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© 2004 International Monetary Fund
February 2004
IMF Country Report No. 04/44
Republic of Korea: 2003 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Korea
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2003 Article IV consultation with the Republic of Korea, the following documents have been released and are included in this package:
the staff report for the 2003 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on November 18, 2003, with the officials of the Republic of Korea on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on February 2, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff statement of February 20, 2004 updating information on recent developments.
a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its February 20, 2004 discussion of the staff report that concluded the Article IV consultation.
a statement by the Executive Director for the Republic of Korea.
The document(s) listed below have been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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INTERNATIONAL MONETARY FUND
REPUBLIC OF KOREA
Staff Report for the 2003 Article IV Consultation
Prepared by the Staff Representatives for the 2003 Consultation with the Republic of Korea
Approved by Wanda Tseng and Michael T. Hadjimichael
February 2, 2004
This report is based on discussions held in Seoul during November 5–18, 2003. The mission team was headed by Mr. Felman, and also comprised Messrs. Beaumont, He, Zebregs, Tressel (from APD), and Kang (Resident Representative). Also participating in the discussions was Mr. Cho Won-Dong, Advisor to the Executive Director.
The team met with a wide range of senior officials and private sector representatives. The officials included Deputy Prime Minister and Minister of Finance and Economy Kim Jin-Pyo; Bank of Korea Governor Park Seung; Financial Supervisory Commission Chairman Lee Jung-Jae; Chief Secretary for National Policy Lee Joung-Woo; and Fair Trade Commission Chairman Kang Chul-Kyu. The team also met representatives of financial institutions, industry federations, labor unions, and the diplomatic and academic communities.
At the conclusion of the previous Article IV consultation in March 2003, Directors encouraged the incoming administration of President Roh Moo-Hyun to enhance the market foundations of the Korean economy. They supported the government’s plans to improve market discipline over the corporate sector by reforming accounting practices, strengthening auditing, and expediting insolvency procedures. They also emphasized the need to tackle long-standing weaknesses in nonbank financial institutions, particularly by privatizing the investment trust companies.
Korea’s statistical base is adequate to conduct effective surveillance. The coverage, periodicity, and timeliness of key data are adequate, although the coverage and detail of fiscal data should be improved.
Korea has accepted the obligations under Article VIII. It maintains an exchange system free of restrictions on payments and transfers for current international transactions.
This report was prepared by the mission team.
Contents
Glossary of Abbreviations and Terms
Executive Summary
I. How Has Korea Changed Since the Asian Crisis?
II. Why Was Korea’s Growth Interrupted in 2003?
III. What Lies Ahead?
IV. Report on the Discussions
A. Supporting the Recovery
B. Strengthening the Financial Sector
C. Ending the Korea Discount
D. Modernizing the Labor Market
E. Other Issues
V. Staff Appraisal
Boxes
1. The Credit Card Boom and Bust
2. Control versus Ownership in the Corporate Sector
3. Korea’s Dual Labor Market
Tables
1. Selected Indicators, 1999–2004
2. Monetary and Financial Indicators, 2001–03
3. Consolidated Central Government Operations, 2001–04
4. Balance of Payments, 2000–04
5. Medium-Term Projections, 2001–08
6. Indicators of External Vulnerability, 2000–03
7. Financial Soundness Indicators, 1997–2003
Figures
1. Activity and Prices
2. External Developments
3. Financial Market Indicators
4. Corporate and Financial Sector Soundness
5. Housing Price Developments
Annexes
I. Debt Sustainability Analysis
II. Statistical Issues
III. Fund Relations
Glossary of Abbreviations and Terms
| BOK |
Bank of Korea |
| CAR |
Capital Adequacy Ratio |
| CCC |
Credit Card Company |
| FSC |
Financial Supervisory Commission |
| FSS |
Financial Supervisory Service |
| FTA |
Free Trade Agreement |
| FTC |
Fair Trade Commission |
| ICR |
Interest Coverage Ratio |
| IT |
Information Technology |
| ITC |
Investment Trust Company |
| KCGS |
Korean Corporate Governance Services |
| KDB |
Korean Development Bank |
| MOFE |
Ministry of Finance and Economy |
| MMF |
Money Market Fund |
| MPB |
Ministry of Planning and Budget |
| NBFI |
Nonbank Financial Institutions |
| NPF |
National Pension Fund |
| NPL |
Nonperforming Loans |
| q/q |
Quarter-on-quarter |
| p.a |
Period average |
| s.a |
Seasonally adjusted |
| SME |
Small- and Medium-scale Enterprises |
| SSF |
Social Security Funds |
| W |
Won |
| y/y |
Year-on-year |
Exchange rate at end-December 2003 US$1 = W 1,192.6
Executive Summary
Until recently, Korea’s economy had been booming, propelled by sweeping structural reforms taken in the aftermath of the Asian crisis. These reforms have created a more competitive system, guided more by market signals and far less by official directives.
There was nevertheless an unfinished reform agenda, as corporate governance practices remained problematic, some nonbank financial institutions weak, and the labor market dualistic. These problems came to the fore in 2003, derailing the longstanding expansion.
The economy has already begun to improve, boosted by surging exports. But putting the country on the path of rapid, sustained growth will require policy action. The authorities have already crafted a well-conceived strategy, which the staff broadly supports. The key elements are to:
Maintain supportive macroeconomic policies in the initial stages of the recovery, including by front-loading fiscal spending;
Strengthen the financial system, by resolving weak nonbank financial institutions and allowing risk to play a greater role in the bond market;
Improve corporate governance, by relaxing regulation of conglomerates that improve their business practices, while reinforcing market-based mechanisms for exerting discipline; and
Modernize the labor markets, by easing employment protection for regular workers and expanding the social safety net for those less fortunate.
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February 20, 2004
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Public Information Notice (PIN) No. 04/11
FOR IMMEDIATE RELEASE
February 25, 2004
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
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February 20, 2004
