IMF Executive Board Concludes 2008 Article IV Consultation With Republic Of Korea

by Mary Swire, for LawAndTax-News.com, Hong Kong

16 September 2008

On September 8, 2008, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with the Republic of Korea, observations on which were published on Friday.

The IMF Directors began by commending the authorities for their continued skillful economic management, which has contributed to the resilience of the Korean economy in the face of challenging global circumstances.

Directors saw the slightly expansionary fiscal stance in 2008 as broadly appropriate. They underscored, however, that the scope for further fiscal stimulus is limited given the inflation pressures and the medium-term fiscal challenges facing Korea. Any further transfers to protect the vulnerable against high oil prices should be temporary, timely, and well targeted, the IMF officials argued.

Continuing, the directors encouraged the authorities to meet head-on the longer-term implications of an aging society. They stressed, in this context, that proposals for reducing taxes should be part of a broader reform plan to address longer-run fiscal challenges.

The South Korean government recently announced a substantial package of tax cuts worth more than 20 trillion won (USD17.9bn) as it attempted to boost flagging levels of corporate investment and consumer spending.

Focusing mainly around a 2% cut on individual income tax, the government also announced that the package would include a cut in corporate tax rates from 25% down to 22%.

The IMF directors further noted that Korea's financial system remains healthy, although the ongoing financial turbulence has raised vulnerabilities. Global credit market stresses have highlighted that banks reliant on wholesale funding are subject to elevated liquidity risk, the IMF observed.

The introduction of Korea's Capital Market Consolidation Act was also praised in the directors' conclusion, and they suggested that it was an important step to develop Korea's financial sector and support long-term growth, by increasing competition and the scope for innovation.

Finally, the directors also welcomed the Korean authorities' intention to privatize remaining state-owned banks, while emphasizing that any loosening of constraints on bank ownership by non-financial corporates should not threaten hard-won progress on corporate governance.

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