Foreign Bank Branches Encouraged to Bring in More Dollars
By Lee Hyo-sik
Staff Reporter
The government will allow branches of foreign banks operating here to borrow more money from their headquarters abroad as part of its effort to increase the dollar supply and boost the won's value to help curb rises in consumer prices.
The Ministry of Strategy and Finance said Monday that local branches of foreign banks will be able to deduct interest payments on more loans borrowed from their overseas headquarters from their taxable income.
They can deduct interest payments on loans that are up to six times their capital from taxable income in the second half of the year, up from the current three times.
The ministry expects the easing of the rule will see branches of foreign banks here borrow an additional $10 billion this year. It plans to revise the law within the latter half and apply the change retroactive to Jan.1, 2008.
The government has sold billions of dollars on the local foreign exchange market over the past month to strengthen the local currency against the greenback. It wants to make the won stronger to help lower import costs of oil and other raw materials, and thus curb consumer price growth.
Last week, the finance ministry also allowed state-run companies to borrow dollars from abroad and convert them into the local currency to shore up the won's value.
``When more dollars are supplied to the domestic foreign exchange market, the won will gain ground against the greenback. Also, it will help financial services companies and businesses secure dollars as they face increasing difficulties in borrowing money abroad amid the aggravating international financial market turmoil,'' Choi Jong-ku, head of the ministry's international financial division, said.
However, the ministry is coming under criticism for its sudden shift in policy. Early last year, it cut the upper ceiling for interest tax deduction from six times capital to three times to discourage branches of foreign banks here from borrowing money overseas to help curb rises in the won's value.
But the government has changed the policy back to where it was a year earlier, displaying an absence of consistency.
``The situation was entirely different early last year. It was before the U.S. subprime mortgage debacle surfaced and most of all, the won was too strong against the dollar at the time, negatively affecting the nation's exports,'' Choi said.
He then said the most important thing now is to bring more dollars into the local currency market as companies are having a difficult time securing the hard currency to pay for oil and other imported commodities, adding that boosting the won's value to mitigate rises in imported raw material prices was also important.