The International Monetary Fund (IMF) warned on Monday that "if the conflict continues amid uncertainty over how long the shock from the Iran war will last, the Asia-Pacific region could face broad supply chain pressures in energy and petrochemical products," in a regional economic outlook briefing. The IMF also cautioned that "Korea has vulnerabilities as an energy-importing region." It advised that "fiscal policies by governments to overcome the energy crisis require a very careful balancing act."
In the wake of the Iran war, the Strait of Hormuz, through which 20% of global crude oil shipments pass, remains unstable. Under these circumstances, Korea—where dependence on Middle Eastern crude reaches 70% and energy self-sufficiency stands at just 18%—is bound to feel relatively greater economic repercussions. This is the same context in which the IMF, while noting that "Korea has very favorable macroeconomic conditions and considerable energy buffers," specifically emphasized the Korean economy's vulnerability as an energy importer.
Of particular note among the IMF's warnings is its point about energy price controls. The IMF noted that "broad fuel subsidies, tax cuts, and price caps can ease inflation in the short term but come at a cost," adding that "they are inefficient, often regressive, and very difficult to reverse." For Korea, which is implementing measures such as an oil price ceiling, this is advice that must not be taken lightly.
In fact, the oil price ceiling, now more than a month into implementation, has played a positive role in easing the impact of high oil prices on household finances but has produced the side effect of increasing petroleum consumption. Within two weeks of the ceiling's implementation, sales of gasoline and diesel rose 25% and 16%, respectively. The gap between the oil price ceiling and international crude oil market prices could add further strain on national finances, which are already flashing warning signs amid surging public debt. Last year, Korea's national debt grew by 129 trillion won ($95 billion) from the previous year, the largest increase since the foreign exchange crisis. Given the strong possibility that the Iran war will cause fiscal conditions to deteriorate structurally, sophisticated fiscal management is needed—such as clearly defining support recipients as vulnerable groups and viable businesses, and providing support on a temporary basis within a set scope, as the IMF recommends.
