IMF official recommends extra budget, low interest rate to help S. Korean economy grow

A visiting official of the International Monetary Fund (IMF) said Tuesday here that South Korea is on track for an economic recovery but still needs a modest budget stimulus and low interest policy.

"An economic recovery is on its way and is being supported by the government's macro-economic policies," Joshua Felman, assistant director at the Asia-Pacific department of the IMF, was quoted as saying by the South Korean Yonhap News Agency in a press briefing.

Felman mentioned private consumption accelerated in the fourth quarter of 2004 to a better-than-expected rate, and pointed out, " As this trend continues, the other sectors of the economy should also begin to revive."

The IMF official stressed, however, that private consumption alone may not be strong enough to offset a slowdown in external demand.

Given the strong front-loading that has occurred in the first half of 2005, there is a risk that government spending could drop in the second half of the year and undermine the still-fragile recovery, he said.

"Accordingly, we would recommend enacting a modest supplementary budget, targeted on the social safety net. Meanwhile, with inflation firmly under control, the Bank of Korea has room to maintain its low interest policy for some time. Indeed, it even has scope to cut rates further, should the recovery falter," said Felman.

He said that the IMF maintains a 4-percent growth forecast for the 2005 South Korean economic growth.

Felman, along with other five IMF analysts, came here on May 30 for a nine-day trip, during which they held meetings with officials from South Korea's Ministry of Finance and Economy, the Bank of Korea, the Financial Supervisory Commission, and other government offices. The IMF sends officials to South Korea twice a year.

South Korea's economy was expected to recover this year as private spending increased to counterbalance a slowdown in exports.

However, the economy only expanded at a 2.7 percent rate in the first quarter of 2005, falling short of expectations due largely to weak private spending.

In an effort to help the economy recover from its two-year slump, the South Korean government diverted the majority of its budget in the first half while the central bank retained its key interest rate of 3.25 percent in May, marking the sixth consecutive month of the record low rate.

Source: Xinhua