Tarrin's plans for the economy
SEOUL - Thailand is taking a textbook approach to strengthening its financial regime to become part of the new international financial architecture, finance minister Tarrin Nimmanahaeminda said here yesterday.
Speaking at the Asia Pacific Economic Cooperation's "Forum on Shared Prosperity and Harmony", Tarrin said that to prevent a recurrence of the economic crisis Thailand would adopt the floating exchange rate mechanism.
This would provide more protection for the economy against current account imbalances and volatile capital flows.
In the past, crises in Thailand and other economies could be traced to the incompatibility of a regime with fixed exchange rates together with free capital mobility and an independent monetary policy.
Accompanying the floating exchange mechanism was a more sound macro-economic policy, he said.
On the monetary front, Thailand was moving to adopt inflation targeting as an anchor. This, the minister said, would be incorporated in the amendment of the Bank of Thailand Act.
On the fiscal front, Tarrin said the government was looking to reduce its deficit steadily to balance and reduce the public debt.
"Once the amendment is enacted, the new Bank of Thailand will not be able to lend to the government to finance the budget deficit," he said.
"Also, we are improving the efficiency of our tax system and carefully managing public expenditures by controlling recurrent expenditures, while allowing our investment budget to increase in areas critical for our long-term growth and competitiveness," he said.
The central bank will be required under the new law to announce its monetary target in advance.
Its operations will have to be reported to the Cabinet and Parliament, and its international reserves will have to be announced weekly, Tarrin said.
The minister warned, however, that there would be several trade-offs involved in adopting these new policies to enhance Thai financial stability.
First, the floating exchange mechanism would have to deal with capital flows, which affect trade flows, debt service and the real economy.
Second, the present fiscal expansionary programme to stimulate the economy and pay for the cost of financial restructuring would become a burden in the future.
Tarrin suggested weighing the maintenance of long-term fiscal prudence against resolving the immediate crisis through massive government deficits.
Third, lower inflation might promote price stability, but it would also increase the cost of other macro-economic objectives. Tarrin noted that trade-offs would be necessary between inflation, interest rates and input.
Apart from the macro-economic side, the financial and corporate sectors would also have to be reformed to help the country participate in the international financial architecture.
Financial sector governance was being implemented across the industry, Tarrin said, with a tightening of rules in loan classification, provisioning and interest accrual and capital adequacy requirements.
The regulatory framework will also be strengthened by financial liberalisation and the amendment to the Bank of Thailand Act.
"The new act will standardise the regulatory framework for banks, finance companies, and creditors.
It will provide a legal basis for the consolidated supervision of financial conglomerates," he said.
More effective debtor-creditor regulations have been put in place.
The regulations appeared adequate in the ruling on the Thai Petrochemical Industry, which was declared insolvent and put under court receivership.
A mechanism to improve the financial sector's long-term strength and stability had also been introduced, said Tarrin.
The banking restructuring programme had helped banks to re-capitalise, and banking liberalisation through foreign ownership had promoted competition and long-term efficiency.
BY THANONG KHANTHONG