## Strong Policies Help Korea Navigate Uncertain Times

_IMF News, May 12, 2022_

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**Canonical URL:** [Strong Policies Help Korea Navigate Uncertain Times](https://www.imf.org/en/news/articles/2022/05/12/cf-korea-strong-policies)

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## Bibliographic details
- Authors: Martin Kaufman, Krishna Srinivasan May
- Published: May 12, 2022

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### Recovery and recent performance
- Korea has recovered well from the pandemic, a testament to its strong economic fundamentals and appropriate policy responses.
- Economic output has surpassed pre-crisis levels despite multiple waves of infection.
- The recovery was supported by:
  - effective containment of the pandemic, including rapid vaccination last year;
  - proactive economic policy support that helped minimize economic scarring, sustain income growth, and maintain financial stability;
  - strong external demand given Korea’s high global integration.

### Risks and outlook
- Before the war in Ukraine, Korea’s growth was expected to remain robust this year and next, with inflation projected to gradually return to target by next year, as reflected in the recent IMF report.
- Significant uncertainties cloud the outlook, including:
  - pandemic-related disruptions to supply chains;
  - geopolitical uncertainties (notably Russia’s invasion of Ukraine and related sanctions);
  - rising interest rates in major advanced economies;
  - domestic risks from weakening economic activity due to rising COVID-19 infections, elevated household debt and real estate prices, and rising inflation.
- The effects of Russia’s invasion of Ukraine have exacerbated concerns about stagflation risks:
  - increases in commodity prices, particularly energy, are fueling inflationary pressures;
  - the adverse impact of the war on trading partners and recent developments in China could significantly weigh on economic activity in Korea.
- So far, Korea’s recovery appears relatively resilient.

### Policy recommendations and calibration
- Policy normalization remains appropriate given Korea’s relatively advanced recovery and rising inflation, but the pace should consider the fast-evolving global conditions.
- Monetary policy:
  - the pace of monetary policy normalization should continue to be calibrated to ensure that inflation stabilizes at its target and expectations remain well-anchored.
- Fiscal policy:
  - fiscal policy should be broadly neutral while continuing to provide targeted support for affected sectors and vulnerable households, as needed.
  - fiscal policy should be anchored in a medium-term framework that stabilizes public debt, considering the expected implications of demographics, structural transformation costs, and the potential need for additional fiscal support when necessary.
- Macroprudential policy:
  - macroprudential policies should continue to guard against systemic financial risks, notably to contain the buildup of vulnerabilities owing to a red-hot housing market and elevated levels of household debt.

### Structural reform priorities
- As global risks abate, the policy focus should shift to structural reform priorities to reinvigorate potential growth and foster greater inclusion, including in the context of the Korean New Deal.
- Key reform directions:
  - recalibrating policies to support productivity growth and innovation;
  - providing transitory support amid reforms to address product, services, and labor market rigidities;
  - ensuring that Korea’s human capital remains a central pillar of the transformation process.

*IMF News, May 12, 2022*

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## References

- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [Chart of the Week](https://www.imf.org/en/Blogs/chart-of-the-week)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Read the Article IV Consultation](https://www.imf.org/en/Publications/CR/Issues/2022/03/24/Republic-of-Korea-2022-Article-IV-Consultation-Press-Release-Staff-Report-Staff-Statement-515711)
- [Republic of Korea and the IMF](https://www.imf.org/en/Countries/KOR)
- [Russia’s invasion of Ukraine](https://www.imf.org/en/Topics/IMF-and-Ukraine)
- [weigh on economic activity](https://blogs.imf.org/2022/04/25/asia-growth-slows-on-commodities-covid-and-rising-interest-rates/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2022/05/12/cf-korea-strong-policies_