The International Monetary Fund (IMF) recommended Thursday that South Korea further carry out accommodative fiscal and monetary policies, including rate cuts, in a bid to accelerate its economic recovery amid the pandemic.

Despite rising budget deficit, the country also has fiscal room for increasing targeted support to people and businesses hit hard by the new coronavirus outbreak, according to Andreas Bauer, Korea mission chief at the IMF.

An IMF team, led by Bauer, unveiled the outcome of its annual meetings with South Korea's finance ministry, the central bank and other institutions over the country's economic situations. The meetings were held via videoconference between Jan. 13 and Tuesday due to the pandemic.

"Given sizable economic slack and downside risks to the recovery, some additional fiscal and monetary policy accommodation would help the economy normalize faster and bring discouraged workers back to the labor market," Bauer said in a statement.

Earlier this week, the IMF revised up its 2021 growth outlook for the South Korean economy to 3.1 percent from its October estimate of 2.9 percent.

The Korean economy contracted 1 percent last year, the first retreat since the 1997-98 Asian financial crisis, amid the fallout of the COVID-19 pandemic. But its contraction was far smaller compared with other major advanced economies.

The IMF said Asia's fourth-largest economy is expected to rebound this year, supported by strong exports, but economic uncertainty stemming from the virus outbreak remains "elevated" and recovery is uneven across sectors.

The Washington-based organization said South Korea has the fiscal room to raise "targeted transfers" to workers and firms stung by the pandemic and accelerate public investment plans.

"A somewhat higher than currently budgeted deficit this year can be offset by gradual consolidation in subsequent years," he said, while welcoming the Korean government's proposed fiscal rules.

The country's government debt is expected to reach 956 trillion won ($859 billion) this year, up 150.8 trillion won from last year. The country's debt-to-gross domestic product (GDP) ratio, a gauge of a nation's financial health, will reach 47.3 percent in 2021, higher than the just below 40 percent before the pandemic.

In October 2020, the finance ministry unveiled a proposal that will limit the country's debt to 60 percent of its gross domestic product (GDP) and its fiscal deficit to 3 percent starting in 2025. The new rule is subject to parliamentary approval.

Bauer said the debt-to-GDP ratio limit in the fiscal rules appears "prudent" in terms of efficiency and sustainability in managing fiscal policy.

On a drive to compensate smaller merchants for losses incurred by COVID-19, Bauer said providing support to the self-employed is "desirable," citing a high portion of such people in the labor market.

The country's ruling party is pushing to legislate a state scheme to compensate for business losses caused by COVID-19. By a rough estimate, around 100 trillion won may be needed to finance the scheme.

"Making transfers to self-employed workers makes a lot of sense in the context of big shocks like the COVID shock. Building a more permanent safety net for the self-employed is also desirable as for all other workers," Bauer said at a virtual press briefing.

He also stressed the need to carefully study such measures in a way that ensures the desired impact and fiscal sustainability.

The IMF also noted the Bank of Korea (BOK), the country's central bank, has room for additional monetary easing to underpin the economic recovery amid tame inflationary pressure.

In January, the BOK froze its key interest rate at a record low of 0.5 percent, after cutting it by a combined 0.75 percentage point in March and May 2020. The bank aims to keep the annual inflation at 2 percent over the medium term.

"This could be achieved through a modest further easing, while forward guidance on the likely course of monetary policy could also help ease financial conditions currently," Bauer said.

On the impact of monetary easing on household debt, Bauer said, "Benefit of taking somewhat more accommodative policy stance outweighs the risk."

He said the BOK appears to have diverse policy options, including an additional rate cut and lending facility.

The IMF voiced concerns about Korean households' high indebtedness.

"Macroprudential policies appear appropriately set to mitigate risks but should be tightened further if household credit continues to rise sharply," he said.

The IMF also recommended that South Korea lift a ban on short selling of stocks, as its financial market has stabilized from the impact of the pandemic.

The country's financial regulator is considering whether to extend a ban on stock short selling, set to expire in mid-March, amid mounting calls from the ruling party and retail investors to extend it. (Yonhap)