Journal Issue

IMF Executive Board Concludes 2017 Article IV Consultation with the Republic of Korea

International Monetary Fund. Asia and Pacific Dept
Published Date:
February 2018
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On January 17, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Korea.

Korea’s near-term outlook is improving. After slowing in the second half of 2016, growth has picked up in 2017, while recent geopolitical tensions have had a limited impact. The rebound was led by a strong expansion in investment, especially in the IT and construction sectors. Export growth strengthened thanks to improving external conditions and high global demand for semiconductors. Private consumption growth picked up, but remains below economic growth. Recovery has been supported by an accommodative monetary policy, with lending rates and long-term yields close to record lows. Instead, the fiscal stance has been tight, with the structural budget surplus expected at 1.4 percent of GDP (consolidating central government and social security fund accounts). The unemployment rate is hovering around 3.8 percent (seasonally adjusted) but remains significantly higher for youth. Inflation has rebounded to around the Bank of Korea’s 2-percent target, although it displayed some volatility. The current account surplus narrowed in 2017, but is expected to remain large above 5 percent in the medium term.

The cyclical recovery is expected to continue. GDP growth is projected at 3.2 percent in 2017, as the momentum in the first three quarters continues. In 2018, growth is forecast at around 3.0 percent, with private consumption growth benefitting from the large minimum wage increase and from policies supporting employment and social spending. Exports will benefit from the strong global trade. The current account surplus remains substantial and is projected to be 5.6 percent of GDP in 2017, and to edge lower to around 5.4 percent of GDP in 2018. Household debt is the main financial stability risk; nevertheless, macroprudential policies are effectively addressing the financial stability challenges so far.

Potential growth has slowed down and its prospects are hampered by unfavorable demographics and slowing productivity growth, driven by structural weaknesses. Income equality and polarization are worsening, partly reflecting inadequate social protection as well as labor and product market duality. The government’s program aims to address impediments to growth and income inequality.

Executive Board Assessment2

Executive Directors welcomed Korea’s ongoing economic recovery despite geopolitical tensions. Directors also noted that risks to near-term growth are balanced. They considered that long-term growth faces challenges from aging population, slowing productivity growth, and rising income inequality, partly reflecting weak social protection, and labor and product market duality. Directors agreed that well-calibrated macroeconomic policies and bold structural reforms aimed at tackling the economy’s structural problems are key to laying the foundations for sustained and inclusive long-term growth.

Directors commended the authorities for following a prudent fiscal policy, which has helped build buffers. They agreed that fiscal policy should be expansionary to enhance social safety net, support short and long-term growth, and reduce imbalances. Many Directors highlighted that a more expansionary stance is warranted given the ample fiscal space. A number of Directors, however, shared the authorities’ cautious approach to increasing public expenditures. For the longer term, Directors agreed fiscal challenges from the aging population will necessitate additional revenue mobilization.

Directors agreed that monetary policy should remain accommodative as inflationary pressures are likely to remain subdued. They recommended that monetary policy credibility could be enhanced by strengthening communication of policy intentions. This involves clarifying the BOK’s policy reaction function that describes the conditions under which it will adjust policy rates in the future. Directors emphasized that the exchange rate should continue to be allowed to move flexibly, with intervention limited to addressing disorderly market conditions. A few Directors encouraged publication of the intervention data.

Directors welcomed that the financial system is sound and that macroprudential policies are effectively addressing financial stability challenges, including from high household debt. They encouraged the authorities to remain vigilant to emerging risks, especially from non-bank financial institutions.

Directors emphasized that structural reforms to mitigate duality in the labor market and support job creation are necessary to increase productivity and foster inclusive growth. They agreed that efforts should be geared towards more flexibility for regular workers; a strong and inclusive safety net for the unemployed; and active labor market policies. While there is scope to expand public sector jobs, Directors underscored that this should be approached cautiously. Moreover, the minimum wage should be increased with care going forward, and any compensatory subsidy to small- and medium-size enterprises should be temporary. To support youth employment, Directors noted that existing measures, such as vocational schools, the work-study dual system, and internships, could be strengthened. Policies should also focus on strengthening female labor force participation and leadership.

Directors considered that the regulatory burden for firms should be eased, especially in the service sector. They highlighted that government policy towards SMEs should prioritize fostering growth and innovation, rather than shielding weaker firms. Additionally, Directors noted that there is scope to better design and coordinate R&D support.

Korea: Selected Economic Indicators, 2014–18
Real GDP (percent change)
Total domestic demand3.
Final domestic demand2.
Gross fixed investment3.
Stock building 1/0.00.5-
Net foreign balance 1/0.4-1.1-1.0-1.90.3
Nominal GDP (in trillions of won)1,4861,5641,6371,7321,805
Saving and investment (in percent of GDP)
Gross national saving34.535.635.736.636.0
Gross domestic investment29.328.929.231.030.7
Current account balance6.
Prices (percent change)
CPI inflation (end of period)
CPI inflation (average)
Core inflation (average)
GDP deflator0.
Real effective exchange rate6.61.3-1.9
Trade (percent change)
Export volume4.
Import volume4.
Terms of trade1.712.01.00.4-0.9
Consolidated central government (in percent of GDP)
Net lending (+) / borrowing (-)
Overall balance (authorities)
Excluding Social Security Funds-2.0-2.4-1.4-1.7-1.6
Structural balance0.
General government debt35.937.838.337.637.3
Central government debt33.935.636.135.435.1
Money and credit (end of period)
Credit growth7.
Overnight call rate2.01.51.3
Three-year AA- corporate bond yield2.42.12.1
M3 growth8.
Balance of payments (in billions of U.S. dollars)
Exports, f.o.b.613.0542.9511.9569.1603.3
Imports, f.o.b.524.1420.6393.1446.6476.9
Oil imports94.955.144.357.365.9
Current account balance84.4105.999.285.688.7
Gross international reserves (end of period) 2/358.8363.2366.3366.9368.5
In percent of short-term debt (residual maturity)208.8231.6236.6240.5240.1
External debt (in billions of U.S. dollars)
Total external debt (end of period)424.3396.1380.9364.9354.0
Of which: Short-term (end of period)116.4104.3105.2106.0106.9
Total external debt (in percent of GDP)30.128.627.023.821.4
Debt service ratio 3/
Sources: Korean authorities; and IMF staff estimates and projections.

Contribution to GDP growth.

Excludes gold.

Debt service on medium- and long-term debt in percent of exports of goods and services.

Sources: Korean authorities; and IMF staff estimates and projections.

Contribution to GDP growth.

Excludes gold.

Debt service on medium- and long-term debt in percent of exports of goods and services.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here:

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