to move beyond financial stabilization and complete strategic sales, spin-offs, and other operational restructuring. The top 4 chaebol remain highly leveraged and their continued restructuring will need to be driven by creditors and markets. With regard to financial sector restructuring, preparations to shift to a limited deposit insurance scheme in January 2001 are under way, and this shift is promoting market discipline and encouraging restructuring. A thorough cleanup of financial institutions’ balance sheets is a precondition for the success of further reform efforts, and hence should be an area of major emphasis. The authorities’ announcement of the key elements of a strategy to divest government shares in commercial banks is welcome. Reforms to put the investment trust sector on a sound footing in the longer run are being implemented, and problems in this sector now appear to be more manageable.

“As the recent instability in financial markets has underscored, it will be critical to persist with forceful implementation of the agreed policy package-especially on structural reforms-in order to reduce the Korean economy’s vulnerability to shocks and thereby help ensure the continuation of high growth in the medium term. The current strength of the economic expansion provides an excellent opportunity to push ahead with the unfinished agenda,” Mr. Fischer said.


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