FX liberalization poses risks

The second-phase liberalization of foreign exchange transactions, which will be implemented starting January next year, will allow the flow of massive funds across the border without any restrictions. The problem is that so-called black money could be transferred at the same time.

Of course, most people agree that the liberalization of the foreign exchange market is the general trend. Yet experts point out that there is a good timing for implementation of such a policy.

It is indicated that the nation's economic condition is weak. According to the Ministry of Finance and Economy, the amount of foreign currency caught for smuggling was 33.25 billion won in 1997 in 122 cases, but it rose to 913.82 billion won in 181 cases. During the first seven months of this year, the illegal outflow of funds soared to 1.28 trillion won in 125 cases, showing an increase of 48.3 percent from the same period of a year ago.

The government contends that it is capable of handling any abrupt fluctuation in foreign exchange rates, as the nation's foreign exchange reserve amounts to US$93 billion. However, full liberalization of foreign exchange transactions would result in increase of legal outflow of funds, as well as capital flight, as Central and South American countries experienced in the past.

Economics Professor Euh Yoon-Dae of Korea University said that the government has enough foreign exchange to stabilize the market through intervention, but the risk for flight of both Korean and foreign capital might occur according to the fluctuation of exchange rates.

The government contends that people would feel comfortable with the liberalization measure. If the limit of overseas moving expenses for a family of four, which is currently US$1 million, it could trigger legal capital flight of those who have, analysts said.

Yoo Jong-Il, research fellow at the Korea Development Institute, indicated that the first phase of foreign exchange liberalization was aimed at corporate transactions of foreign currency and it facilitates overseas marketing activities of corporations. However, the beneficiary of the second phase of liberalization is unclear, as it is targeting individuals.

Currently, the government has no concrete plan to cope with the projected market-lifting measure, although a joint team consisting of personnel from 11 government offices including the Prosecutor's Office, National Information Service, National Tax Administration and Financial Supervisory Service will monitor it. However, the unit is not designed to monitor the entire foreign exchange transactions but to collect information about money laundering.

Lee Hoon dreamland@donga.com