BOK: IMF Current Account Assessment Overhaul Disadvantages Korea... Fails to Reflect Semiconductor Boom, Demographic Structure

Lower Estimated Current Account Balance, Widening Gap

'Excess-Adjusted Net Foreign Assets' to be Reflected in Next Year's IMF Assessment

Current Account Gap Expected to Be Rated as 'Substantially Stronger'

The Bank of Korea has projected that Korea’s fair current account balance will be assessed as excessively low and therefore disadvantageous due to the International Monetary Fund (IMF)’s revamped External Balance Assessment (EBA) model. This is because the IMF’s revised EBA model fails to fully capture Korea’s semiconductor export boom and demographic changes. If there is a significant gap between the IMF’s suggested fair current account and the actual current account (the current account gap), it can lead to problems such as abrupt currency fluctuations and external trade frictions. Therefore, there is a call for supplemental explanations that reflect Korea’s unique circumstances during both domestic and international communications.

On October 6, in the “BOK Issue Note: The Impact of the IMF EBA Model Revision on Korea’s Current Account Assessment” (authored by Kim Min), the Bank of Korea stated, “The two-step upgrade in Korea’s current account assessment in the IMF’s External Sector Report (ESR), from ‘broadly in line’ to ‘stronger,’ cannot be explained solely by changes in Korea’s current account.”

The IMF publishes the ESR annually to evaluate member countries’ current account balances as a percentage of the previous year’s gross domestic product (GDP), and it estimates the fair current account level that aligns with each country’s medium-term equilibrium. This year’s assessment concluded that Korea’s current account exceeds its medium-term equilibrium level, marking a two-level upgrade from the ‘broadly in line’ evaluation issued last year. According to the IMF, an ‘above’ (stronger) current account means that Korea is accumulating excess savings or that domestic investment is not being carried out. As a result, the IMF may judge that a structural imbalance exists in Korea, where savings outpace investment, and thus offer policy advice on this basis.

Last year, Korea’s current account expanded to 6.6% of GDP. However, the new IMF assessment model calculated Korea’s fair current account at 3.3%, down from 4.7% the previous year. As a result, the current account gap widened by 2.3 percentage points to 3.1%. Notably, this year, the IMF’s change in how it reflects demographic structure means Korea’s fair current account drops by 1.10 percentage points—the largest decline among 26 countries reviewed.

The Bank of Korea pointed out that, in calculating population shares, the denominator was changed from the working-age population to the total population, and the future elderly ratio was replaced with the current elderly ratio. Consequently, the IMF model fails to reflect the specifics of Korea’s demographic structure and speed of aging. According to the IMF model, as the population ages, it is assumed that the retired elderly will reduce savings to spend more. However, last year, the average savings rate of Korean households aged 65 and older was 32.2%, higher than the overall average of 30.9%. Moreover, 83% of elderly households’ assets are tied up in real assets like real estate, making it challenging for them to reduce savings and increase spending.

Furthermore, the excess-adjusted net foreign assets concept to be introduced in next year’s assessment may also act negatively by lowering Korea’s fair current account in the external balance evaluation. Under this approach, excess-adjusted net foreign assets are assessed by subtracting the cumulative excess current account balances (both surpluses and deficits) during a specified period from actual net foreign assets. Korea is a net creditor nation, and since it has accumulated positive current account gaps over past periods, the reformed model leads to an expanded current account gap. Under three scenarios—optimistic, baseline, and pessimistic (23.3%, 20.0%, and 16.0%, respectively, based on 2026 projections)—the impact of the model revision (-0.74 percentage points) caused the fair current account to fall by 1.1% in every case. The current account gap was estimated at 21.1%, 17.8%, and 13.8% in the three scenarios, suggesting that all are likely to be assessed as ‘substantially stronger’ rather than just ‘stronger.’

Kim Min, Head of the International Finance Research Team at the Bank of Korea’s International Department, said, “The IMF model has limitations in reflecting unique characteristics of Korea such as rapid aging and the semiconductor boom. Understanding the underlying reasons behind the expansion of the current account gap, rather than focusing solely on its size, is more important. We should strive to ensure that excessive recommendations (including policy prescriptions) do not arise during communications and negotiations with the IMF.”

This content was produced with the assistance of AI translation services.