Snowballing short-term BOK loans to gov't trigger concerns

By Lee Yeon-woo

The government's short-term borrowings from the Bank of Korea (BOK) have skyrocketed due to a steep decline in tax revenues, stoking concerns of potential side effects, including a negative impact on monetary policy.

Recent finance ministry and BOK data submitted to Rep. Jang Hye-yeong of the minor opposition Justice Party showed that the total amount of short-term loans the BOK extended to the government or fiscal bond issuances in the first half of this year totaled 113.7 trillion won ($89 billion).

This figure is close to the full-year total for 2020, which stood at 142.5 trillion won as emergency fiscal spending was required to deal with the impact of the COVID-19 pandemic.

In principle, the government seeks short-term loans when there is a temporary mismatch between the scale of income and expenditure. It can either issue fiscal bonds or borrow money from the BOK. Borrowing from the central bank is considered to be simpler as the government only needs to repay the borrowed money within 15 days.

As a result, the borrowings from the BOK reached 87 trillion won during the same period, which is already close to the record high set in 2020. The government borrowed money from the BOK every month so far in this year.

Even though the government is repaying the owed amount on schedule, leaving only approximately 5 trillion won in outstanding debt, the fiscal deficit remains at a dangerously high level. As of May, tax revenues declined by 36 trillion won year-on-year to 160.2 trillion won.

“Financial authorities argue that it is a temporary liquidity measure, unrelated to fiscal soundness. The argument holds under the assumption that the current tax revenue shortage is temporary,” Rep. Jang said. “However, if the fiscal deficit is not resolved by the end of the year, the government will have no choice but to repay the debt by issuing government bonds.”

Some market observers are also voicing concerns that the rise in borrowing could exacerbate inflation, as it increases the money supply, potentially having a negative impact on monetary policy.

Additionally, if the government fails to repay the borrowed money, it could lead to a default, even though the chances of such an event are viewed as slim. Such a possibility could have a profound impact on financial markets. As a result, major economies like the U.S. have outright bans on borrowing money from their central banks.

Due to the drop in tax revenues, the volume of short-term borrowing is expected to rise further. Plans to revise the tax code, which the government announced on Thursday, also offered no specific solutions to dealing with the fiscal deficit.