Balanced approach out of dilemma urged
THERE have been some indications, particularly from the World Bank, that the International Monetary Fund should readjust its support programme by allowing the Thai government to adopt a more expansionary fiscal policy. Underlying the World Bank's concern is a threat of social unrest if the economy is denied a fiscal stimulus to reverse its downward spiral.
Here lies a different approach between the two sister global organisations. While the World Bank is more conscious about social well-being, the IMF is almost heartless in its programme to restore confidence to a wrecked economy.
The IMF is not known to be a strong pro-growth advocate in its attempt, at the early stage, to cure the ailing economy, infected by financial and foreign exchange crises. What it deems as appropriate is a prescription of monetary and fiscal tightening and bank closures.
In the case of Thailand, higher interest rates have been used to keep the baht stable, albeit unsuccessful until now due to the unexpected region-wide turmoils. The IMF recognises that its first order of business is to restore confidence to the baht. When the IMF stepped in in August last year with its support programme, the baht had overshot to Bt35-Bt36/US dollar. This level was already far higher than what was desirable.
Thailand's fiscal tightening was designed from the outset to deal with the costs of financial restructuring and to address the current account deficit. That's the reason why the support programme requires the Thai government to achieve a 1 per cent budget surplus of the gross domestic product.
Both Michel Camdessus, the IMF's managing director, and his first deputy, Stanley Fischer, have argued that the IMF's approach to fiscal programme is a balance one. In November last year Camdessus was a bit irritated by a question from the press in Bangkok that the IMF's fiscal prescription for Thailand was too tough a medicine.
''Don't forget that this one per cent budget surplus, as well as other key features of the programme, are not a kind of dictation of the IMF on Thailand...but are measures Thailand wants, so you should not ask me if the IMF is going to be flexible...you should first ask the government,'' he said.
''If the government was not able to achieve that targets for whatever reason --falling revenues, unexpected expenditures and so on -- then what we will do, before deciding to be flexible or not, is to sit with your government...and then in view of the circumstances decide to...in some proportion...change the requirements.''
In his presentation to the Midwinter Conference of the Bankers' Association for Foreign Trade last month in Washington DC, Fischer considered expansionary fiscal programme to offset the economic slowdown as a fine balance but he also cautioned that the IMF won't sit around while the fiscal deficit was running away.
''At the outset of the crisis, countries need to firm their fiscal positions, to deal both with the future costs of financial restructuring and -- depending on the balance of payments situation -- the need to reduce the current account deficit. Beyond that, if the economic situation worsens, the IMF generally agrees with the country to let automatic stabilisers work and the deficit to widen somewhat. However, we cannot remain indifferent to the level of the fiscal deficit,'' he argued.
Thailand's fiscal position is in shambles. Revenue shortfall might hit Bt100 billion in fiscal 1998, arousing fears that the budget surplus might not be achieved. Furthermore, it might trigger sharper economic contraction if the fiscal tightening is adopted without due regard to other policy mix. This is one of the subjects keen on the mind of Finance Minister Tarrin Nimmanahaeminda when he discussed with the top IMF officials in Washington DC last month.
Tarrin would not spell out what he would like to see in the newly adjusted IMF-supported programme. But certainly some of the policy conditionalities will have to be loosen to cope with the regional contagion effect of the financial turmoils. Even though Thailand has been a good student of the IMF, there is no guarantee that it will recover before the damages to the economy are beyond repair. For foreign investor confidence and capital inflow might not return easily like in the past to give Thailand another boost because of the region-wide financial contamination.
A valid question then can be asked: Is loosening the fiscal policy an answer to the present dilemma when interest rates need to be kept high to defend the wobble baht? Expanding the fiscal programme may give a conflicting signal to the financial markets, which will be prompted to question the policy mix. For the expansionary fiscal policy means that interest rates won't come down.
A balance will have to be weighed between satisfying the immediate public needs through the expansionary fiscal policy and reviving the corporate sector through interest rate cuts.
So far interest rates have not come down because Thailand is still restructuring its financial sector, in which more banks will have to be taken over or forced into mergers and recapitalisation. Besides, it has yet to extend the maturities of the short-term debts, which will continue to put pressure on the baht.
For how long can Thailand bite the bullets of higher interest rates before the entire economy comes to a grinding halt? This is the dilemma Thailand is facing, and there is no easy way out. The IMF officials are presently in town to review the progress, or a setback, of the support programme for Thailand, which covers the monetary policy, the fiscal policy, the privatisation, the financial restructuring and the foreign exchange reserves.
Speaking from Tokyo last week, Dr Amnuay Viravan, the former finance minister, voiced his support for the IMF programme in general but also called for more flexibility in the policy conditionalities because nobody had expected the broader Asian crisis.
''I must say that the IMF programmes are fundamentally valid, but adjustments must be made to deal with the great Asian crisis,'' he told a conference. He said the IMF's policies were designed to conserve foreign exchange needed to pay for imports and loans, but he warned: ''That approach can choke off the economic growth needed to generate income. If the economy slips into depression, a great majority of debt would be cast in doubts and a fatal liquidity drought will ensue. That vicious cycle could deflate the economy into collapse.''
BY VATCHARA CHAROONSANTIKUL and THANONG KHANTHONG