The International Monetary Fund (IMF) has praised South Korea’s sound fiscal policies, stating that the country’s national debt is at an appropriate level. However, the IMF has also expressed concerns about the high levels of household debt in South Korea.
According to the transcript of a press briefing held in Singapore on Oct. 29, based on the recent Asia-Pacific Economic Outlook released through its website, the IMF expressed praise for South Korea’s sound fiscal policies. Thomas Helbling, deputy director of the IMF’s Asia and Pacific Department, stated, “We commend South Korea for the intentions and actions of its sound fiscal policy. The current debt level in South Korea is generally appropriate and should be maintained as such.”
It is not the first time that the IMF has positively evaluated the government’s sound fiscal policy. During a press conference with South Korean media at the IMF-World Bank Annual Meetings held in Marrakech, Morocco on Oct. 13, Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, also emphasized the importance of fiscal soundness, stating, “Fiscal prudence is more important than ever. It is a time to prepare buffers to be ready for potential shocks in the future.”
The government’s current efforts to introduce “fiscal rules” were positively evaluated by the IMF, with the organization stating that they are “very well-designed rules” and represent a “good framework for medium-term fiscal management.”
The IMF is recommending that South Korea capitalize on the exceptional fiscal support provided during the COVID-19 period to reduce deficits and establish fiscal buffers.
Deputy Director Helbling said, “After the pandemic, South Korea’s commitment to reducing deficits both now and in the future serves as an example of sound fiscal policy implementation.” During the COVID-19 period, South Korea’s national debt increased by around 100 trillion won (US$73.64 billion) annually, but this year it is predicted to decrease to 67 trillion won, and next year it is expected to further decrease to 62 trillion won.
In addition, it is analyzed that the South Korean government has embarked on efforts to reduce debt in the context of considering the expected increase in fiscal burdens due to an aging population.
However, the IMF expressed concerns about South Korea’s household debt levels. This is because South Korea’s total household debt, which accounts for an average of 160 percent of disposable income, is significantly high even among the top group of countries within the Organization for Economic Co-operation and Development (OECD).
Deputy Director Helbling emphasized, “While the IMF does not have specific recommendations regarding the level or ratio of household debt, it is important to establish macroprudential policies to manage the risks associated with the increase in household debt.”
Meanwhile, in the World Economic Outlook published on Oct. 10, the IMF maintained its projection for South Korea’s growth rate for this year at 1.4 percent. However, it revised next year’s growth forecast from 2.4 percent down to 2.2 percent.