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Press Release: IMF Staff Concludes 2016 Article IV Mission to Korea
June 8, 2016
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IMF COMMUNICATIONS DEPARTMENT |
| Media Relations |
|---|
| E-mail: media@imf.org |
| Phone: 202-623-7100 |
June 8, 2016
IMF COMMUNICATIONS DEPARTMENT |
| Media Relations |
|---|
| E-mail: media@imf.org |
| Phone: 202-623-7100 |
End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
An International Monetary Fund (IMF) mission led by Kalpana Kochhar visited Seoul during May 25–June 8 to conduct discussions for the 2016 Article IV Consultation. Ms. Kochhar issued the following statement at the conclusion of its visit:
“Korea has made remarkable economic progress over the past sixty years, but now, with income levels still short of the OECD frontier, potential growth has slowed, and in light of population aging, the government is paying increasing attention to inequality and poverty.
“At the same time, Korea is facing major structural headwinds including: rapid population aging; the economy’s heavy reliance on exports even as global trade slows; corporate vulnerabilities; labor market distortions; and lagging productivity, particularly in the service sector and among small and medium enterprises. We strongly support the priority that the Korean authorities have placed on structural reforms to counter these headwinds.
“Corporate restructuring has been an area of particular emphasis for the authorities. They are taking a proactive approach to address overcapacity and declining growth prospects, with a focus on certain sectors, many of which are facing problems worldwide. In tackling these issues, Korea has the opportunity to be a global leader.
“Efforts are underway to agree, and then swiftly implement, plans for the operational and financial restructuring of vulnerable firms, while ensuring an adequate social safety net to assist affected workers. At the same time, the authorities are preemptively making arrangements to safeguard the capital adequacy of the key policy banks throughout the process. The authorities share the view that fiscal policy should play the lead role and that any involvement by the Bank of Korea should be consistent with its mandate.
“Structural reforms in other areas are also of critical importance. Strong efforts are warranted to remove barriers between worker categories, boost labor force participation, and—building on the authorities’ efforts to promote a “creative economy”—address lagging productivity.
“Given Korea’s low public debt, there is space to use fiscal policy in a complementary fashion, both to cushion the impact of structural reforms and to incentivize such reforms. In addition, a carefully targeted expansion of social expenditure, sustained over the medium term, could yield multiple benefits. It would reduce poverty and would also promote stronger consumption-led growth, both by raising the disposable income available to the elderly and other vulnerable groups and by reducing the incentives of younger households to hold precautionary savings.
“To ensure fiscal sustainability in the face of long-term pressures from population aging, the expansion of social protection should be financed by an eventual increase in pension and health care contributions as well as in tax revenues, although this would not be needed for several years. The authorities’ strong focus on maintaining fiscal discipline is welcome and, indeed, could be made even stronger through a set of fiscal rules to ensure that debt remains at prudent levels well into the medium term.
“Turning to near-term prospects, a modest recovery is envisaged, with growth ticking up to 2.7 percent this year. Risks, however, are to the downside, as the external environment is weak and uncertain, and a premature withdrawal of fiscal support could undermine the expected rebound in private consumption. Inflation is expected to remain subdued.
“Against this background, macroeconomic policies should be supportive. Speedy implementation of additional fiscal stimulus should be a priority and should be complemented by monetary easing. The authorities are taking welcome steps to contain the rapid growth of household debt, and a further tightening of prudential standards for household lending would be desirable.
“Many of the policies described above will tend to reduce savings, boost investment, and support growth—Korea’s current account surplus will moderate slowly over time, and the economy will be able to rebalance away from weak and volatile external demand. The exchange rate will need to be flexible to accommodate this transformation, and to help the economy weather external shocks. Intervention should be limited to addressing disorderly market conditions.
“The mission wishes to express its deep gratitude to the authorities for their hospitality, gracious support, and constructive discussions.”
