Bank of Korea says IMF current-account model overhaul works against Korea
In short
The Bank of Korea said in a report on Oct 6 that the International Monetary Fund's revamped external balance assessment model is expected to work unfavorably for Korea's current account evaluation. The BOK said the new model fails to capture Korea's semiconductor export boom and its changing population structure, cutting the estimated appropriate current account surplus to 3.3% of GDP from 4.7% and widening the gap with the actual surplus. The bank's researcher said Seoul should explain Korea's specific circumstances in talks with the IMF so that no excessive policy recommendations follow.
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The Bank of Korea said on Oct 6 that the International Monetary Fund's overhaul of its external balance assessment model is expected to work unfavorably for Korea's current account evaluation, according to a BOK issue note. Korean business outlets reported the finding the same day. [ 1 , 2 , 3 ]
In this year's IMF External Sector Report, Korea's current account was assessed as “stronger” than its medium-term norm, two steps up from the earlier “broadly in line” assessment, the BOK noted. The central bank said that change cannot be explained by shifts in Korea's current account alone. Under the new model, Korea's estimated appropriate current account fell to 3.3% of GDP from 4.7% a year earlier, while the actual current account widened to 6.6% of GDP last year, leaving a gap of 3.1%, or 2.3 percentage points wider than before. [ 3 ]
The BOK pointed to the treatment of population structure. It said the IMF changed the denominator from the working-age population to the total population and replaced the future share of elderly people with the current share, so the model does not reflect Korea's demographic structure or the pace of ageing. On the BOK's calculation, this change alone lowers Korea's appropriate current account by 1.10 percentage points, the largest decline among 26 comparison countries. The note said the model assumes retirees cut saving and spend more, but Korea's households aged 65 and over had an average saving propensity of 32.2% last year, above the 30.9% overall average, and 83% of elderly assets are real assets such as property. [ 3 ]
The BOK also said a new concept of excess-adjustment net foreign assets, to be reflected in next year's assessment, will lower Korea's appropriate current account level. In three scenarios for Korea's current account gap — 23.3%, 20.0% and 16.0% — the model change cut the appropriate current account by the same 1.1%, producing gaps of 21.1%, 17.8% and 13.8% and likely a “substantially stronger” assessment, one step above “stronger”, the note said. [ 3 ]
Kim Min, a manager in the BOK's international finance research team, said the IMF model has limits in capturing Korean specificities such as rapid ageing and the semiconductor boom. He said understanding why the gap widened matters more than how much it widened, and that efforts should be made so that no excessive result, such as policy recommendations, emerges in consultations with the IMF. [ 3 ]
The note explained that the IMF publishes its External Sector Report each year, assessing member economies' current accounts as a share of GDP for the previous year and estimating an appropriate level consistent with each country's medium-term equilibrium. Korea's assessment as exceeding that level implies an excess of saving over investment, which can lead to policy advice, and a large gap between the appropriate and actual current account can bring sharp currency moves and trade friction, according to the BOK. [ 3 ]
Why it matters
A wide gap between the IMF's estimated appropriate current account and the actual one can trigger sharp currency moves and trade friction, the BOK note said. With the model change due to apply to next year's assessment, the BOK argued that Korea should communicate its special circumstances to the IMF so that the result does not lead to excessive policy recommendations.
Key facts
- The Bank of Korea published an issue note on Oct 6 saying the IMF's EBA model overhaul is expected to work unfavorably for Korea's current account assessment. [ 1 , 2 , 3 ]
- Korea's current account was assessed as “stronger” than its medium-term norm in this year's IMF External Sector Report, two steps up from “broadly in line”. [ 3 ]
- Under the new model, Korea's estimated appropriate current account fell to 3.3% of GDP from 4.7%, while the actual current account was 6.6% of GDP last year, widening the gap to 3.1% from 0.8%. [ 3 ]
- The change in how population structure is measured lowers Korea's appropriate current account by 1.10 percentage points, the largest fall among 26 comparison countries. [ 3 ]
- The BOK said 65-and-over households had an average saving propensity of 32.2% versus 30.9% for all households, and that 83% of elderly assets are real assets such as property. [ 3 ]
- BOK official Kim Min said the IMF model has limits in capturing Korea's rapid ageing and semiconductor boom, and that the reasons behind a wider gap matter more than its size. [ 3 ]
Confirmed by several sources
Still unclear
- Whether the IMF will adjust its model to take Korea's population structure and export cycle into account. The documents report only the BOK's analysis and do not include any IMF response or commitment.
- What practical consequences the assessment will have for Korea's currency or trade policy. The note describes possible risks such as currency swings and trade friction but states no outcome.
- Whether the BOK's projections for next year's assessment will hold. The figures come from a single BOK issue note and are presented as scenarios, not confirmed results.
- One outlet's article text, attributed to its current account headline, discusses an unrelated Supreme Court story. Only that outlet's headline addresses this event, so its supporting detail cannot be used.