IMF Recommends South Korea Maintain Restrictive Policies to Tackle Inflation and Strengthen Finances
The International Monetary Fund (IMF) has advised South Korea to retain its current restrictive monetary and fiscal policies to address inflation and work towards achieving sustainable finances. The IMF stated that South Korea should keep the monetary policy rate above neutral for the time being, emphasizing that the interest rate path should remain dependent on data to combat inflation.
Harald Finger, the IMF’s Korea Mission Chief, emphasized the importance of moderate consolidation in the 2024 government budget. Such consolidation would help manage public debt while supporting monetary policy in its efforts to contain inflation.
Rather than hindering economic growth, prudent fiscal policy is seen as crucial in maintaining South Korea’s economic fundamentals and strength in the medium term. South Korea’s government recently proposed a budget spending increase for 2024 at the lowest rate in two decades, prioritizing fiscal discipline amidst reduced tax revenue due to slower economic growth.
The Bank of Korea has kept interest rates unchanged for five consecutive meetings in August, balancing softer inflation against rising risks to economic growth.
The IMF noted a slight increase in downside risks for South Korea’s growth, particularly in 2024, due to China’s renewed economic slowdown. However, positive factors such as China’s measures to address the slowdown and the resumption of Chinese group tourism were also highlighted.
In July, the IMF forecasted that South Korea’s economy, Asia’s fourth-largest, would grow by 1.4% in 2023, marking a three-year low compared to 2.6% in 2022 and 4.3% in 2021. Growth of 2.4% is expected for the following year.
The IMF decided not to assess South Korea’s foreign exchange reserve adequacy using its Assessing Reserve Adequacy (ARA) metrics from July. Instead, it found it more suitable to assess South Korea’s adequacy on a scenario basis due to its unique economic characteristics. The IMF’s recommendations aim to help South Korea navigate economic challenges, particularly related to inflation and fiscal sustainability, while maintaining overall economic stability.