International Monetary Fund Managing Director Christine Lagarde in Paris, France, July 1, 2016. Reuters/Jacky Naegelen

WASHINGTON (Reuters) – South Korea should use fiscal policy to support its economy in the face of a number of structural headwinds, the International Monetary Fund on Friday.

In a statement released following the conclusion of its annual assessment of South Korea’s economy, the IMF also predicted that the export-driven economy will grow 2.7 percent this year and 3.0 percent in 2017.

International Monetary Fund (IMF) Managing Director Christine Lagarde in Paris, France, July 1, 2016. REUTERS/Jacky Naegelen

South Korea, the fourth largest economy in Asia, faces several structural constraints in the future, the IMF said. They include a rapidly ageing population, reliance on exports and lagging productivity.

“A carefully targeted expansion of social expenditure over the medium term could help reduce poverty and inequality and aid rebalancing by bolstering consumption and raising productivity,” the IMF’s executive board said.

On Thursday, the nation’s central bank kept interest rates unchanged at 1.25% as policymakers watch the effects of existing stimulus measures but the dire state of global trade has kept open the possibility of a rate cut this year.

The IMF noted that labour market reform was critical to bolstering the South Korean economy along with more competition in the service sector to boost productivity.

It called on South Korea to contain risks from rising household debt by tightening macroprudential standards across banks and nonbanks.

In keeping with previous statements, the IMF also urged South Korea to continue to allow a flexible exchange rate and limit intervention to addressing disorderly market conditions.

(Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama)

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