[BOK Focus] Government Reaches Out to Bank of Korea... Will It Also Eye the '20 Trillion' Legal Reserve?

Last year, the cumulative amount of 'temporary loans' borrowed by the government from the Bank of Korea increased more than fourfold in just one year. While there are many areas where funds need to be spent, the immediate tax revenue is insufficient, leading to a significant increase in the amount borrowed from the Bank of Korea. This year, with an expected further decline in tax revenue due to economic slowdown and various tax reductions, the government is also expected to increase Bank of Korea loans as it needs to supply liquidity to prevent financial instability and stimulate the economy.

According to the Bank of Korea's annual report on the 3rd, last year the government procured a total of 34.2 trillion won in temporary loans from the Bank of Korea. On a cumulative basis, this is an increase of 26.6 trillion won compared to 2021 (7.6 trillion won). Although it is significantly lower than the 102.9 trillion won in 2020 when COVID-19 spread, it is a much larger amount compared to previous years such as 2016 (11.4 trillion won), 2017 (8 trillion won), and 2018 (1 trillion won).

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Loans from the Bank of Korea act as a kind of 'overdraft account' for the government. According to Article 75 of the Bank of Korea Act, the Bank of Korea may provide credit to the government through current account loans or other methods. Accordingly, the government can freely borrow money from the Bank of Korea within the limit set by the Monetary Policy Committee, which is 50 trillion won, by paying only interest (the average daily yield of 91-day monetary stabilization bonds in the last month of the previous quarter + 0.1 percentage points).

Although there are conditions such as the government needing to make efforts to raise funds through issuing treasury bonds before borrowing from the Bank of Korea, and to ensure that temporary borrowing is not used as a fundamental means of financing shortages, these conditions have little practical significance. Therefore, when an urgent supplementary budget must be prepared as in last year, or when unexpected financial market instability requires liquidity supply, the amount of Bank of Korea loans freely available inevitably increases significantly.

This year, due to economic slowdown caused by high interest rates, real estate market slump, and tax reduction policies, tax revenue is likely to decrease more than expected, so temporary loans from the Bank of Korea are expected to increase further. The forecast for this year's national tax reduction amount is 69.3 trillion won, a record high. A Ministry of Economy and Finance official explained, "There are many cases of early fiscal execution in the first half of the year, but tax revenue does not come in exactly matching expenditures, so Bank of Korea loans are used to adjust the timing difference between revenue and expenditure."

The government is already known to have borrowed a considerable amount from the Bank of Korea in the first quarter of this year. In the short-term money market, some voices say that the release of these borrowings has somewhat eased the liquidity crunch that has continued since last year. A Bank of Korea official explained, "Since the economy is expected to be weak in the first half of the year, it seems the government’s early fiscal execution had an effect," adding, "Also, part of the Bank of Korea loans was used before the corporate tax payment deadline in March."

However, there are also critical views regarding the government's free use of Bank of Korea loans. If too much money borrowed through loans is released while inflation has not yet stabilized, it could negatively impact inflation. There are also concerns that the government is abusing the Bank of Korea's issuance power for its discretion.

In particular, if tax revenue falls significantly contrary to government expectations, there is a possibility that the government may not be able to repay the borrowings on time. In fact, in 2004, the government borrowed 1 trillion won from the Bank of Korea but caused controversy by failing to repay within the set period. At that time, the government requested an extension just days before the maturity date but was rejected by the Bank of Korea. The government explained it was a mishap due to a mismatch between revenue and tax collection rather than a liquidity crisis, but in effect, it was a default.

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Some voices suggest that if the government's tax revenue shortage worsens, the ruling party and government may reach out to the Bank of Korea reserves, which have surpassed 20 trillion won for the first time. When the Bank of Korea generates net income, it allocates a portion to statutory reserves (30% of net income) and discretionary reserves, and the remainder is paid to the government as revenue. The reserves serve as emergency funds for potential crises, and as of the end of last year, a total of 20.1379 trillion won had been accumulated.

Because the reserve size is substantial, when the economy is in recession or there are concerns about government tax revenue shortages, the ruling party has frequently argued that the Bank of Korea reserves should be used to stimulate the economy. In early 2021, as COVID-19 spread, the ruling Democratic Party pressured that it was not right for the Bank of Korea to hoard reserves and that some of the approximately 17 trillion won accumulated at that time should be used for COVID-19 support.

However, the Bank of Korea is negative about using these reserves for other purposes. Although the Bank of Korea’s net income has increased significantly in recent years, leading to a large accumulation of reserves, the Bank explains that the funds are meant to prepare for potential future deficits and should not be used for purposes other than their intended use. Especially recently, with global financial instability increasing due to events like the collapse of the U.S. Silicon Valley Bank (SVB), the importance of reserves is being emphasized. The Bank of Korea posted a net income of 2.5452 trillion won last year, which is a 68% decrease from 2021 and the worst performance since 2014.

Within the Bank of Korea, the appropriate reserve size is considered to be about 5% of total assets. This standard was internally set by the Bank of Korea after consecutive deficits and financial crises from 2004 to 2007. Calculated based on total assets (582.8261 trillion won) at the end of last year, this ratio is still only 3.45%.

A Bank of Korea official explained, "If the international financial market environment leads to losses for the Bank of Korea, it often lasts not just one or two years but three to four years or more," adding, "In such cases, losses must be covered from the reserves." The official also said, "Although 20 trillion won is a large amount, the Bank of Korea’s foreign currency assets are also increasing. Since losses increase proportionally with asset size, it is hard to say the reserves are sufficient."

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