News Brief: IMF Completes Final Review of Korea Program
IMF News, August 23, 2000
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- Published: August 23, 2000
Program status and recent Executive Board action
- The Executive Board 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 the decision.
- The stand-by expires on December 3, 2000 and no further Executive Board reviews are scheduled.
Facility size, drawings, and repayments
- Stand-by credit approved on December 4, 1997 in an amount equivalent to SDR 15.50 billion (about US$21 billion).
- Total drawn under the program: SDR 14.4 billion (about US$19.5 billion).
- Amount repaid to date: SDR 9.95 billion (about US$13.5 billion). This includes advance repayments under the Supplemental Reserve Facility (SRF).
IMF assessment of the recovery and macroeconomic outlook (Mr. Stanley Fischer)
- Directors' overall assessment:
- Commended Korean authorities on the "impressive recovery from the financial crisis and the deep recession that had ensued."
- Attributed the rebound to: supportive macroeconomic policies and a competitive exchange rate; a wide range of structural reforms; a favorable external environment; and an improvement in confidence from strong policies and buildup in foreign exchange reserves.
- Short-term and medium-term projections and indicators (as stated):
- "Real GDP growth in 2000 forecast to be 8½ percent."
- 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."
- "Real GDP growth is projected to average 6-6½ percent over the medium-term, in line with estimates of potential output growth."
- Inflation: subdued this year, but "inflationary pressures are likely to build progressively over the course of next year, as the output gap closes."
Policy challenges and recommended stance
- Macroeconomic policy challenge:
- "The challenge for macroeconomic policies in the period ahead is to foster a sustainable output expansion while keeping inflation in check."
- Major part of adjustment should be on fiscal policy.
- Fiscal policy and interest rate interaction:
- With strong fiscal performance in the first half of the 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."
- Exchange rate principle: "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."
- Timing and size of interest rate increases depend critically on fiscal consolidation and exchange rate developments.
Structural reforms: corporate and financial sector priorities
- General:
- Significant progress made, but "it remains critical to tackle the remaining weaknesses in the financial and corporate sectors."
- "The framework for restructuring is generally in place"—focus should be on implementation and stronger market roles.
- Corporate restructuring:
- Creditor-led workout programs need to move beyond financial stabilization to complete strategic sales, spin-offs, and operational restructuring.
- "The top 4 chaebol remain highly leveraged and their continued restructuring will need to be driven by creditors and markets."
- Financial sector restructuring:
- Preparations to shift to a limited deposit insurance scheme in January 2001 are under way; 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."
- Authorities’ announcement of key elements of a strategy to divest government shares in commercial banks is welcome.
- Reforms to stabilize the investment trust sector are being implemented; problems in this sector "now appear to be more manageable."
- Implementation imperative:
- "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."
Source: IMF, News Brief: IMF Completes Final Review of Korea Program, August 23, 2000.