By Lee Hyo-sik
Staff Reporter

The International Monetary Fund (IMF) said it has no plan to cut its forecast for South Korea’s economic growth this year as the economy is on its way to recovery.

Its latest forecast for the country’s gross domestic product (GDP) growth is 4 percent, the same level predicted by the Bank of Korea but lower than the government’s target of 5 percent.

The IMF mission led by Joshua Felman, assistant director in the Asia-Pacific Department, said in a statement released yesterday that the Washington D.C.-based international financial organization is convinced that an economic recovery is on its way as most households are now in a position where they can begin to spend again.

The statement said that the recovery is being supported by the government’s expansionary macroeconomic policies.

IMF delegates visited Seoul from May 30 to June 7 to hold consultation meetings with a wide range of people from both the private sector and the government to discuss the economic outlook and policies to promote recovery.

``Private consumption increased modestly in the fourth quarter of last year, the first such increase in nearly two years after the economy has been undergoing a period of adjustment,’’ the IMF said.

It added that private consumption accelerated further in the first quarter of 2005 to a rate that was better than they had expected.

The IMF expected the other sectors of the economy should also begin to revive as the trend continues in the coming quarters.

The statement also underscored the government’s fiscal policy aimed at stimulating the economy by frontloading budget expenditures into the first half of the year and increasing infrastructure spending through the comprehensive investment initiative.

But it also cautioned that given the strong frontloading that has occurred, there is a risk that the government spending could drop in the second half, undermining the still-fragile recovery.

``We would recommend enacting a modest supplementary budget, targeted on the social safety net,’’ the IMF said.

Touching on the country’s monetary policy, it said that the Bank of Korea has room to maintain its low interest policy for some time and even has scope to cut rates further, should recovery falter.

It recommended that to ensure the recovery is vigorous and sustainable, the government should address the economy’s three underlining structural problems _ acceleration of the restructuring of delinquent household debt, revitalization of small- and medium-sized enterprises (SMEs) and enhancement of labor flexibility.

``Personal bankruptcy procedures need to be streamlined and the resources of the courts expanded to help delinquents reschedule their debts,’’ the IMF said.

It advised the government to gradually scale back the public credit guarantee system to level the playing field among SMEs and to further deregulate the service sector to create new investment opportunities.

Regarding labor flexibility, reducing the employment protection for regular workers and strengthening the social safety net for the most vulnerable are crucial for encouraging companies to hire more regular workers and to invest more in Korea.

leehs@koreatimes.co.kr