OECD urges Korea to map out exit strategy

By Kang Seung-woo

Staff reporter

South Korea should map out an exit strategy from the current stimulus pumped, low interest rate powered economic policy, an international body recommended Tuesday.

In its report, the Organization for Economic Cooperation and Development (OECD) said that Korea is making a strong recovery from the global recession, and needs to start to raise interest rates.

The OECD recommendation came at a time when there is an ardent discussion about rate hikes. Korea's economy was hit hard by the global financial crisis in late 2008, sparked by the collapse of Lehman Brothers, pushing the Bank of Korea (BOK) to reduce its key interest rate from 5.25 percent in 2008 to a record-low 2 percent by February 2009.

Since then, the central bank has maintained the rate for the 16th straight month, citing potential risks to the export-driven economy from the eurozone debt crisis.

The OECD report said that Korea's public debt needs to be reduced.

"Maintaining a low public debt burden is an important priority for Korea, given rapid population ageing and uncertainty about the eventual cost of greater economic integration with North Korea," the report said.

The debt of public corporations has increased sharply in recent years, from 10 percent of gross domestic product (GDP) in 2004 to 17 percent in 2008, it observed.

The OECD took note of the government's role in the recovery.

According to the report, Korea committed 6.1 percent of GDP in a stimulus package, composed evenly of supplementary expenditure and tax cuts. The United States committed 5.6 percent of GDP to pump priming.

As a result, nearly 300,000 temporary jobs were created in the public sector in 2009.

The OECD's assessment is expected to affect the Strategy and Finance Ministry's revised outlook, which is due on June 24. It will be the second of two official growth outlooks it will announce.

It is widely believed that the ministry will raise the growth outlook from 5 percent to just less than 5 percent for this year on the back of a rapid economic recovery.

"Given that all economic indicators are better than the government's projections, it is inevitable for us to revise upward our earlier growth outlook," a ministry official said.

The government is expected to maintain its target for consumer price growth at the current 3 percent, while expecting more than 250,000 jobs to be created, up from the previous prediction of 200,000.

Officials, however, say that high oil prices and Europe's financial fiasco will bring down the current account surplus from $15 billion to the $12-13 billion range.