A menu board featuring a wide variety of Korean dishes in foreign languages is displayed at the widow of a restaurant in Seoul’s popular Myeong-dong shopping area on March 27. Yonhap
By Yi Whan Woo
Rising inflation and resulting declining sales are forcing heavily indebted small business owners in Korea into a dilemma in which they are willing to accept higher interest rates if they can help control inflation.
Korea’s year-on-year consumer price growth surpassed 3 percent for the second straight month in March, after briefly falling below the mark in January for the first time in six months.
In February, prices of food and non-alcoholic beverages in Korea rose 4.5 percent compared to a year earlier, marking the third highest increase among OECD member states, after Turkey (71.12 percent). percent) and Iceland (7.52 percent), according to OECD data.
Such high prices have forced consumers in Korea to reduce their overall purchases, dealing a severe blow to the income of small business owners.
The impact was particularly severe for restaurant owners, as prices for agricultural, livestock and fishery products increased by 11.7 percent year-on-year in March, the largest increase since April 2021, when the figure stood at 13. .2 percent. Prices of agricultural products saw a staggering 20.5 percent increase.
Worse still, high inflation is expected to continue as oil prices are expected to rise amid rising tensions in the Middle East, which could also increase utility rates.
In this context, many small business owners express their preference for the Bank of Korea (BOK) to increase the policy rate, which has remained stable at 3.5 percent since January 2023, because the rate increase The main objective of the central bank’s reference interest rate is to curb inflation. when it is unacceptably high.
Their desire comes even though they know that a higher policy rate will make their loan payments more difficult.
According to credit rating firm NICE Information Service, the outstanding balance of loans that small business owners obtained from banks and other financial institutions increased 2.5 percent year-on-year to 1,109.66 trillion won (US$804.68 billion). in December 2023.
In particular, late payments lasting three months or more increased by 49.7 percent to 27.38 trillion during the cited period.
“Still, prices are too high and a higher interest rate is possibly better for our business to survive,” one person wrote last week on the nation’s largest online community of small business owners.
Requesting anonymity, one person who runs a hamburger restaurant suggested the BOK may need to raise the rate again to curb inflation and spur sales by small business owners, even if it means “sacrificing those who can no longer pay their loans.” “.
However, Ha Joon-kyung, a professor at Hanyang University, was skeptical about the potential effectiveness of a rate hike in revitalizing businesses.
“This will worsen the country’s growing household debt, which is already at a serious level,” he said.
According to a recent report by the Institute of International Finance (IIF), Korea’s household debt-to-GDP ratio stood at 100.1 percent in the fourth quarter of 2023, the highest among the 34 countries surveyed.
The professor noted that many small business owners rely on a government-run relief program that allows them to delay loan payments.
The program began in April 2020 to support small business owners and other indebted individuals affected by the COVID-19 pandemic. Since then, it has been expanded repeatedly every six months.