On behalf of the Korean authorities, we would like to thank Mr. Andreas Bauer and his team for the candid and constructive discussion and policy dialogue during the 2021 Article IV consultations under particularly challenging circumstances. The authorities value staff’s continuous engagement and broadly agree with staff’s assessment on the economic outlook and policy recommendations. Despite the contraction brought on by the pandemic last year, the Korean economy has remained resilient through strong economic fundamentals and appropriate policy responses.

COVID-19 Response and Vaccination

Since the onset of the COVID-19 pandemic, the Korean authorities have successfully managed to contain the spread of the virus without resorting to strict lockdowns despite several spikes in infection. A systematic response strategy consisting of extensive testing, rigorous contact tracing, prompt isolation of the confirmed cases and transparent disclosure of COVID-related information, has helped contain massive infections. A nation-wide compliance of containment measures such as wearing masks, utilization of ICT technologies and innovative measures such as drive-through testing have also contributed to the successful containment1.

The authorities have secured enough COVID-19 vaccine to cover the entire population2. In accordance with the national vaccination plan, vaccinations began in February 26 with the aim of inoculating 70 percent of the population by November this year. The initial priorities will be placed on medical staff and the elderly group.

The authorities pursued a two-track approach seeking a balance between containment and economic recovery. They deployed multi-faceted policy responses on fiscal, monetary, and financial fronts in a bold and timely manner. An unprecedented policy support amounting to more than KRW 310 trillion (equivalent to USD 280 billion or around 16 percent of GDP), including four supplementary budgets (KRW 66.8 trillion) and financial support packages (more than KRW 175 trillion), could help protect livelihoods and limit the economic fallout. The government made three rounds of emergency relief payments — initially beginning with universal cash transfer to the entire population (KRW 14.3 trillion) and subsequently to support more targeted to those most affected (KRW 17.1 trillion). Financial support packages include support for vulnerable groups such as small businesses and the self-employed through emergency loans and reduction of social insurance premiums. The government placed a high priority on maintaining jobs including through Employment Retention Subsidy (KRW 2.7 trillion) which covers up to 90 percent of allowances for paid leave and Emergency Employment Stability Subsidy (KRW 2.6 trillion) for freelancers and non-regular workers. The authorities also formulated policy measures to restore consumption and facilitate investment and export, including by distributing discount coupons (equivalent to USD 1.8 billion) for culture and hospitality sectors, streamlining investment tax incentives and creating online platforms for exporting SMEs.

Recent Developments and Outlook

In 2020, real GDP contracted by 1.0 percent for the first time since the Asian Financial Crisis in 1998, but it was relatively less severe than contractions seen in other advanced economies. Continued facility investment and strong government spending, along with a rebound in exports in the second half of the year, partly offset a significant contraction in private consumption brought on by COVID-19. Despite a resurgence of COVID-19 cases, the Korean economy recorded positive real GDP growth (Q-o-Q) in two consecutive quarters (3Q 2.1 percent, 4Q 1.2 percent) signaling a strengthened foundation for a swift and strong economic recovery. Consumer Price Index (CPI) inflation has been subdued at 0.5 percent in 2020, below the target of 2 percent, due mainly to weakened inflationary pressure on the demand side, substantially lower global oil prices and government’s welfare policies. Core inflation averaged 0.4 percent. Employment decreased by about 218,000, mainly in contact-intensive service sectors and temporary workers, and the unemployment rate was somewhat elevated to 4.0 percent, up 0.2pp compared to 2019.

The authorities take note of staff’s assessment that Korea’s external position in 2020 is broadly in line with fundamentals and desirable policy setting. The current account surplus reached USD 75.3 billion in 2020, up by USD 15.6 billion from the previous year. The unexpected increase is attributable to a rebound in exports in the second half of the year led by strong global demand for high-tech products, substantial decline in global oil prices and a sharp drop in demand for tourism and overseas study due to the pandemic. While Korea will continue to see a current account surplus this year, once the temporary factors related to the pandemic are resolved, the surplus is expected to shrink somewhat.

The authorities projected the growth rate this year would reach 3.0–3.2 percent reflecting the solid rebound in both exports and domestic demand. Exports and facilities investment will have continued growth momentum of the fourth quarter in 2020 supported by economic rebounds in major trading partners, an upturn in the semiconductor cycle and investment plans in new industry areas such as electric vehicles and bio-health. Private consumption is expected to rebound moderately with a gradual normalization of economic activities and improvement in income and employment in addition to base effect. While the authorities agree there remains a significant output gap currently, their view is that the Fund’s estimate of potential growth in the medium term is somewhat large due to IMF’s overestimation of total factor productivity. The authorities shared staff’s views on inflation which is projected to remain at a little over 1 percent in 2021. Some factors that weighed down inflation last year will in turn act as a factor in adding inflationary pressure this year.

The authorities concur with staff that uncertainty surrounding the outlook remains elevated reflecting COVID-related risks on both sides. Recurrent surges in infections and delayed vaccinations at global and domestic levels would be the principal downside risk to the economy while growth could be accelerated in case of a faster containment of the pandemic. The pace of recovery in private consumption and investment can also play in both directions. Other downside risks include disruptions in global value chains, continued US-China trade tensions and a sudden reversal of risk sentiment in financial markets.

Fiscal Policy

The authorities concur with staff’s view that fiscal policy should continue to play a critical role in overcoming the pandemic crisis and support those affected in a targeted manner. Last year, supplementary budgets were formulated four times for the first time in 59 years and the fiscal execution rate was the highest ever recorded at 97.8 percent. Fiscal policy will remain expansionary in accordance with staff’s recommendation. In 2021, the budgetary expenditure will be increased by 8.9 percent compared to the 2020 original budget. The 2021 budget aims to maintain COVID-related support and strengthen momentum for economic recovery as well as provide support for national priorities such as digital transformation and a greener and more inclusive economy. Furthermore, the government plans to frontload spending—committing 63 percent of the budget in the first half of the year—focusing on job creation and SOC projects. In line with staff recommendation, the government submitted to the National Assembly a proposal of supplementary budget amounting to KRW 15 trillion early this month. This extra budget aims to provide further emergency relief subsidy to those most affected by the prolonged pandemic including small merchants and vulnerable workers such as freelancers and platform workers without employment insurance coverage, support employment retention and job creation, and increase spending for COVID-19 vaccine rollout.

The authorities remain mindful of maintaining fiscal soundness in the medium to long term amid rising fiscal spending related to the pandemic. The unprecedented expansionary government spending has widened the budget deficit to 4.4 percent from 1.5 percent of GDP in the original budget plan in 2020. Although Korea’s government debt to GDP remains low at around 40 percent as of 2020 compared with other OECD countries, the authorities have been concerned about the pace of the accumulation of government debt. In December last year, the government submitted to the National Assembly a proposal of fiscal rule which ensures flexibility to manage the government’s debt and fiscal deficit instead of targeting a specific level for either one. There will be a transition period of three years before the national fiscal rules take effect in 2025. The proposed fiscal rule includes a complementary provision that ensures countercyclicality by easing the fiscal balance rule by 1 pp in case of a downturn in addition to an escape clause in case of a crisis. The government views that the staff recommendation to introduce an expenditure rule is not appropriate for Korea at this stage because structural change on the revenue side is expected given increasing welfare expenditure. However, an expenditure rule can later be considered as additional operative rule for fiscal sustainability once the government-proposed fiscal rule is well in place and operationalized. The specific conditions of the escape clause and relaxation provision for fiscal balance rule will be discussed in the course of the legislation of the fiscal rule. Due attention will be paid to the staff recommendation on the designation of an independent institution such as a fiscal council.

Monetary Policy and Exchange Rate Policy

The Bank of Korea (BOK) pursued accommodative monetary policy through a wide range of policy tools to minimize the negative impact on the economy from the pandemic. In 2020, the BOK lowered its policy rate by 75 basis points to 0.5 percent, temporarily offered unlimited repos, raised the ceiling on the Bank Intermediated Lending Support to SMEs by KRW 18 trillion to KRW 43 trillion, and introduced Corporate Bond-Backed Lending Facility as a safety net for banks and non-bank financial institutions (NBFIs)3.

The authorities consider the current policy rate supportive and accommodative considering the all-time low interest rate, high money and credit growth, and loose financial conditions. The BOK is cautious against pre-emptively providing additional monetary accommodation unless the economic conditions deteriorate significantly. The BOK stressed that an additional policy rate cut could have a limited effect on the real sector because the current downturn is mainly driven by containment measures and may increase the risk of financial imbalances by sending the wrong signal to asset markets. The BOK affirmed that it would consider various policy tools as necessary with careful examination of the effectiveness of various instruments. However, a yield curve control or negative interest rates are not considered viable options for now. While the authorities concurred with the primary role of macroprudential measures for financial stability, they called attention to the heightened risk of financial imbalances. Despite the continued tightening of macroprudential policy measures, financial imbalances have been accumulating in an environment of financial easing, with funds concentrated in asset markets and with household debt increasing. In this regard, attention also needs to be paid to financial stability, in terms of monetary policy operation.

The authorities have implemented FX policy tools in a flexible manner to cope with external shocks triggered by the pandemic while maintaining a flexible foreign exchange rate regime. The authorities reaffirmed that foreign exchange rate is determined in the market and FX intervention is conducted only in exceptional market conditions. Since December 2019, the authorities have shortened the cycle of publication of net purchase of US dollars for the FX market stabilization from semi-annually to quarterly to further enhance the transparency of the foreign exchange policy4. As global financial market strain deteriorated FX funding conditions and triggered a severe bout of turbulence in Korea’s FX markets in March 2020, the Korean authorities relaxed FX macroprudential measures such as a levy of non-deposit foreign currency liabilities and a leverage cap on FX derivatives to ease burden of financial institutions in funding FX liquidity. In January this year, the authorities announced a policy initiative to tighten monitoring on FX management of financial institutions. This initiative includes measures to strengthen monitoring on FX liquidity of NBFIs, build FX liquidity backstop mechanisms for NBFIs, and recalibrate FX macroprudential regulations.

Financial Sector Policy

Korea’s banking sector entered the pandemic in a strong position and remains sound overall. The financial soundness indicators are stronger than the previous year and the asset quality indicators are also very strong. The financial sector has played an important part in supporting SME borrowers by providing extension of maturity and deferral of loan payments (more than KRW 130 trillion). Set to expire at the end of March 2021, these measures were extended six more months to September 2021 after gaining consensus among the authorities and financial institutions. An orderly exit plan will be discussed before then.

The authorities launched a wide range of financial support facilities to provide emergency credit for SMEs and small merchants and stabilize bond and stock markets5. While most financial support packages introduced last year have been functioning well so far, a few, such as Key Industry Stabilization Fund, have shown low utilization. This is partly because these facilities are a back-up measure and the Korean economy weathered the COVID-driven downturn relatively well. The authorities also temporarily relaxed some of the regulations on financial institutions’ capital adequacy and liquidity, and asset quality requirement to help boost their financing capacity, mostly until end-June 2021. The authorities remain committed to maintaining these financial facilities and extended temporary regulatory relaxation by six months as the virus is still spreading and its detrimental effects prevalent. In December 2020, the authorities also extended the SPV for corporate bond and commercial paper by six months to July 2021 and increased the portion of the SPV’s purchase for lower-credit bonds to 75 percent from the previous 70 percent.

The authorities agree with staff that overall household debt risks are limited and manageable with several mitigating factors. The authorities shared the concern on increasing household loans, both unsecured loans and mortgages, on the back of asset market rallies and the expectation of a continuing increase in asset prices. They have already increased the frequency of scrutiny on bank risk management regarding unsecured loans. The authorities are currently reviewing a new and stricter DSR rule which is based on individual borrowers rather than financial institutions as well as on the lifetime income rather than the current income. The authorities see merit in introducing Sectoral Countercyclical Capital Buffer (SCCyB) and consider measures to require banks to set aside additional capital in proportion to their household assets.

The authorities aim to stabilize housing markets by eradicating speculative demand and protecting end users of houses and they are committed to develop various ways to increase housing supply. Abundant liquidity and increased demand driven by proliferation of households pushed housing prices up. The government recently introduced measures including relaxing regulation on floor area ratio and extra incentives for landowner-residents to facilitate housing development in major cities. The authorities have a different view from staff on the effect of pre-construction sales procedures and pre-sale price cap system that have helped stabilize the housing market and have not prevented private developers from supplying houses as the price is sufficiently high to cover the construction cost and margin.

Structural Policies

In July 2020, the Korean government announced a bold national transformation strategy called “the Korean New Deal (KND),” bracing for the post-COVID era. The KND rests on three pillars: Green New Deal, Digital New Deal and the strengthening of safety nets. The Green New Deal initiative aims to gain a foothold for Korea’s sustainable growth and carbon-neutral society. It consists of the green transition of infrastructure and transportation, increased supply of low-carbon renewable energy and innovation-friendly ecosystem for green industries. This initiative will set a solid groundwork for Korea’s recent commitment to carbon neutrality by 2050. The Digital New Deal aims for digital transformation of traditional industries by strengthening systems for data, network and Artificial Intelligence. In connection with the KND, the industrial policy direction is set to green and digital. The authorities pursue upgrading the overall production process of traditional key industries such as shipbuilding and steel and promoting new industries including future cars, bio-health and system semiconductors. Structural changes from the Green and Digital New Deal would entail job mismatches and the government is dedicated to strengthening social safety nets by providing job training and expanding the coverage of employment insurance. The authorities anticipate KRW 160 trillion of investment in the KND from central and local governments as well as private sector until 2025, which will create 1.9 million jobs.

One of Korea’s key policies is promoting innovation to boost productivity. The authorities have implemented a regulatory sandbox that is pre-permissive and post-regulatory. For the past two years, 410 cases have been approved through the regulatory sandbox process, contributing to more than KRW 1.4 trillion of investment and around 2,800 of jobs created. The authorities have strived to lift regulations that restrict economic activities. They launched multi-ministerial Task Forces and relaxed regulatory measures related to start-ups. Government support for business foundation has been extended to the service sector. Regulation Free Zones were created in 2019 to promote innovation and balanced development of local regions.

Korea continues to promote labor market stability and flexibility through social dialogue and compromise. The authorities are committed to strengthen the social safety net through measures such as unemployment benefits and further improving active labor market policies—including public employment services and vocational training. They have already extended the coverage of Employment Insurance to artists in 2020 and plan to extend it to non-regular dependent workers in 2021. They are also currently working on the roadmap to extend the mandatory membership to the self-employed. The authorities also expanded the eligibility of National Basic Livelihood Security by abolishing family-support obligation criteria.

In 2020, the Korean authorities announced their vision of carbon neutrality by 2050 and laid out the policy framework to achieve this ambitious vision. To this end, they will accelerate the transition towards a low-carbon economy in all areas from energy and transportation to industry and city-planning and promote new promising low-carbon industries. The authorities plan to rebuild the institutional foundation, such as taxes, levy, R&D subsidies and emission trading system, in the direction of strengthening carbon pricing and supporting a low-carbon transition, introduce a dedicated fund, and increase green financing. The emission trading system (ETS) will be recalibrated in accordance with an upgraded target of carbon emission to be determined through a comprehensive consultation with stakeholders to achieve the carbon neutrality vision. However, the authorities have a view that carbon price floor is premature in Korea as it may hinder market determination of carbon price and reduce companies’ participation in the ETS. In addition, the government will not neglect to take care of those left behind in the transition process.

The corporate resolution system is well-organized in Korea and the authorities affirmed that the system would work well in the aftermath of the pandemic. Korean companies have emerged from several crises with greatly improved corporate balance sheets and reduced reliance on short-term financing, and therefore, large-scale corporate bankruptcies are not expected. There has been little change in the overall trend of corporate restructuring cases and the courts have sufficient capacity to cope with a potential increase of cases. Furthermore, the corporate resolution system is under review to enhance the effectiveness and efficiency.


Korea’s comprehensive response to COVID-19 from the outbreak in January to the end of September in 2020 is well described in an e-book, “All about Korea’s response to COVID-19,” published in October 13, 2020.


The authorities have purchased 106 million doses of vaccines (for 56 million people) with four pharmaceutical companies and are discussing the purchase of 20 million additional doses.


BOK’s Corporate Bond-Backed Lending Facility expired on February 3, 2021 as Korea’s financial markets have stabilized and liquidity conditions have been favorable.


The publication of net purchase of US dollar for FX market stabilization started on a semi-annual basis in March 2019.


The financial support facilities include Emergency Lending Program for Small Merchants, Working Capital Support Program, Stock Market Stabilization Fund, Bond Market Stabilization Fund, Key Industry Stabilization Fund, and Special Purpose Vehicle to support Corporate Bond and CP Markets.

Republic of Korea: 2021 Article IV Consultation-Press Release; Staff Report; Staff Statement; and Statement by the Executive Director for the Republic of Korea
Author: International Monetary Fund. Asia and Pacific Dept