Korea, now a major lender to developing countries, will make a change in its loan system in order to better manage the growing volume of its loans to those developing countries. The first step is to eliminate currency exchanges, an obstacle to the efficient enforcement of loans.
The Korean government held a cabinet meeting chaired by Prime Minister Han Duck-soo at the Government Complex in Seoul on June 20 to approve an amendment to the Enforcement Decree of the Economic Development Cooperation Fund (EDCF) Act, which paves the way for having a foreign currency account at a commercial bank.
The EDCF is a type of paid official development assistance (ODA) fund that the Korean government lends to the governments of developing countries on a long-term, low-interest basis to help them develop their economies and industries and strengthen cooperation with them. Currently, the EDCF only has a Korean won account at the Bank of Korea, which means that foreign currencies must be converted into Korean won when collecting the principal of foreign currency loans, and vice versa when giving new foreign currency loans.
The problem is that this system is not suitable for the growing size of EDCF foreign currency loans. This year, the planned EDCF volume is 1.503 trillion won (US$1.162 billion), which is 12.7 percent higher than 1.3334 trillion won (US$1.0312 billion) in 2022. The number of recipient countries also increased from 38 to 42. According to the Korean government, this not only made the process more cumbersome, but incurred redundant currency exchange costs.
The Korean government expects that this change will lead to the installation of a foreign currency vault at a commercial bank and will allow loan principal payments received in foreign currencies from developing countries to be used as new loans without exchange. This will strengthen the efficiency of loan operations by simplifying the structure of putting in and taking out foreign currencies from state coffers.
The Korean government is planning to install the foreign currency vault within this year. It will select a foreign currency vault bank from among commercial banks and install the vault in the second half of this year.
