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At some stage someone has to do something!

May 26, 2000

MR Chatu Mongol Sonakul, the Bank of Thailand governor, has given the government three bits of homework to think about. Let's go through them one by one.

The straight-talking Chatu Mongol has told the government, which is to complete its term this year, that it should tidy up the national debt and lay down a game plan as to how to deal with it. Second, the government should accelerate the creation of a deposit insurance scheme to replace the Financial Institutions Development Fund (FIDF), which is now writing a blank cheque for the financial system. Third, the central bank should be allowed full independence in its redefined task as guardian of price stability and of the financial system.

On the first point, it is true that the government does not have a strategy to deal with the rising public debt. This national debt is now approaching 40 per cent of gross domestic product. It normally takes other countries three decades to arrive at this level. Thailand has turned from a fiscally sound to a fiscally irresponsible country in three years due to the restructuring cost of the financial system.

The FIDF is saddled by a debt load of between Bt800 billion and Bt1.2 trillion. Both the Finance Ministry and the central bank have just agreed on a short-term measure to deal partially with this massive debt. They will be using some Bt130 billion in excess reserves from the consolidation of the central bank's different book accounts to reduce the burden of the FIDF. The rest will have to be fiscalised through the normal budget process.

The government has not yet tabled a clear guideline as to how it will pay off the FIDF's debts through the budget. The debts will be reduced only when the government fiscalises them on an annual basis. If not, the FIDF will have to continue to borrow money in the market to service its interest in a pyramid scheme. Sounds like the Chamoy Pyramid Fund of a decade ago.

 

The government has not yet tabled a clear guideline as to how it will pay off the FIDF's debts through the budget. 

PlanetRx - Product Page

Chatu Mongol is urging the phase-in of a Deposit Insurance Corporation. As long as the government still provides 100-per-cent deposit protection to the financial system, there are little incentives for commercial banks to improve their operations. Minimum protection for deposits should instead be guaranteed through the Deposit Insurance Corporation. However, Finance Minister Tarrin Nimmanahaeminda is still apprehensive over the introduction of the corporation at any time soon, given the fragile state of the banking system. If the government were to announce tomorrow that it would only provide minimum deposit protection, the public could rush to withdraw their money and create another round of bank runs. It is difficult to get the right timing.

Then there's the question of the central bank's independence. Chatu Mongol would like full independence, in the written law and in practice, for the central bank, so that it can concentrate on managing price stability and look after the financial institutions. But it can be said that the economic crisis could also be traced partially to the weakness and incompetence of the central bank itself - from the misreading of the macroeconomic picture and the mismanagement of foreign exchange to poor supervision of the financial system.

Often in the past politicians would interfere in the central bank's affairs and officials made little effort to defend their cause. They mostly went along with the political wind, leaving the central bank in the unenviable position of now having to earn credibility.

However, managing price stability and guarding the financial system may become conflicting tasks. Can the central bank afford to stand by and let the financial institutions collapse without injecting liquidity that might harm its inflation targeting?

After the Russia crisis in August 1998, Long-Term Capital Management, the high-flying US hedge fund, collapsed because of poor betting on global stocks, currencies and bonds. Alan Greenspan, the chairman of the US Federal Reserve Board, and his colleagues stepped in to bail out the fund and cut interest rates instead of raising the rates to stem the rise of inflation. By doing so, the US monetary officials put their textbooks and ideology on the shelf to save the US financial institutions and the US economy, for a stock-price crash would have created a liquidity crisis that would have an adverse impact on the health of US banks.

In this respect, the ultimate task of a central bank is to work with the government to make sure that the economy grows healthily, even though it might have to forget its textbooks from time to time.

By Thanong Khanthong

 

 

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