[Exclusive] Losses of 33 Billion Won Due to High Exchange Rates... 'Unprotected' Defense Budget

[Asia Economy Sejong=Reporter Son Seon-hee] This year, as the won-dollar exchange rate soared, it was revealed that the Ministry of National Defense incurred foreign exchange losses amounting to 33 billion KRW from its foreign currency budget. There are concerns that urgent measures are needed as significant losses have occurred in equipment maintenance projects and fuel costs, which are directly linked to defense capabilities.

According to the office of Yoon Hu-deok, a member of the National Defense Committee of the National Assembly from the Democratic Party of Korea, the Ministry of National Defense's foreign exchange losses due to the sharp rise in exchange rates from the beginning of this year until the end of last month were estimated at 32.922 billion KRW. The total foreign currency budget allocated to the Ministry of National Defense this year is 1.55 billion USD. The reference exchange rate at the time of allocation was 1,130 KRW (the average exchange rate over the past three months at the time of allocation), but during the actual budget execution process, the exchange rate surged sharply, causing losses. By the end of last month, 1.1 billion USD of the foreign currency budget had been executed, with an execution rate of about 70%. The exchange rate remains around 1,300 KRW, about 20% higher than the allocated rate, so the scale of foreign exchange losses will inevitably increase as more foreign currency budget is executed in the remaining two months.

The Ministry of National Defense's foreign currency budget is mostly used for importing weapons and equipment such as tanks and aircraft, as well as fuel. Among these, military support projects, including weapon purchases that account for a significant portion of the foreign currency budget, are executed through the Defense Acquisition Program Administration (DAPA). For the foreign currency budget used by DAPA, it can be exchanged at the reference exchange rate through the Foreign Exchange Equalization Fund (FEEF) operated and managed by the Ministry of Strategy and Finance, so no foreign exchange losses occur. This is possible because DAPA has a prior agreement with the Ministry of Strategy and Finance every year to exchange the foreign currency budget through the FEEF. Similarly, the Ministry of Foreign Affairs, which also frequently uses foreign currency, signs an annual agreement with the Ministry of Strategy and Finance to prepare for losses due to exchange rate fluctuations.

However, even if the ministries with agreements apply for FEEF exchange, it is not fully reflected. From the Ministry of Strategy and Finance's perspective, it must manage foreign currency reserves stably, so in situations like this year’s sharp exchange rate rise, it must take a conservative approach. In fact, even the Ministry of Foreign Affairs, which has a foreign currency ratio of 40% in its total budget, only uses the FEEF for international organization contributions, while other expenses such as overseas diplomatic mission operations and overseas diplomatic activity project costs were applied for but not reflected. Accordingly, the Ministry of Foreign Affairs plans to cover this year's foreign exchange losses by reallocating its own budget, but due to concerns that the high exchange rate trend will continue into next year, it reportedly secured an increase in next year's foreign currency budget, which was allocated based on 1,290 KRW, at last week’s National Assembly Foreign Affairs and Unification Committee budget subcommittee.

The problem is that although the Ministry of National Defense is one of the three major ministries with large foreign currency budgets along with DAPA and the Ministry of Foreign Affairs, it has not applied for FEEF exchange for the budget it directly supports without going through DAPA, thus bearing the full brunt of losses due to exchange rate fluctuations. Until now, the exchange rate was stable, so even if the Ministry of National Defense executed most of its foreign currency budget for military support through DAPA and indirectly utilized the FEEF, there was no major issue. However, the situation is different with this year’s exceptional exchange rate surge. About 20% of the Ministry of National Defense’s foreign currency budget executed independently, amounting to 33 billion KRW, was lost due to foreign exchange losses. The foreign currency budget executed independently by the Ministry of National Defense without going through DAPA includes fuel imports for tanks and aircraft, as well as equipment maintenance projects such as repairs and spare parts for military equipment imported from overseas.

An official from the International Finance Bureau of the Ministry of Strategy and Finance, responsible for the FEEF, said, "To structurally defend against foreign exchange losses in foreign currency budgets, we are prepared to exchange up to 4 billion USD through the FEEF," adding, "We conduct a demand survey of ministries that need to exchange at the end of each year and make agreements with the applying ministries, but we have not heard from the Ministry of National Defense."

The Ministry of National Defense explained that it is currently covering the foreign exchange losses incurred so far by reallocating budgets from other projects. A representative from the Ministry of National Defense’s Planning and Budget Division said, "Most of the insufficient budget is covered by utilizing the remaining balances of other projects," and added, "In principle, the remaining balances should be returned, but within the legal framework, we adjust projects and use the remaining balances."

However, the Ministry of National Defense also stated that it will consider signing an agreement with the FEEF to prepare for foreign exchange risks in its own foreign currency budget. A Ministry of National Defense official said, "Next year’s foreign currency budget allocation exchange rate is also 1,290 KRW, so an increase at the government level will be necessary," and added, "We will review the cases of DAPA and the Ministry of Foreign Affairs and consider whether the Ministry of National Defense also needs an agreement with the FEEF."

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