IMF Staff Completes 2021 Article IV Mission to Republic of Korea

January 27, 2021

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.
  • The Korean economy has weathered the COVID-19 pandemic comparatively well and is projected on a preliminary basis to grow by 3.1 percent in 2021 after contracting by 1 percent in 2020.
  • Some additional policy accommodation would help the economy normalize faster and bring discouraged workers back to the labor market.
  • The Korean New Deal offers an opportune strategy to develop new growth drivers and achieve greater inclusiveness; broader product market reforms and steps to tackle remaining rigidities in the labor market will help generate greater impact.

Washington, DC: An International Monetary Fund (IMF) team, led by Mr. Andreas Bauer, Mission Chief for the Republic of Korea and Assistant Director of the Asia and Pacific Department, held virtual discussions on the 2021 Article IV Consultation from January 13 to 26, 2021. At the conclusion of the discussions, Mr. Bauer issued the following statement:

“The Korean economy has weathered the COVID-19 pandemic comparatively well, supported by its sound macroeconomic fundamentals, a timely and effective public health response, and the deployment of a comprehensive set of fiscal, monetary, and financial measures.

“As a result, Korea’s economic contraction in 2020 was significantly smaller than in most other advanced economies, with real GDP estimated to have declined by 1 percent. Activity was supported by buoyant exports of high-tech products and resilient investment in machinery and equipment.

“The outlook is for a recovery in 2021 with real GDP projected on a preliminary basis to grow 3.1 percent, supported by a gradual lifting of COVID-related restrictions and stronger external demand. [1] Uncertainty surrounding the outlook remains elevated, however, reflecting external and domestic COVID-related risks. The recovery is expected to be uneven, with growth rates in services and sectors dependent on domestic demand lagging those in export-oriented industries.

“Building on the successful response to the COVID-19 shock, the priorities for the period ahead will be to nurture the ongoing recovery and solidify the foundations for resilient, greener and more inclusive medium-term growth.

“Given sizable economic slack and downside risks to the recovery, some additional fiscal and monetary policy accommodation would help the economy normalize faster and bring discouraged workers back to the labor market.

“The 2021 budget rightly aims at maintaining an accommodative fiscal policy stance, but there is scope for raising targeted transfers to adversely affected workers and firms and accelerating public investment plans to support the recovery. A somewhat higher than currently budgeted deficit this year can be offset by gradual consolidation in subsequent years. In this context, the government’s proposal to operate fiscal policy within a rules-based medium-term framework is welcome.

“Monetary policy was appropriately eased in 2020 and has scope for additional support to underpin the recovery and bring inflation closer to the Bank of Korea’s target. This could be achieved through a modest further easing, while forward guidance on the likely course of monetary policy could also help ease financial conditions currently.

“The financial system has remained resilient overall. Macroprudential policies appear appropriately set to mitigate risks but should be tightened further if household credit continues to rise sharply.

“Financial support programs have been critical to sustain corporate credit, especially to SMEs. Given the lingering impact of the pandemic, the authorities are appropriately avoiding a premature winding down of these programs. As the economy recovers, the focus of support should shift from liquidity provision to targeted measures that promote corporate restructuring and solvency.

“The Korean New Deal represents a welcome strategy to develop new growth drivers in the post-pandemic world and increase inclusiveness. Reforms that reduce entry barriers and stimulate competition, especially in the services sector, and tackle remaining rigidities in the labor market can provide a further boost to potential growth. Strengthening carbon pricing to provide robust incentives for green investment will also be important to achieve the objectives of the green pillar of the Korean New Deal.

“We would like to thank the authorities for excellent discussions and support during the Article IV consultation."

[1] The final forecast will be updated to reflect the QIV GDP release.

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