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Report Says IMF Reform Program

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Korea Herald
March 16, 2000

A reform program initiated by the International Monetary Fund (IMF) and the World Bank has its limitations in helping boost the growth potential of the Korean economy, said a report by the Bank of Korea yesterday.


The central bank alleged that the effectiveness of the reform program, which focuses mainly on repairing Korea's external balance, has been reduced sharply since Korea's foreign exchange reserves rose to a significantly high level. There is a possibility that several inherent problems in the reform program will dampen growth of the Korean economy, the report said, adding that the nation should urgently seek ways to boost long-term growth potential on its own.

The shift in the plan's focus to business expansion from a tight monetary policy may cause adverse effects from the ensuing recovery of macroeconomic indicators, the report said. Improvements in macroeconomic indicators may lead to a bubble since the economy has yet to solve many of its problems and strengthen its foundations, it warned.

In addition, huge government debts incurred in the process of the economic reform program and the nationalization of several financial institutions will also block smooth implementation of its macroeconomic policy, the report said. Due to the injection of huge amounts of public funds, the government will feel increasingly inclined to stabilize interest rates as they have a direct bearing on the fiscal position, it said.

The government should therefore rely on market forces and refrain from continuously lowering interest rates simply for the sake of easing the burden on its fiscal balance, the report stressed. The trend of the stock market will also have a direct impact on the government's fiscal activities because it has controlling stakes in several commercial banks and nonbank financial firms, it said.

In future, the government should focus its economic policy on revitalizing the functions of the domestic financial markets via enhanced competitiveness of financial organizations and ensuring macroeconomic stability, the report suggested. At the height of the nation's foreign exchange crisis in December 1997, Korea accepted a harsh economic reform program imposed by the IMF and the World Bank in return for a bailout loan of around $57 billion. Korea's foreign exchange reserves, which plummeted to below $8 billion at the time, shot up to $79.73 billion as of the end of February this year thanks to a continued current account surplus. (KYS)


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