À̹ÌÁö È®´ë Last week the International Monetary Fund (IMF) lowered its growth forecast for South Korea`s economy this year to -2.1 percent amid a global economic slowdown, a fallout of the ongoing COVID-19 pandemic. If this projection is met, Asia¡¯s fourth largest economy will record the second lowest growth rate in history since 1998 when the figure was -5.1 percent. The Korean government is going all out to boost the economic recovery by means of extra budget already three times this year, but a controversy follows over where the budget should go.
During a telephone interview with Maeil Business Newspaper on Tuesday, Rhee Chang-yong, Director of the Asia and Pacific Department at the IMF, raised concerns that the Korean government and political circles are not clear about the differentiation between support policy with a long-term financial burden and a short-term stimulus package recommended by the IMF.
The following is the excerpt of the interview.
Q: The International Monetary Fund (IMF) revised down the economic growth forecast.
A: The IMF lowered its growth forecast for the global economy for 2020 to -4.9 percent from -3 percent, meaning that there is a slim chance for a V-shaped rebound for the global economy due to the lingering effects of COVID-19 even if a vaccine or a cure for the virus is developed. The IMF expected a relatively slower contraction for Korea and China that began to show a recovery momentum from the second quarter thanks to their early containment measures, but their growth outlook was cut for next year. Although Korea has been less affected by the virus outbreak compared to other economies, but the country has a high reliance on exports, making ¡®decoupling¡¯ from other countries in recovery is almost impossible.
Q: Do you think that the Korean government has been adequately responding to the crisis so far?
A: The Korean government implemented a bigger relief package than other non-key currency countries. As of June, Korea injected some 13 percent of its gross domestic product (GDP) as fiscal stimulus, payment guarantees, as well as investment and loan support. It needs to decide whether to conduct additional relief measures depending on the pace of its economic recovery. The IMF recommends that Korea actively use the remaining fiscal space if the economic downturn worsens.
Q: The fiscal space could hit the limit.
A: The fiscal space means a government¡¯s ability to implement an economic stimulus measure in the short-term. It aims to prevent a severe economic slowdown from permanently hurting the mid- to long-term economic growth rate through a temporary stimulus program. As Korea is able to access the international financial market and its sovereign debt rate remains low, it can boost the economy through fiscal spending, but it will be a different story if its fiscal spending increase goes for a long run because it could undermine fiscal soundness and cause many problems.
Q: Do you think that the Korean government¡¯s fiscal spending has been appropriate (in terms of long-term fiscal soundness)?
A: Most of the measures including the extension of unemployment benefits and liquidity support for SMEs have been set in the right direction, but that is not easy to say that there is no problem at all. The IMF has been emphasizing the importance of not only the size of the relief aid but also its usage. In the temporary stimulus measures to respond to COVID-19, the so-called ¡®3T¡¯ is important, which means ¡®targeted, temporary and transparent¡¯ spending. Korea¡¯s sovereign debt rate is expected to exceed 60 percent against GDP by 2040 and 100 percent by 2050 due to population aging, and therefore the Korean government should consider its mid- to long-term fiscal soundness when it provides stimulus measures.
Q: What is inappropriate fiscal spending?
A: It could be, for instance, a permanent increase in public jobs or introduction of new welfare policy without a careful plan for financing. What I want to make clear is that the IMF believes Korea¡¯s welfare policy and social safety net should be further strengthened and the income gap between regular and temporary workers should be narrowed. But that does not mean that the Korean government should increase the number of hires in the public sector and have state corporations turn temporary jobs into full time work. Apart from social justice and equality issues, what if people at other state enterprises will request more regular jobs following the case of Incheon International Airport Corp. The government is not considering how to raise funds in the long-term to increase regular workers and expand jobs in the public sector. The measure may sound like a good deal for young people who want to get job stability at a public company, but it would add a burden on future taxpayers. The temporary job issue should be addressed urgently, but we cannot cut corners. The COVID-19 relief package would have been more effective if it was given a selective number of people who were hit harder than others including the unemployed or self-employed. The universal basic income floated by some politicians can also be another example of populism if the government does not have a long-term financing plan.
Q: Any advice on monetary policy when the interest rate is expected to stay low for a while?
A: People¡¯s opinions are changing about the role of a central bank as the low growth rate and low inflation have become a new normal. The U.S. Federal Reserve Board is now buying corporate bonds while exposing itself into credit risks. More nations are getting closer to employ non-conventional monetary measures such as quantitative easing or yield-curve control beyond simple short-term interest rate adjustment or inflation targeting.
By Shin Heon-cheol and Choi Mira
[¨Ï Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]