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Thursday, December 4, 1997 Published at 14:01 GMT

Special Report

South Korea: How the IMF deal works

The economic rescue package for South Korea - led by the International Monetary Fund - is the biggest ever at $57 billion. BBC economics correspondent James Morgan explains how such IMF programmes work.

The document signed in Seoul late last year is what is known as a Letter of Intent. It is signed only by the government and must precede formal agreement on the part of the International Monetary Fund. That will come at a meeting of the fund's executive board, which consists of 24 national directors who represent the membership.

The Letter of Intent signed by the South Korean government late is a promise to implement the measures agreed with the fund and so represents the conditions under which the credits are granted.

The letter is a vital feature in all IMF loans: it means the agreed programme is that of the government, not the fund. The fund insists on this point to argue against the widely held view that an IMF programme is something it imposes on a member country - in theory it is drawn up by the recipient government.

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Once the conditions have been agreed and the programme approved by the board, lending starts. This takes the form of a series of "tranches", or loans of specified sums at predetermined intervals. So if the IMF offers a credit of $12 billion, it could mean $3 billion are handed over every six months for two years.

This allows the fund to test compliance with the agreed objectives. In the case of Russia, so great are the tensions and difficulties that the loans are made monthly and can be suspended at short notice - they are in suspension now.

Lending programmes often cease because governments fail to tackle inflation properly or let the budget deficit get out of hand.

The Korea programme will be more complicated because it involves far more than a simple question of economic policy.

The closure of banks, and reforming the great industrial conglomerates, known as Chaebols, are complex matters. The World Bank has become involved because of its expertise in what are known as sectoral reform questions. In this sense the Korea programme will have elements of what are known as Structural Adjustment Loans, which were common in the 1980s.

The $57 billion, which will be disbursed on IMF conditions, is large enough to ensure not all is needed, to help create a climate of confidence.


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