In a recently released report, the International Monetary Fund (IMF) said Korea's government debt (D2) ratio will rise from 54.4% this year to over 60% in 2029, listing Korea among countries expected to see a "considerable increase in the debt ratio." The government and the presidential office countered in succession, saying, "IMF projections have not always been right," and calling them "exaggerated."
The IMF releases twice a year, in April and October, projections of the debt-to-gross domestic product (GDP) ratio for up to five years ahead. Comparing the IMF's medium-term projections in reports released from 2014 to 2026 with actual outcomes shows that, in general, the projected trend materialized.
Lee Cheol-in, a professor in the Department of Economics at Seoul National University who previously chaired the Korea Institute of Public Finance, said, "From the government's perspective, there may be room to feel the IMF figures are exaggerated, but objectively, given the current speed of liability growth, it would be stranger not to be concerned."
◇ IMF flagged Korea's rapid liability surge path even before COVID
ChosunBiz on the 26th compared the IMF's projections in the Fiscal Monitor published from 2014 to 2026 for Korea's D2 as a share of GDP with the actual D2 outcomes. D2 is an indicator that adds the liabilities of nonprofit public institutions such as the National Health Insurance Service and Seoul Metro to government debt (central and local government liabilities) and is mainly used for cross-country liability comparisons. Each year's D2 result is compiled and released at the end of the following year.
Earlier, the IMF expected Korea's liability ratio to generally remain within 40% from 2016 to 2019, and that is what happened. The IMF also predicted relatively early, in 2019, that the ratio would surge to near 50% after COVID.
In particular, the projection made in Oct. 2019 for up to 2023 had an error margin of only 0 to 2 percentage points (p). Comparing IMF projections with actual figures shows there was little difference: ▲2019 40.1% (projection) · 39.7% (actual) ▲2020 43.4% · 45.9% ▲2021 46.4% · 48% ▲2022 49% · 49.8% ▲2023 51.3% · 50.5%.
In an explanatory release on the 16th, the government noted that "the IMF (April 2021 issue) projected the 2023 D2 ratio would exceed 60%, but the final outcome was 50.5%," highlighting differences from actuals. Still, the general upward trend was largely similar. Moreover, the lower actual debt ratio was also influenced by the government's pursuit, since 2022, of a sound fiscal stance, including curbing the growth rate of total expenditure to reduce the debt ratio.
◇ When the IMF recommended "expansionary fiscal policy," the government embraced it with extra budgets
Meanwhile, the IMF did not always call for austerity from Korea. From 2016 to 2019, assessing that Korea had considerable fiscal space, the IMF even recommended an expansionary fiscal stance. The Korean government at the time followed this IMF recommendation and drew up a supplementary budget in 2019, and during the COVID phase in 2020–2021, it implemented a total of six supplementary budgets. A researcher at a private think tank said, "One could say the government selectively adopts the IMF's messages depending on the timing."
Fiscal experts say the government should not brush off the IMF's warning. Kim Woo-cheol, chair of the Korea Institute of Public Finance and a professor in the Department of Taxation at the University of Seoul, said, "If you look at the government's own midterm fiscal management plan, it charts a path of fiscal balance deficits of around 4% of GDP for a considerable period. It is hard to see such a plan as a signal that fiscal soundness will be actively managed," adding, "The IMF's warning can be seen as a natural response to this trajectory."
Lee Cheol-in, a professor in the Department of Economics at Seoul National University, said, "Not even making basic efforts such as introducing fiscal rules can be interpreted from the outside as 'using fiscal space to the limit.'"