The government Wednesday disclosed 2016 economic policy directions aimed at revitalizing the economy by boosting domestic demand and strengthening support for exporters.

It expected Korea’s gross domestic product to grow by 3.1 percent in real terms next year, a modest improvement from this year’s growth, which is estimated to reach 2.7 percent.

Under the policy directions finalized at a meeting of economy-related ministers, drastic deregulation will be pursued to help promote private-sector investments, with regulation-free zones to be set up in 14 metropolises and provinces. A special law is scheduled to be submitted to the parliament in June to designate and operate the zones designed to develop future strategic industries tailored to specific regional conditions.

Efforts will be strengthened to prevent rising household and corporate debts from hurting the economy in the course of U.S. rate hikes, which are likely to start this week.

Economic policymakers are pinning hopes primarily on a continuous rise in domestic expenditure to put a floor under a fragile economy. The contribution of domestic demand to growth increased by 3.5 percentage points from a year earlier in the first three quarters of this year.

The corresponding figure for exports fell by 1 percentage point over the cited period, prompting calls for more effective and innovative policies to help the country’s manufacturing exporters, which have been struggling with declining demand and mounting competition in global markets.

Many economists give little credibility to the government’s adherence to keeping the 2016 growth target above 3 percent, cautioning that the Korean economy might be pushed over a “consumption cliff” early next year as most available stimulus options have been taken over the past year.

In response, the government plans to increase fiscal spending in the first quarter of 2016 by 8 trillion won ($6.7 billion) more than originally set aside to 125 trillion won. Public corporations, particularly those that benefit from low oil prices, will be prodded to expand investment.

The trend of loosening monetary policy will stay on course, with the Bank of Korea set to keep its benchmark rate low and lower its inflation target. The pace of consumer prices hike is forecast to pick up from 0.7 percent this year to 1.5 percent next year. 

Announcing the policy directions, policymakers said they would pay heed equally to the nominal and real growth rates in macroeconomic management, as the former is actually related to consumer and business sentiments.

The government will continue to try to boost domestic consumption next year by holding nationwide sales promotion events, attracting more foreign tourists, particularly Chinese travelers, and encouraging more retiring homeowners to use reverse mortgages.

It will also step up efforts to increase the country’s exports, which declined by 7.4 percent for the first 11 months of this year. Export financing will be expanded from 251 trillion won in 2015 to 271 trillion won in 2016 and measures will be worked out to help Korean companies advance into China’s growing consumer markets on the back of the bilateral free trade agreement that comes into force Sunday. In particular, customized support will be provided to some promising export items including cosmetics, food and baby goods.

The country’s exports and imports are projected to increase by 2.1 percent and 2.6 percent, respectively, next year, with current account surplus expected to be reduced to $98 billion from this year’s $112 billion.

Many economists indicate that unfavorable conditions at home and abroad will remain unchanged or even get tougher well into 2016, making it difficult to reinvigorate the Korean economy with some policy steps to increase domestic demand and overseas shipments.

Moves designed to curb rising household debt may run counter to measures to boost consumer spending and the property market. The reshoring of manufacturers to advanced nations and slowdowns in China and other emerging economies, coupled with the strengthening of the won against major currencies except for the U.S. dollar, will continue to hamper a recovery in Korea’s exports.

The fundamental concern for Asia’s fourth-largest economy is a shrinking workforce brought on by a low birthrate and an aging population, which is expected to reduce growth potential to near 1 percent in less than two decades. This bleak outlook has heightened calls for structural reforms that economists say are essential to prevent the economy from being trapped in the frame of low growth.

Announcing the policy directions, the government reiterated its pledge to carry out reforms in the four major areas of labor, education, finance and the public sector. It also put forward plans to expedite the restructuring of unprofitable and debt-ridden companies in shipbuilding, shipping, petrochemicals and steel industries, strengthen support for selective new growth engines and enhance the service sector.

Policies on immigration, foreign residents and multicultural families will be coordinated more closely among government agencies in a bid to cope with demographic challenges facing the country. Three committees that handle them separately will eventually be integrated into one.

By Kim Kyung-ho (khkim@heraldcorp.com)