S. Korea needs greater exchange rate flexibility: IMF

By Lee Chi-dong
WASHINGTON, Sept. 20 (Yonhap) -- The International Monetary Fund (IMF) advised South Korea Tuesday to seek exchange rate flexibility to help curb short-term external liabilities.
In a regular report on the global economy released ahead of the World Bank/IMF Annual Meetings later this week, the Washington-based organization also said South Korea needs to sustain monetary tightening despite the "unusual uncertainty in the external environment."
Elaborating on its view on Asia, the IMF grouped South Korea and China as current account surplus economies that have "moved less than those in deficit economies" in terms of real effective exchange rates.
"For these economies, a stronger exchange rate, combined with structural reforms, would raise domestic purchasing power and allow external rebalancing, while also containing inflation pressure," it said.
It said South Korea will also be able to "slow the pace of debt-creating capital inflows and the buildup of short-term external liabilities."
The IMF expects South Korea's consumer prices to rise 4.5 percent this year, with the real gross domestic product to jump 3.9 percent.
In South Korea, India and Vietnam, according to the IMF, the real cost of capital is at historical lows because of elevated inflation in spite of nominal policy rate hikes.
"Inflation expectations are inching up," added the IMF, "In these economies, the monetary tightening phase needs to be sustained for as long as the baseline scenario prevails."
The IMF said global economic activity has markedly slowed mainly due to troubles in major economies such as the U.S. and the European Union and financial instability has renewed.
It said there are "accumulating signs of weakness in key advanced economies."