Local Government Investment Projects Including Guarantee Obligations to be Subject to Mandatory 'Central Investment Review'

Strengthening Local Debt Management to Prevent Recurrence of Legoland Incident
Refinancing Bond Limit Recognition Ratio Reduced to 30% by 2026
Changes in Guarantee Debt Amount Also Require Local Council Approval

[Image source=Yonhap News]

[Asia Economy Reporter Han Jinju] The government is focusing on managing local debts and contingent liabilities and is pushing for improvements in related systems. Procedures will be strengthened so that local government investment projects involving guaranteed liabilities undergo central investment review.

On the 7th, the Ministry of the Interior and Safety held the '2022 Local Finance Crisis Management Committee' meeting and finalized and announced agenda items to enhance local fiscal soundness, including measures to strengthen debt management for local governments and local public institutions.

The debt management strengthening measures discussed by the Local Finance Crisis Management Committee include ▲ short-term liquidity response ▲ strengthening local debt management ▲ improving local finance systems.

It will be mandatory to obtain approval from local councils even when there are changes in the amount or content of guaranteed liabilities of local governments. In addition, if unusual trends related to guaranteed liabilities occur, the central government ministries will be notified and consultations will be held. Investment projects of local governments that include guaranteed liabilities will be subject to mandatory central investment review by the Ministry of the Interior and Safety regardless of their scale, thereby strengthening management.

The scale of local debt will be managed at an appropriate level, and the review of acts imposing guaranteed liabilities will be strengthened. The ratio of refinancing bonds recognized outside the autonomous issuance limit of local bonds by each local government will be gradually reduced from 100% this year to 80% in 2024, 50% in 2025, and 30% in 2026.

According to the 'Short-term Financial Market Stabilization Plan' announced last month, local governments nationwide will actively repay local bonds and public bonds maturing at the end of this year and early next year, minimize new issuances, and promote the short-term financial market stabilization plan.

System improvements for local finance and local public institutions will also be pursued. Guaranteed liabilities will be reflected in the indicators of the Local Finance Crisis Management System to recognize signs of fiscal crisis, and measures to supplement inspection indicators possible at specific points in time instead of based on the previous year's settlement will be considered.

Grounds will also be established to reduce grant taxes if a local government is forced to fulfill guaranteed liabilities due to acts violating the law. When local public enterprises invest in other corporations, feasibility reviews will be conducted by specialized institutions designated and announced by the Ministry of the Interior and Safety, and development of standard establishment models for local public institutions will also be promoted.

Han Chang-seop, Vice Minister of the Ministry of the Interior and Safety, said, "We have prepared liquidity securing and system improvement measures to alleviate concerns in the financial market due to recent high interest rates and real estate downturns and to secure the fiscal sustainability of local governments," adding, "We will comprehensively organize systems related to local debts to enhance trust in local governments and local public institutions in the financial market."