South Korea’s economic growth, long a hallmark of its transformation, appears increasingly constrained, a negative development that calls for more decisive policy action from the government.

The International Monetary Fund on Wednesday projected that the country could post a modest 2 percent expansion for 2025, a downward revision from the 2.2 percent forecast issued just last month.

The IMF’s revised forecast clearly signals diminished expectations, illustrating the mounting structural and external challenges facing Asia’s fourth-largest economy.

The IMF’s assessment, delivered by Rahul Anand, its mission chief for South Korea, identifies both global and domestic headwinds. External risks, including faltering trade and geopolitical instability, loom large. In particular, the Middle East’s volatility has sent commodity prices upward, putting more pressure on Korea’s export-dependent economy.

Compounding the problems is growing uncertainty over the US policy shifts expected under Donald Trump’s incoming administration. This has already sent ripples through the local currency market. Since Trump won the high-stakes election, the Korean currency has lost its value to hover near 1,400 won per US dollar, a volatile level that unnerves players in the financial markets.

For now, the IMF called for restraint in foreign exchange intervention, advising Korea to maintain the flexibility that has long served its trade interests as an export-driven economy. It is a convincing suggestion since state interventions to maintain exchange rate stability, while tempting in the short term, could eventually hurt Korea’s competitive edge in global markets if over-managed.

Korea’s domestic economic issues are no less daunting. While inflation is expected to converge on the Bank of Korea’s 2 percent target by 2025, consumer spending remains sluggish and domestic demand shows no sign of a refreshing growth.

The IMF “welcomed” Korea’s pivot to monetary easing that began in October, which may offer some relief to debt-laden households and businesses. But monetary policy alone cannot address the structural problems that weigh heavily on Korea’s long-term prospects.

Korea’s policymakers should pay keen attention to the IMF’s unequivocal message that the country’s structural reforms needed to secure long-term growth are overdue. Chief among these is addressing Korea’s widening divide in productivity. Small and medium-sized enterprises find it hard to compete in major industries dominated by large conglomerates, or chaebol. In the same vein, the productivity divide between manufacturing and service sectors continues to drag on overall efficiency. To bridge these worrisome gaps, the government must spearhead reforms to labor markets and regulatory frameworks.

The IMF also rightly pointed out Korea’s demographic crisis that results in the declining labor force. The country’s fertility rate hit a historic low of 0.72 in 2023, underscoring the gravity of a shrinking and aging workforce. Unless this trend is reversed, Korea risks confronting more problems as fewer workers shoulder the burden of economic output and welfare costs.

Policy changes must tackle the underlying causes: expensive housing, inadequate child care and rigid workplace cultures that deter younger generations from having children.

The IMF team’s forecast came after Korea’s state-run Korea Development Institute cut 2025 growth outlook to 2.0 percent last week from its previous estimate of 2.1 percent made in August.

As latest economic projections suggest, the road ahead is filled with rocky obstacles. Policymakers are required to work on structural reforms that can narrow the gaping divides in productivity. And companies must accelerate innovation to stay ahead in the global competition, shedding outdated practices and addressing governance issues that hinder their growth.

The IMF’s downgrade paints a challenging picture for the Korean economy. But it also suggests that the country has the tools to reshape its economy and tide over the challenges both at home and abroad. What remains to be seen is whether Korea can implement the much-needed structural reforms.