IMF Staff Completes 2025 Article IV Mission to Republic of Korea

IMF Staff Completes 2025 Article IV Mission to Republic of Korea

September 23, 2025

• The Korean economy is expected to rebound in 2026 after being subdued in 2025, driven by easing uncertainties and accommodative policies. Revitalizing domestic demand, strengthening external resilience and accelerating structural reforms to boost potential growth remain key priorities.
• Growth is projected at 0.9 percent in 2025 and is expected to rebound to 1.8 percent in 2026, while inflation is expected to stay near the target of 2 percent in the near term. A near-term mix of accommodative monetary and fiscal policies and targeted financial measures is appropriate to support growth and preserve macroeconomic stability.
• Expediting structural reforms to boost productivity, tackle declining labor supply and enhance capital allocation remain crucial to raise Korea's potential growth. Advancing reforms to stimulate private consumption and reduce vulnerabilities to external demand will make growth more resilient. Long-term fiscal reforms are needed to accommodate future age-related spending pressures while ensuring fiscal sustainability.

Seoul: An International Monetary Fund (IMF) team, led by Mr. Rahul Anand, Mission Chief for the Republic of Korea, visited the country from September 11 to 24, 2025, to hold discussions for the 2025 Article IV Consultation. At the conclusion of the discussions, Mr. Anand issued the following statement:

"Prolonged domestic political and global trade policy uncertainties have weighed on growth in 2025, while inflation has remained close to target. With sufficient policy space, the authorities are taking measures to stimulate the economy. While the accommodative policies will support near-term growth, achieving the authorities' 3 percent growth target would require advancing structural reforms to raise productivity, address demographic headwinds, and improve capital allocation. The government's new Economic Growth Strategy aims to address some of these key structural challenges.

"Growth is expected to reach 0.9 percent in 2025, as domestic demand gradually recovers, supported by more accommodative fiscal and monetary policies, and strong semiconductor external demand offsets declines in other exports. Real GDP is projected to expand by 1.8 percent in 2026, driven by easing uncertainties, the full impact of accommodative policies, and base effects. Inflation has declined to 1.7 percent (y/y) in August 2025 but is projected to remain close to the target of 2 percent in 2025 and 2026. Uncertainty around the outlook remains high and risks are tilted to the downside.

"Given sufficient policy space, a negative output gap, and inflation close to target, accommodative monetary and fiscal policies are appropriate. With inflation expectations well-anchored and risks to inflation broadly balanced, monetary easing will help bolster the growth recovery. However, monetary policy should remain agile and adjust to the evolving outlook and risks, given persistent external uncertainties. The authorities' near-term fiscal stance and spending priorities in the 2026 budget proposal are appropriate. Fiscal consolidation should resume as growth converges to potential to create space to meet significant long-term spending pressures. Foreign exchange interventions should remain limited to preventing disorderly market conditions. Proactive policies to curb household loan growth, particularly in certain areas of Seoul, and resolve troubled real estate project financing exposures have been effective in addressing financial sector vulnerabilities.

"Revitalizing domestic demand and diversifying Korea's export structure will be essential for more resilient growth. Gradually deleveraging households, reducing labor market rigidities, and addressing demographic challenges could help boost domestic demand. Policies to support the development of service exports, leverage innovation and artificial intelligence (AI) transformation, and diversify export destinations and supply chains would further enhance external demand resilience. The focus of the Economic Growth Strategy on AI adoption, innovation and service exports is welcome.

"Accelerating structural reforms remains crucial to boost Korea's potential growth. To enhance productivity, reforms should focus on narrowing the productivity gap between small and medium-sized enterprises and larger firms and harnessing the benefits of innovation and AI transformation, while managing AI transition risks. The authorities' corporate governance and foreign exchange market reforms are welcome and should help reduce the Korea discount, deepen financial markets and attract long-term investment. To create fiscal space for long-term spending pressures from aging, structural fiscal reforms-reforming the pension system, mobilizing revenue, enhancing expenditure efficiency-remain essential. Adopting a credible medium-term fiscal anchor, supported by an enhanced medium-term fiscal framework, would help safeguard long-term fiscal sustainability.

"We would like to express our gratitude to the authorities and other stakeholders for productive discussions, excellent support, and generous hospitality during our visit."