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© 2005 International Monetary Fund

February 2005

IMF Country Report No. 05/49

Republic of Korea: 2004 Article IV Consultation—Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion

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 2004 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 2004 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on October 28, 2004, 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 December 29, 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 January 21, 2005 updating information on recent developments.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its January 21, 2005 discussion of the staff report that concluded the Article IV consultation.

The document 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

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

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Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

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Staff Report for the 2004 Article IV Consultation

Prepared by the Staff Representatives for the 2004 Consultation with the Republic of Korea

Approved by Wanda Tseng and Michael T. Hadjimichael

December 29, 2004

  • This report is based on discussions held in Seoul during October 13–28, 2004. The mission team was headed by Mr. Felman, and also comprised Messrs. Beaumont, Senhadji, Zebregs, and Miniane (all APD), Mr. Frydl (MFD), and Mr. Kang (Resident Representative). Mr. Oh Jong-Nam, Executive Director, also participated in the discussions.

  • 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 Lee Hun-Jai; Bank of Korea Governor Park Seung; Financial Supervisory Commission Chairman Yoon Jeung-Hyun; Senior Secretary for Policy Planning Kim Young-Joo; and Fair Trade Commission Chairman Kang Chul-Kyu. The team also met representatives of financial institutions, industry federations, labor unions, NGOs, and the diplomatic and academic communities.

  • At the conclusion of the previous Article IV Consultation in February 2004, Directors commended the progress that Korea had made in establishing a market-driven economy, but urged the authorities to address the remaining structural problems, including a credit card bust, lingering problems of corporate governance, and an inflexible regular labor market.

  • Korea’s statistical base is adequate to conduct effective surveillance.

  • Korea has accepted the obligations under Article VIII, and maintains an exchange system free of restrictions on payments and transfers for current international transactions.

  • The authorities have not yet indicated their intention to publish the staff report, and have not yet decided to consent to the Fund’s publication of the PIN.


  • Glossary of Abbreviations and Terms

  • Executive Summary

  • I. Introduction

  • II. The Ubiquitous Hand

  • III. An Economy Flying on Just One Engine

  • IV. What Lies Ahead?

  • V. How Can Korea Start the Stalled Engines of Growth?

    • A. Providing a Macroeconomic Spark

    • B. Reviving Household Spending

    • C. Revitalizing the Small and Medium Enterprises

    • D. Unleashing Corporate Investment

    • E. Other Issues

  • VI. Staff Appraisal

  • Boxes

  • 1. Are SMEs the Next Credit Card-Style Problem?

  • 2. When will Private Consumption Recover?

  • 3. How Much Progress is Being Made in Resolving Credit Card Debts?

  • Figures

  • 1. Activity and Prices

  • 2. External Developments

  • 3. Financial Market Indicators

  • 4. Corporate and Financial Sector Soundness

  • 5. Housing Price Developments

  • Tables

  • 1. Selected Indicators, 2000–05

  • 2. Consolidated Central Government Operations, 2001–05

  • 3. Monetary and Financial Indicators, 2001–04

  • 4. Balance of Payments, 2000–05

  • 5. Medium-term Projections, 2002–09

  • 6. Financial Soundness Indicators, 1997–2004

  • 7. Indicators of External Vulnerability, 1999–2004

  • Annexes

  • I. Debt Sustainability Analysis

  • II. Statistical Issues

  • III. Fund Relations

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Glossary of Abbreviations and Terms


Association of Southeast Asian Nations


Bureau of Audit and Inspection


Bank of Korea


Capital Adequacy Ratio


Financial Supervisory Commission


Financial Supervisory Service


Free Trade Agreement


Fair Trade Commission


Industrial Bank of Korea


Interest Coverage Ratio


Information Technology


Investment Trust Company


Korean Asset Management Company


Korean Credit Guarantee Fund


Korea Corporate Governance Service


Korean Development Bank


Korea Development Institute


Korean Federation of Banks


Korean Deposit Insurance Company


Korea Investment Corporation


Korean Security Dealers Association Index


Korea Stock Price Index


Korea Technology Guarantee Fund


Ministry of Finance and Economy


Ministry of Planning and Budget


Nonbank Financial Institutions


Nondeliverable Forward


National Pension Fund


Nonperforming Loans


Personal Debt Rehabilitation Program




Period average


Seasonally adjusted


Small and Medium-size Enterprise


Social Security Funds





Exchange rate as of December 29, 2004: $1 = W1,041

Executive Summary

  • After a long post-crisis boom, the Korean economy has begun to sputter. Domestic demand has stagnated for the past two years, forcing the economy to rely on exports. These boomed in 2003, but have now slowed, reducing growth to low levels.

  • What has gone wrong? The answers are several. Households and SMEs have been unable to spend, as they are repairing their balance sheets following a long credit boom. Meanwhile, corporations have become reluctant to invest domestically, mainly because they are discouraged by the highly regulated labor market.

  • Reviving the economy will consequently require restarting the domestic engines of growth: spending by households, SMEs, and larger corporations. To do this, the government needs to provide a macroeconomic spark, while putting in place market-friendly frameworks needed to solve the underlying problems. Specifically, it should:

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    Implement stimulative fiscal and monetary policies, while continuing to pursue a flexible exchange rate policy;

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    Accelerate the resolution of household debt delinquencies, by strengthening the personal bankruptcy system;

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    Revitalize the SME sector, by expanding the sources of private financing while gradually unwinding public credit guarantees; and

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    Promote investment, by modernizing the labor market, easing strict job protection for regular workers while expanding social protection.

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Public Information Notice (PIN) No. 05/13


February 4, 2005

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On January, 21, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Korea.1