Press Release No. 24/427

IMF Staff Completes 2024 Article IV Mission to Republic of Korea

November 20, 2024

• The Korean economy has demonstrated remarkable resilience against global shocks. Reinvigorating growth and building resilience to the changing global landscape remain key priorities.
• Growth is projected at 2.0 percent in 2025 and inflation is expected to stay near the target of 2 percent in the near term. A near-term mix of monetary normalization, exchange rate flexibility, gradual fiscal consolidation, and targeted financial policies would help preserve macroeconomic stability and fortify the recovery.
• Tackling declining labor force due to rapid population aging, enhancing capital allocation, and bolstering productivity remain crucial to boost the growth potential. Advancing reforms would also help enhance resilience in a changing environment characterized by geoeconomic fragmentation, technological changes, population aging, and climate change.

Seoul: An International Monetary Fund (IMF) team, led by Mr. Rahul Anand, Mission Chief for the Republic of Korea, visited the country from November 7 to November 20, 2024, to hold discussions for the 2024 Article IV Consultation. At the conclusion of the discussions, Mr. Anand issued the following statement:

“Strong economic fundamentals and sound macroeconomic policies have helped the Korean economy navigate through multiple global shocks in recent years. Economic growth has recovered, inflation has steadily declined, and financial stability risks have decreased. Key medium-term challenges are to boost the growth potential amidst rapid population aging, and to adapt to shifting trade patterns, transformative technological change, and climate vulnerabilities.

“Growth is expected to reach 2.2 percent in 2024, supported by strong semiconductor exports, while partially offset by a weak recovery of domestic demand. Real GDP is projected to expand by 2.0 percent in 2025 as the economy converges to its potential growth and the output gap is closed. Inflation has declined to 1.3 percent (y/y) in October 2024 and is projected to remain close to the target of 2 percent in 2025. Uncertainty around the outlook remains high and risks are tilted to the downside.

“While inflation is around the Bank of Korea’s target of 2 percent, a gradual monetary policy normalization seems appropriate given high uncertainty. Foreign exchange interventions should remain limited to preventing disorderly market conditions. The authorities’ envisaged fiscal consolidation and spending priorities in the 2025 budget proposal is appropriate, but more ambitious consolidation will be needed to create the space to meet significant long-term spending pressures. Targeted policy efforts to address real estate related financial risks are welcome, and the authorities should continue to monitor pockets of vulnerabilities and stand ready to act preemptively. If needed, additional prudential measures could be considered as monetary policy normalizes further.

“Medium-to-long term economic reforms are crucial to sustain growth amid structural transitions. Comprehensive reforms are needed to tackle declining labor force, including through alleviating economic constrains that hold back Korea’s fertility rate, increasing female labor force participation and attracting foreign talents. Continued efforts are important to improve capital allocation, through strengthening resilience of financial institutions, addressing risks from high levels of private debt, and advancing capital market reforms. The recent FX market and corporate value-up reforms are a good start. Enhancing allocative efficiency in the services sector and SMEs, through labor and product market reforms, while leveraging the revolution of Artificial Intelligence (AI) could boost productivity and help counteract adverse effects of declining labor force.

“Strong economic policies are needed to enhance resilience in a changing domestic and global environment. Maintaining Korea’s competitiveness is key to navigating the evolving global trade landscape. Policy priorities include boosting innovation, diversifying supply chains, and promoting service exports. Structural fiscal reforms are required to create space for meeting aging-related spending needs, including through reforming the pension system, adopting fiscal rules, increasing revenue mobilization, and prioritizing spending. Targeted policies are needed to prepare for the AI adoption and to protect vulnerable groups. Achieving Korea’s climate goals would require continued efforts. The expedited implementation of structural reforms, as laid out in the authorities’ recently released Dynamic Economy Roadmap, would help boost Korea’s growth potential and build resilience.

We would like to express our gratitude to the authorities and other stakeholders for productive discussions, excellent support, and generous hospitality during our visit.”