News Brief No. 99/85

News Brief: IMF Board Completes Korea Review

December 17, 1999

The Executive Board of the International Monetary Fund (IMF) today completed the semi-annual review under the Stand-by credit for Korea. This will allow Korea to draw a further SDR 362.5 million (about US$495 million) from the IMF. However, in view of the impressive recovery and strong external position, the authorities have indicated that they do not intend to draw on the additional resources.

In commenting on the Executive Board's discussion of the issue, Stanley Fischer, Acting Managing Director, made the following statement:

"Executive Directors welcomed the success achieved by Korea in the implementation of its stabilization and reform program. They noted the remarkable speed and strength of Korea's economic recovery and the marked reduction in external vulnerability. Directors observed that the structural reforms implemented so far have made Korea a more open, competitive and market driven economy, and have contributed to significantly improved market confidence. They stressed, however, that the sustainability of strong growth is not yet assured, and that it will be essential to maintain the momentum of reform, particularly in the financial and corporate sectors.

"Directors emphasized that, with the narrowing output gap and continuing large external inflows, macroeconomic policies need to begin shifting to a more neutral stance and the mix of policies needs to be rebalanced. In this context, Directors welcomed the authorities' intention to begin the process of fiscal consolidation with the 2000 budget, and the goal of achieving a balanced budget by 2004. Directors noted that the recent appreciation of the won was appropriate in light of the large depreciation following the crisis, and was also consistent with achieving a more balanced and sustainable current account position in the medium term.

"Directors considered forceful action to further strengthen the financial system as a high priority in the period ahead. They noted that fundamental reforms to overhaul the investment trust industry are needed, and welcomed the plans to increase the use of market valuation principles in the industry. Directors commended the authorities for the substantial achievements in improving the health of the banking system over the last two years, but noted that the process of building a sound banking system is far from over. In this connection, they stressed the importance of strengthened supervisory oversight in the implementation of the new tighter loan classification guidelines, and recommended that bank privatization be expedited.

"Directors noted that although favorable economic conditions and a strong stock market have helped improve corporate liquidity, Daewoo's failure clearly shows that it is not possible to simply grow out of structural problems. Directors therefore stressed the need to accelerate and strengthen the corporate restructuring process to ensure that more fundamental and meaningful operational restructuring is undertaken," Fischer said.