Money Circulates at Slowest Pace in Market
By Kim Jae-kyoung
Staff Reporter
The speed at which money circulates in the economy, or velocity of money, fell to its lowest level in the country's history in the first quarter, meaning that ample liquidity supplied by the government has not been used to boost the real economy.
According to the Bank of Korea (BOK) Sunday, the velocity of money, calculated by dividing the gross domestic product (GDP) by M2, a broader measure to quantify the amount of money in circulation, dipped to 0.687 in the first quarter.
This was the first time that the figure fell below the 0.7 mark since the central bank began compiling related data. In 2008, it stood at 0.778 in the first quarter, 0.769 in the second, 0.748 in the third and 0.703 in the fourth.
``The velocity of money is important for measuring the rate at which money in circulation is used for purchasing goods and services,'' said a BOK economist.
``This helps investors gauge how robust the economy is. The falling velocity explains why the economy is recovering at such a slow pace,'' he added. ``The continuing fall has rendered monetary policy impotent.''
The key culprit behind the sluggish money circulation was banks' tightening of lending to small firms and households. Pushed by the government, banks have extended more loans, but the absolute amount is much smaller than the previous year.
Banks extended 3.2 trillion won in fresh loans in April, compared with the 10.9 trillion won lending in the same period last year. ``Liquidity can be created when banks supply money to the real economy by making loans but this function is not working properly.''
Local firms' sluggish investment is another reason. According to the Korea Exchange, the top 10 business groups' subsidiaries listed on the main bourse recorded 945.54 percent in earnings retention ratio in March, up 60.8 percentage points from the previous year.
Retention ratio refers to the percent of earnings credited to retained earnings. In other words, it is the proportion of net income that is not paid out as dividends. A higher retention ratio means that firms are shunning making fresh investments.
The central bank reported Friday that the gross domestic investment ratio came to 26.5 percent in the first quarter, the lowest level since it recorded 26 percent in the fourth quarter of 1998 when the currency crisis shook the country.
``A recovery in the velocity of money will depend on how fast banks begin to lend to firms and individuals,'' a market analyst said.
``To that end, more efforts should be made to speed up corporate restructuring to weed out non-viable companies,'' he added.