ED Economic headwinds
IMF recommends big supplementary budget for Korea
The International Monetary Fund (IMF) has suggested that South Korea draft a large supplementary budget ― as much as 0.5 percent of gross domestic product (GDP) ― if it wants to achieve its economic growth target of 2.6 percent to 2.7 percent this year.
Tarhan Feyzioglu, the head of an IMF delegation, made the suggestion Tuesday after holding annual discussions with Korean policymakers. He stressed the need for more expansionary fiscal policies to cope with growing headwinds at home at abroad.
His policy recommendation certainly reflects increasing downside risks the domestic economy now faces. It also implies the country might not meet its growth target unless it undertakes pump-priming measures by executing a sizable extra budget worth 9 trillion won ($8 billion).
The IMF appears to be taking the country's economic situation more seriously than was thought. In fact, the Moon Jae-in administration adopted a super budget of 470 trillion won ($415 billion) for this year, up nearly 10 percent from 2018. This record figure indicated the government was trying to boost the economy with generous fiscal expansion. But the IMF considers the annual budget alone is insufficient.
In this context, Moon's economic team needs to accept the IMF suggestion as a warning on the economy. It is time to overhaul the President's economic policies and map out new stimulus measures to prevent a looming recession before it is too late.
Asia's fourth-largest economy has already begun to lose steam, showing no signs of improvement. President Moon introduced his signature policy of income-led growth designed to create more jobs and bring higher income to workers.
Yet his policy has so far failed to make any progress. On the contrary, the number of new jobs has declined with the 2018 unemployment rate hitting the highest since 2001. The embedded cause of this job creation failure can be attributed to sluggish investment, production and consumption.
Amid shrinking domestic demand, steep minimum wage hikes ― 16.4 percent in 2018 and 10.9 percent in 2019 ― have aggravated the situation. A growing number of smaller firms and the self-employed have hired fewer workers, further tightening the job market.
Worse, the country's exports, its key growth engine, are suffering a setback due to sliding demand for Korean goods, particularly semiconductors, following a slowdown in the global economy. Overseas shipments dropped 1.2 percent in December, 5.8 percent in January and 11.1 percent in February.
Against this backdrop, Moody's Investor Service, one of the major global credit rating agencies, revised Korea's 2019 growth projection down to 2.1 percent from its earlier figure of 2.3 percent. No doubt dark clouds are gathering over the local economy.
As the IMF pointed out, the Moon administration should push for structural reform to overcome chronic economic weaknesses and strengthen growth potential. For this, the country must improve labor market flexibility and productivity, and encourage investment.
Most of all, the authorities ought to promote deregulation, innovation and entrepreneurship. Otherwise, the country may face a more serious catastrophe than the 1997-98 Asian financial crisis that forced Korea to go cap in hand for an IMF bailout package.