Spend, spend and spend some more, IMF tells Korea

Economy

Published: 28 Jan. 2021, 17:57 Updated: 28 Jan. 2021, 20:02

Spend, spend and spend some more, IMF tells Korea

Finance Minister Hong Nam-ki holds a virtual discussion with Andreas Bauer, IMF Mission Chief for Korea and Assistant Director of the Asia and Pacific Department, on Wednesday at the government complex in Seoul. [MINISTRY OF ECONOMY AND FINANCE]

The International Monetary Fund (IMF) is advising Korea to continue spending, in line with its unusual global prescription of spend as much as you can and then spend some more.

In its review of Korea, the fund said that the country is on the path to recovery and that growth will accelerate. It complimented Korea’s effective and timely response to Covid-19 as well as its aggressive monetary and fiscal policies.

“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,” said Andreas Bauer, IMF mission chief on Korea and assistant director to the Asia and Pacific Department, via a videoconference held on Thursday.

Bauer credited “sound macroeconomic fundamentals, timely and effective public health response and the deployment of a comprehensive set of fiscal, monetary and financial measures.”

While the IMF raised concerns about the growing budget deficit, it advised the Korean government to keep the spigots open.

“Given sizable economic slack and downward 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,” Bauer said.

“The 2021 budget rightly aims at maintaining an accommodative fiscal policy stance,” Bauer added. “But there is scope for raising targeted transfers to adversely affected workers and firms and accelerate public investment plans to support the recovery.”

He noted that the Korean government's priorities should be to “nurture the ongoing recovery, solidify the foundations for resilient, greener and more inclusive medium-term growth.”

In its latest forecast announced Wednesday, the IMF projected the Korean economy to expand 3.1 percent in 2021, up from the earlier 2.9 percent.

“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,” Bauer said.

He said in the short term the government fiscal policies will have a positive influence on the economic recovery considering the low inflation and economic slack.

The IMF mission chief noted that the long-term aging of the population will not only put pressure on the government’s fiscal balance but also on the national debt.

As such, the IMF supports the Korean government’s decision to implement a fiscal rule.

The Korean Finance Ministry in October announced the implementation of a fiscal rule, limiting the national debt-to-GDP ratio to 60 percent, up from the 40-percent guideline that has been followed.

The deficit limit rule will be applied starting in 2025.

“A somewhat higher than currently budgeted deficit this year can be offset by gradual consolidation in subsequent years,” Bauer said. “In this context, the government’s proposal to operate fiscal policy within a rules-based medium-term framework is welcome.”

Bauer said debt level should be approached from all angles and be evaluated on efficiencies and costs, especially the possibility of paying back the debt.

Bauer said the 60 percent debt-to-GDP ratio is a prudent and appropriate level for Korea.

The IMF chief said focus should be on improving imbalances.

“Uncertainty surrounding the outlook remains elevated, however, reflecting external and domestic Covid-related risks,” Bauer said. “The recovery is expected to be uneven, with growth rates in services and sectors dependent on domestic demand lagging from those in export-oriented industries.”

The IMF chief said fiscal measures should selectively target areas that are in need.

He said the government’s focus should be on the self-employed, adding that Korea has a relatively higher self-employed ratio compared to other Organisation for Economic Cooperation and Development members.

While saying it would be best to set up a permanent safety net for the self-employed, it wouldn’t be easy based on experiences in other countries, mainly because it is not easy to collect information on self-employed earnings.

The IMF chief also weighed in on the controversial short-selling ban that the ruling Democratic Party (DP) has been strongly pushing to maintain.

Bauer said short selling itself is practiced in major financial markets and effectively used as a risk management tool within the markets.

While he argued that short selling increases market volatility and that many countries including Korea have banned the investment practice in times of trouble, he said as the Korean market is stabilizing and the economy is recovering, it is likely that short selling will resume.

The Financial Services Commission earlier this month said it will end the yearlong ban on short selling March 15, but the ruling DP has been pressuring the financial authority to extend the ban as it could hold back the index, which has been breaking records since the beginning of the year.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]