Reuters, Friday, 22 May 1998

By Yoshiko Mori

Economists Say IMF Opened Pandora's Box In S. Korea

Tokyo, - The remedy prescribed by the International Monetary Fund (IMF) for South Korea's economy is prolonging a recession and pushing the country to the verge of a new crisis, experts in Tokyo say.


Korean short-term interest rates have skyrocketed since December as Seoul accepted a tight credit policy demanded by the IMF in return for a $58.35 billion bailout package.

The IMF's board is due to decide the release of the next tranche of $1.8 billion from the package at a meeting that Finance Ministry officials in Seoul said will be held around the end of May.


A tight credit policy suffocated Korean companies with massive borrowing, and the weak yen trend wiped away the merit of the won's depreciation, which otherwise made Korean products more competitive on global markets, he said.

The debt-to-equity ration of South Korean manufacturing firms soared to 396.3 per cent at the end of 1997, compared with 193.2 per cent in Japan and 153.5 per cent in the U.S.

Korean companies are facing a liquidity crisis that is again threatening the health of the banking sector and Seoul's fiscal balance, economists said.


"The IMF believes that only through crisis will Asian economies change," said Richard Werner, Tokyo-based chief economist and managing director of Profit Research Center Ltd.

Werner said the IMF sees a prolonged crisis as the only way to draw out deep structural changes, economic reform, deregulation and an opening of Asian economies.

"The IMF's approach is immoral.... It presents itself as a helping hand that will rescue Asian countries, but what it's been doing is worsening the crisis," he said.


In Korea, a quick and sustainable economic recovery could easily be engineered by using central bank funds to write off all the bad debt in the banking system and kick-start private bank lending again, Werner said.

But the IMF programme explicitly forbids the Korean government from doing this.

"As the IMF knows well, fiscal policy does not help in a situation where central and private banks'credit injection into the real economy is contracting," he said.