Fuel cap raised, taxes cut as Seoul responds to war fallout

South Korea is set to raise its fuel price cap and expand tax relief measures as it moves to shield consumers and markets from the economic fallout of the Middle East conflict involving the United States, Israel and Iran.

According to a government announcement reported by Reuters, the new measures will take effect from midnight Friday, March 27. They include an increase in the fuel price cap and broader tax reductions aimed at easing pressure on households and businesses facing rising energy costs.

Finance Minister Koo Yun Cheol said the government will also boost the utilisation rate of nuclear power plants to above 80% and lift seasonal restrictions on coal-fired power generation. The steps are designed to stabilise energy supply as the prolonged conflict continues to disrupt global markets and threaten Asia’s fourth-largest economy.

“The Middle East war, which began at the end of February, has now entered its fourth week, and its economic consequences — such as rising prices, supply disruptions, and increased volatility in currency and financial markets — are becoming increasingly evident,” Koo said.

He described the situation as a “serious problem,” adding that the government is prepared to deploy all available resources and may introduce additional measures if needed.

President Lee Jae Myung convened a high-level economic meeting to coordinate the response, warning of an “unpredictable situation” compounded by already complex global supply chains, which complicates policymaking.

South Korea remains particularly exposed due to its heavy dependence on imported energy supplies that transit through the Strait of Hormuz, which has effectively been closed since early March, disrupting flows of oil and petrochemical feedstocks.

Two weeks after introducing an initial fuel price cap — which had been tied to supply volumes and global oil benchmarks prior to the conflict — the government is now preparing to implement a revised ceiling to better reflect current market conditions.

To further cushion the impact of surging energy prices, fuel tax cuts will be expanded from 7% to 15% on gasoline and from 10% to 25% on diesel, Koo said.

In addition, a ban on exports of naphtha-derived products will come into force from midnight Friday. Supply disruptions have significantly affected feedstocks critical to South Korea’s petrochemical sector, around half of which are imported through the Strait of Hormuz.

On the financial side, the government plans to buy back treasury bonds worth 5 trillion won (approximately $3.32 billion) in an effort to stabilise markets. It also intends to redeem additional bonds using a budget surplus, according to the finance ministry.

Authorities are also preparing to tighten oversight of foreign capital inflows, ahead of the planned inclusion of South Korean government bonds in a major global sovereign bond index next month.

By Tamilla Hasanova