REPUBLIC OF KOREA|
IMF Stand-By Arrangement
Summary of the Economic Program
December 5, 1997
The program is intended to narrow the external current account deficit to below 1
percent of GDP in 1998 and 1999, contain inflation at or below 5 percent,
and--hoping for an early return of confidence--limit the deceleration in real GDP
growth to about 3 percent in 1998, followed by a recovery toward potential in 1999.
2. Monetary policy and exchange rate policy
- To demonstrate to markets the authorities' resolve to confront the present crisis,
monetary policy will be tightened immediately to restore and sustain calm in
the markets and contain the impact of the recent won depreciation on inflation.
- In line with this policy, the large liquidity injection in recent days has been reversed,
and the call rate has been raised from 12 1/2 percent on December 1, 1997 to
21 percent today, and will be raised further in the next few days.
- Money growth during 1998 will be limited to a rate consistent with containing
inflation at 5 percent or less.
- A flexible exchange rate policy will be maintained, with intervention limited to
3. Fiscal policy
- A tight fiscal policy will be maintained in 1998 to alleviate the burden on monetary
policy and to provide for the still uncertain costs of restructuring the financial
- The cyclical slowdown is projected to worsen the 1998 budget balance of the
consolidated central government by about 0.8 percent of GDP. The present
estimates of the interest costs of financial sector restructuring is 0.8 percent of
GDP. Offsetting measures amounting to about 1.5 percent of GDP will be
taken to achieve at a minimum budget balance and, preferably, a small surplus.
This will be achieved by both revenue and expenditure measures to be
determined shortly. These may include, among others:
- increasing VAT coverage and removing exemptions;
- widening the corporate tax base by reducing exemptions and certain tax incentives;
- widening the income tax base by reducing exemptions and deductions;
- increasing excises, luxury taxes, and transportation tax;
- reducing current expenditures particularly support to the corporate sector; and
- reducing low priority capital expenditures.
Financial Sector Restructuring
1. The following financial sector reform bills submitted to the National Assembly
will be passed before the end of the year:
- A revised Bank of Korea Act, which provides for central bank independence, with
price stability as its main mandate.
- A bill to consolidate supervision of all banks, including specialized banks, merchant
banks, securities firms, and insurance companies in an agency with operational
and financial autonomy, and with all powers needed to deal effectively with
troubled financial institutions.
- A bill requiring that corporate financial statements be prepared on a consolidated
basis and be certified by external auditors.
2. Restructuring and reform measures
- Troubled financial institutions will be closed or if they are deemed viable,
restructured and/or recapitalized. The government has already suspended 9
insolvent merchant banks (on December 2, 1997). These banks have been
placed under the control of MOFE and required to submit a rehabilitation plan
within 30 days. These plans will be assessed in consultation with Fund staff
and, if not approved, the institution will have its license revoked.
- A credible and clearly defined exit strategy will include closures as well as mergers
and acquisitions by domestic and foreign institutions, provided the viability
of the new groupings is assured. Clear principles on sharing of losses among
equity holders and creditors will be established.
- The disposal of nonperforming loans will be accelerated.
- The present blanket guarantees which will end in three years will be replaced by a
limited deposit insurance scheme.
- A timetable will be established for all banks to meet or exceed Basle standards.
- Prudential standards will be upgraded to meet Basle core principles.
- Any support to financial institutions will be given on strict conditions.
- All support to financial institutions, other than BOK liquidity credits, will be
provided according to pre-established rules, and recorded transparently.
- Accounting standards and disclosure rules will be strengthened to meet international
practice. Financial statements of large financial institutions will be audited by
internationally recognized firms.
- Manpower in the unit supervising merchant banks will be sufficiently increased to
make supervision effective and to allow proper handling of troubled banks.
- The schedule for allowing foreign entry into the domestic financial sector will be
accelerated, including allowing foreigners to establish bank subsidiaries and
brokerage houses by mid-1998.
- Borrowing and lending activities of overseas' branches of Korean banks will be
closely monitored to ensure that they are sound. Nonviable branches will be
- BOK's international reserve management will be reviewed with the intention to bring
it closer to international practice. Deposits with overseas branches of domestic
banks will not be increased further, but gradually withdrawn as circumstances
allow. Financial institutions will be encouraged to improve their risk
assessment and pricing procedures, and to strengthen loan recovery; actions in
these areas will be reviewed as part of prudential supervision.
Other Structural Measures
1. Trade liberalization
Timetables will be set, in compliance with the WTO commitments, at the time of the
first review, to:
- eliminate trade-related subsidies;
- eliminate restrictive import licensing;
- eliminate the import diversification program; and
- streamline and improve the transparency of the import certification procedures.
2. Capital account liberalization
- The present timetable for capital account liberalization will be accelerated by taking
- liberalize foreign investment in the Korean equity market by increasing the ceiling
on aggregate ownership from 26 percent to 50 percent by end-1997
and to 55 percent by end-1998. The ceiling on individual foreign
ownership will be increased from 7 percent to 50 percent by end-1997.
- effective immediately, for foreign banks seeking to purchase equity in domestic
banks in excess of the 4 percent limit requiring supervisory authority
approval, the supervisory authority will allow such purchases
provided that the acquisitions contribute to the efficiency and
soundness of the banking sector; legislation will be submitted to the
first special session of the National Assembly to harmonize the
Korean regime on equity purchases with OECD practices (with due
safeguards against abuse of dominant positions.)
- allow foreign investors to purchase, without restriction, domestic money market
- allow foreign investment, without restriction, in the domestic corporate bond
- further reduce restrictions on foreign direct investment through simplification of
- eliminate restrictions on foreign borrowings by corporations.
3. Corporate governance and corporate structure
- Timetable will be set by the time of the first review to improve the transparency of
corporate balance sheets, including profit and loss accounts, by enforcing
accounting standards in line with generally accepted accounting practices,
- independent external audits,
- full disclosure, and
- provision of consolidated statements for business conglomerates.
- The commercial orientation of bank lending will be fully respected, and the
government will not intervene in bank management and lending decisions.
Remaining directed lending will be eliminated immediately. While policy
lending (agriculture, small business, etc.) will be maintained, the interest
subsidy will be borne by the budget.
- No government subsidized support or tax privileges will be provided to bail out
- The "real name" system in financial transactions will be maintained, although with
some possible revisions.
- Measures will be worked out and implemented to reduce the high-debt-to-equity
ratio of corporations, and capital markets will be developed to reduce the share
of bank financing by corporations (these will be reviewed as part of the first
- Measures will be worked out and implemented to change the system of mutual
guarantees within conglomerates to reduce the risk it involves.
4. Labor market reform
- The capacity of the new Employment Insurance system will be strengthened to
facilitate the redeployment of labor, in parallel with further steps to improve
labor market flexibility.
5. Information provision
- There will be regular publication of data on foreign exchange reserves, including the
composition of reserves and net forward position with a two weeks delay
initially. Data on financial institutions, including nonperforming loans, capital
adequacy, and ownership structures and affiliations will be published twice a
year. Data on short-term external debt will be published quarterly.