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Don’t dismiss the warning from the IMF

Published: 21 Nov. 2024, 19:03

The International Monetary Fund (IMF) has cut its growth outlook for Korea to 2.2 percent for this year, off 0.3 percentage points from its earlier estimate, and to 2.0 percent for 2025, down 0.2 percentage points. IMF Mission Chief Rahul Anand said, “Uncertainty around the outlook remains high, and risks are titled to the downside.” The bank was echoing private institutions’ warnings that Korea’s potential growth rate could slump below 2 percent from next year due to external uncertainties including Trump 2.0.

The IMF agreed that a “gradual” monetary policy normalization is “appropriate given high uncertainty” and advised for more “ambitious” fiscal consolidation “to create the space to meet significant long-term spending pressures.” It is advising the Bank of Korea to gradually lower the benchmark rate and fiscal authorities to abstain from spending increases regardless of the main opposition party’s pressure. In short, it is prescribing against artificial monetary and fiscal stimuli to prop up the economy.

The bank added “additional prudential measures” may be needed to target real estate-related financial risks. Household debt topped a new milestone of 1,900 trillion won ($1.4 trillion) as of September. Authorities should ready additional measures such as upping the ceiling of debt service ratio if necessary.

The IMF also recommended “strong economic policies” to “enhance resilience in a changing domestic and global environment.” Policy priorities should be given to boosting innovation, diversifying supply chains and promoting service exports. According to a recent report by the Presidential Advisory Council on Science & Technology, Korea lacks graduate degree holders in science and engineering by 40,000 a year. Doctoral degree holders in AI make up 6 percent, while the world is vying to get hold of AI experts. How can Korea sustain competitiveness at this rate?

The prescription of “medium- to long-term economic reforms to sustain growth” is a regular on IMF policy suggestions for Korea. It is repeated because of slow strides on the front. When macroeconomic ammunitions are restricted, regulatory reforms can be most handy. Regulations are “invisible taxes” on businesses and consumers. Removing regulations can be tantamount to tax cuts and stimuli means.

Elon Musk called for a “regulation removal department” — a job recently granted by president-elect Trump — saying there are so many government regulations placed on businesses that it’s like “a million little strings that tie Gulliver down” and that with each regulation “we lose a little bit of freedom.” Musk has been given the sword to cut off the strings that chain businesses. President Yoon Suk Yeol is a champion of freedom. How he axes regulations will be closely watched.