Government Draws on 'Foreign Exchange Emergency Funds' While Trying to Avoid Deficit Bonds

Government Approves '2020 2nd Supplementary Budget' at Extraordinary Cabinet Meeting

Central Government Funding Requirement 7.6 Trillion Won…6.4 Trillion Won from Expenditure Adjustment, 1.2 Trillion Won from Fund Utilization

Cutting 700 Billion Won from Civil Servant Salaries and 900 Billion Won from Defense Budget

Reducing Foreign Exchange Stabilization Fund Expenditure by 2.8 Trillion Won

Prime Minister Chung Sye-kyun (center) is speaking at the temporary Cabinet meeting held at the Government Sejong Complex in Sejong City on the morning of the 16th.
[Image source=Yonhap News]

[Asia Economy, Joo Sang-don (Sejong), Jang Se-hee] The government has secured all the emergency disaster relief fund resources through expenditure restructuring and fund resource utilization without issuing deficit bonds, aiming to avoid further increasing the national debt ratio. This is to save 'ammunition' in preparation for potentially greater economic shocks and difficulties ahead. However, there are criticisms that in avoiding deficit bond issuance, the government has taken a reckless step by tapping into funds that could be considered emergency reserves.

According to the '2020 Second Supplementary Budget' approved at the temporary Cabinet meeting on the 16th, out of the 7.6 trillion won required for disaster relief funds, 6.4 trillion won will be secured through expenditure adjustments such as cuts in spending projects, and the remaining 1.2 trillion won will be raised by early repayment and additional deposits into funds such as the Housing and Farmland Funds.

The government cut 2.4052 trillion won from project expenses including defense (904.7 billion won), social overhead capital (SOC, 580.4 billion won), and official development assistance (ODA, 267.7 billion won). A total of 695.2 billion won was also cut from civil servant salaries. Additionally, 494.2 billion won was secured through reductions such as a 270 billion won decrease in government bond interest payments due to lower interest rates and a 224.2 billion won cut in heating fuel and oil costs due to falling oil prices. Alongside this, the government plans to reduce expenditures on the Foreign Exchange Stabilization Fund from the Public Fund Management Fund (Gongja Fund) by 2.8 trillion won and raise 1.1748 trillion won by utilizing resources from the Housing Finance Credit Guarantee Fund, Housing and Urban Fund, and Farmland Management Fund.

The government stated that out of the 7.6 trillion won from the central government, 84.2% would be secured through expenditure restructuring and 15.8% through fund resource utilization, but a closer look at the supplementary budget reveals a different story. The government classified the 2.8 trillion won saved by reducing expenditures on the Foreign Exchange Stabilization Fund from the Gongja Fund as expenditure restructuring, but this can be seen as tapping into funds. Considering this, the share of expenditure restructuring (3.6 trillion won) and fund resources (4 trillion won) reverses to 47.4% and 52.6%, respectively. This means more money is being taken from emergency funds than from restructuring.

In particular, the use of 23.3% (2.8 trillion won) of the 12 trillion won Foreign Exchange Stabilization Fund, which is reserved for foreign exchange market instability, for disaster relief funds raises concerns. The Foreign Exchange Stabilization Fund is established to stabilize exchange rates and prevent adverse effects caused by sudden inflows and outflows of investment funds. Because of this, there are worries that the capacity to respond to future foreign exchange market instability may be reduced. Professor Sung Tae-yoon of Yonsei University's Department of Economics said, "It is completely unpredictable how the foreign exchange market will change in the second half of this year due to COVID-19," adding, "There could be problems with reduced capacity to respond to foreign exchange market instability."

In response, Ahn Il-hwan, Director of the Budget Office at the Ministry of Economy and Finance, explained, "Originally, 12 trillion won was allocated as deposits in the Gongja Fund to expand the won-denominated assets of the Foreign Exchange Stabilization Fund, but considering market conditions, 2.8 trillion won was reduced," adding, "When the exchange rate rises, demand for won-denominated assets decreases, so this was taken into account."

The fact that funds are being used contrary to their original purposes is also pointed out as a problem. The government plans to raise a total of 1.1748 trillion won from the Housing Finance Credit Guarantee Fund (500 billion won), Housing and Urban Fund (474.8 billion won), and Farmland Management Fund (200 billion won). Currently, the surplus funds for each fund are 1.2 trillion won for the Housing Finance Credit Guarantee Fund, 27 trillion won for the Housing and Urban Fund, and 765 billion won for the Farmland Management Fund. Professor Kim Tae-gi of Dankook University's Department of Economics said, "While the urgency is understandable, using various funds in ways that violate their intended purposes could cause side effects," adding, "It is necessary to verify whether each fund has sufficient surplus funds."

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