IMF: South Korea Must Prepare for Rapid Debt Increase Due to Aging Population

[Asia Economy Reporter Park Byung-hee] "Korea has solid fundamentals in terms of manufacturing and the quality of its labor force, and will maintain a manageable level of debt. However, the increasing burden of medical services due to rapid aging could become a concern."

Andreas Bauer, Deputy Director of the Asia and Pacific Department and Head of the Korea Mission at the International Monetary Fund (IMF), gave this advice in an interview with Bloomberg, Bloomberg reported on the 13th (local time). Bauer also emphasized the need for labor market flexibility and deregulation.

Regarding the increase in Korea's debt ratio due to COVID-19, Bauer gave a positive assessment. He said, "It is reasonable to use fiscal capacity to respond to the COVID-19 shock," adding, "The fiscal policies implemented over the past year to offset the COVID-19 shock have been effective and the stance should be maintained." However, he advised, "In the longer term, measures should be taken to prevent a sharp increase in debt burden as the aging ratio rises."

Earlier, the United Nations predicted that by 2050, the proportion of the population aged 65 and over in Korea will reach 40%, the highest level in the world. Last year, Korea experienced a population decline for the first time in history, with the number of deaths exceeding the number of births.

The IMF, in a fiscal surveillance report released earlier this month, projected that Korea's government debt-to-GDP ratio will increase from 53.2% this year to 69.7% in 2026.

Compared to the average of the Group of Twenty (G20), Korea's debt ratio is low, but the IMF notes that the rate of increase is rapid. The IMF expects the average debt ratio of G20 countries to slightly decrease from 133.7% this year to 133.0% in 2026, as debt ratios in Eurozone countries and Japan decline.

Bauer mentioned that structural reforms in the labor market are necessary due to aging, including stronger safety nets for workers and increased labor flexibility.

He also pointed out the high level of regulation. He said, "Much of growth comes from young companies," adding, "Some of these young companies are small but grow very rapidly, which is an area Korea has somewhat overlooked until now."