IMF: "Targeted Disaster Relief Payments Are Effective"... National Debt Ratio of 60% Is Appropriate

Increase in Household Debt... "Will Raise Above Regulatory Levels"
Purchasing Government Bonds Through Distribution Market is Preferable

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The International Monetary Fund (IMF) has expressed the opinion that selective payments are effective regarding the direction of the 4th disaster relief fund currently being advocated in the political sphere. It also advised that maintaining an expansionary fiscal stance would help economic normalization in response to the novel coronavirus infection (COVID-19) in the future.

Andreas Bauer, head of the IMF mission, stated at a briefing on the '2021 IMF Annual Consultation Results' held via video conference on the 28th, "In a situation where COVID-19 recovery is proceeding unevenly, fiscal measures should be selectively focused on the parts that have suffered greater damage." He viewed selective support as useful in stimulating consumption effects and securing fiscal soundness.

Regarding the 'legislation of compensation for losses of small business owners,' he said, "It is desirable to establish a permanent safety net for the self-employed," and emphasized, "Attention should also be paid to the fact that Korea has a relatively high proportion of self-employed people compared to other OECD member countries." However, he noted that in-depth research is needed on whether income and sales can be tracked in the future and on plans to secure fiscal soundness.

The IMF mentioned that Korea's national debt ratio relative to gross domestic product (GDP) is at an appropriate level of up to 60%. Considering the downside risks to economic recovery in the short term, it analyzed that additional easing of fiscal and monetary policies would accelerate the pace of economic normalization. The IMF emphasized, "Additional easing of fiscal and monetary policies is expected to speed up economic normalization and help discouraged workers return to the labor market." It added, "Even if the fiscal deficit size increases somewhat compared to this year's budget, it is expected to be offset by gradual fiscal soundness over the coming years."

The IMF also warned about rapidly increasing household debt. It added, "While macroprudential policy operations to mitigate risks appear to be appropriately implemented, if household debt continues to increase sharply, it will be necessary to raise regulatory levels further."

Meanwhile, it advised that once the economy recovers, liquidity released should be withdrawn and corporate restructuring should be promoted. This stems from concerns that liquidity released due to COVID-19, if used to support marginal companies, could reduce the competitiveness of the entire industry. The IMF advised, "As the economy recovers, the main purpose of support needs to shift from liquidity supply to selective measures that promote corporate restructuring and enhance survival prospects."

Although the government is supplying policy finance at an unprecedented scale as part of overcoming the COVID crisis, domestic experts expect issues with marginal companies to emerge once loan maturity extensions and interest payment deferrals end. Professor Lee In-ho of Seoul National University’s Department of Economics said, "When the COVID recovery phase comes, it means letting those who should fail in the real economy fail and be cleared," adding, "Also, the released funds should flow into stable investments."

Meanwhile, the IMF predicted that the economy could gain momentum through additional measures such as lowering the Bank of Korea’s base interest rate. However, it stated that bond purchases are preferable through the secondary market.