IMF Approves Three-Year Stand-By Credit to Support Korea's Economic, Financial Program

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Following is the text of IMF Press Release No. 97/55, dated December 5, on the Executive Board's approval of the Stand-By Arrangement for Korea.

The IMF approved Korea's request for a three-year stand-by credit equivalent to SDR 15.5 billion (about $21.0 billion) in support of the government's economic and financial program. Of the total, SDR 4.1 billion (about $5.6 billion) is available immediately. SDR 2.6 billion (about $3.6 billion) will be available December 18, following the first review under the program, and a further SDR 1.5 billion (about $2.0 billion) on January 8, 1998 following the second review.

Subsequent disbursements will be made available subject to the attainment of performance targets and, in some cases, program reviews. The stand-by credit is equivalent to 1,939 percent of Korea's quota of SDR 799.6 million (about $1.1 billion) in the IMF.

In approving Korea's request for the stand-by credit, the IMF made use of the accelerated procedures established under the Emergency Financing Mechanism, which was adopted in September 1995. The Emergency Financing Mechanism strengthens the IMF's ability to respond swiftly in support of a member country facing an external financial crisis and seeking financial assistance from the IMF in support of a strong economic adjustment program.

Background

For the past several decades, the Korean economy has grown rapidly. With per capita GDP rising at an annual rate of nearly 7 percent, a once poor agrarian economy has been transformed into an advanced industrial economy. At the same time, in the process of development, the limitations of Korea's system of detailed government intervention at the micro level have become increasingly apparent. In particular, the legacy of intervention has left an inefficient financial sector, which has led to a highly leveraged corporate sector that lacks effective market discipline.

Until the present financial crisis, Korea's macroeconomic performance in 1997 was broadly favorable. Notwithstanding a sharp slowing of domestic demand, real GDP grew by 6 percent during the first three quarters and inflation declined slightly to 4 percent. Subdued import demand and rapid growth of exports caused the external current account deficit to narrow in the second quarter, and a current account deficit of 3 percent of GDP is expected in 1997. Fiscal policy remained prudent and, despite a large tax shortfall, expenditure cuts were made so as to ensure that thePage 389 consolidated central government accounts record only a small deficit for 1997.

However, since the beginning of the year, an unprecedented number of highly leveraged...