A casualty of independence
May 30, 2001
Bank of Thailand governor MR Chatu Mongol Sonakul's dismissal yesterday
came as no surprise in light of the rising tension and deteriorating relationship
between him and Prime Minister Thaksin Shinawatra ever since the new government
was formed in February.
The last straw came on Friday when Chatu Mongol launched an Internet
war against the Thaksin government after it had ordered him to review
the central bank's low interest rate policy.
Chatu Mongol fired off an e-mail to investment analysts worldwide subscribing
to the Bank of Thailand's research reports. In it, he asked for their
opinions on the central bank's low interest rate policy in what came across
as a high-handed tactic to lobby international support for his cause.
Word of Chatu Mongol's action greatly upset the prime minister and his
team of advisers. On the same Friday of the Internet war, Thaksin issued
a statement from Government House justifying the government's interference
in the central bank's affairs.
Under the present law, the government - through the finance minister
- can appoint or dismiss the governor, whose role is limited to providing
policy suggestions or technical advice to the government.
Thaksin's statement was aimed at quelling the conflict between the government
and the central bank over the appropriate level of interest rates. The
prime minister would like to see deposit rates raised to deter capital
outflows and allow fiscal stimuli and other social platform measures of
the government to work.
Yet Chatu Mongol, with support from the International Monetary Fund,
viewed the low interest rate policy as correct under the circumstances.
To stimulate the economy, the governor argued, the government should instead
focus on its own fiscal stimulus measures so that companies and factories
operating at only 60 per cent of actual capacity can step up production
and get the economy going again.
Over the weekend, Finance Minister Somkid Jatusripitak and the prime
minister discussed the possibility of removing Chatu Mongol and replacing
him with MR Pridiyathorn Devakula.
It was believed that they would wait until June 4, when the governor
was due to present his financial models on low and high interest-rate
scenarios as a basis for government decision. When Chatu Mongol met with
the prime minister and his top-level advisors on May 21, he said he needed
two weeks to study the pros and cons of monetary policy adjustments.
Yet the governor's e-mail was the last straw. Before going into a Cabinet
meeting, Thaksin said rather impatiently: "The management of monetary
policy should be conducted on economic principles rather than on lobbying
efforts. I don't have the time to waste on this kind of conflict."
He then went ahead and sacked the governor, following a suggestion from
Somkid, who said the firing "was necessary in view of the need to
improve the efficiency of the central bank".
Earlier Somkid also shook his head at Chatu Mongol's controversial e-mail
manoeuvre. "The governor likes to go international," he quipped.
Chatu Mongol quickly left central bank headquarters in Bangkhunprom in
the afternoon after he was informed about his discharge. Refusing to comment
in detail, he simply said: "Since they're no longer paying me a salary,
I don't want to talk."
Chatu Mongol's removal was inevitable, given the litany of policy and
personality conflicts between him and the prime minister and his advisers.
First, Chatu Mongol did not agree with the Thaksin government's policy
to set up the Thai Asset Management Corporation to buy out bad assets
from the banking system. He viewed this policy as replicating the corporate
debt-restructuring effort that had already been well under way. Moreover,
most of the debt cases were locked in the courts of justice.
But the corporation represents one of the key policy proposals of the
Thaksin government, which would like to put a quick end to the bad-debt
situation and get the banking system moving again.
At a workshop held in Cha-am in late February on how to fix the financial
system, Chatu Mongol's role was downgraded while Thaksin appeared to assign
broader responsibility to Somchainuek Engtrakul, the permanent secretary
Second, when the baht began to waver in March and April - following the
regional trend and the weakness of the yen - the government wanted the
central bank to do something proactive to halt the rapid slide in the
But Chatu Mongol came out strongly against the government, arguing that
government figures should not make public comments on foreign exchange
policy, which might affect market sentiment. He also would like the market
to determine the value of the baht, although the central bank would intervene
from time to time to limit its volatility.
At one point, Chatu Mongol declared that the central bank had intervened
in the offshore markets to rein in the baht, shocking financial markets
with his candid remark. His revelation came out just one day after Somkid
went on record to state that the government had no policy of intervening
in the foreign exchange market to support the unit, but would rely on
the market to decide its value.
Third, there had been quiet discussions over how the banking system should
be salvaged. The government would like the central bank to rethink the
capital-adequacy ratio standard as recommended by the Bank for International
Settlements (BIS). Banks are required to maintain, at a minimum, capital
at 8.5 per cent of risk assets to encourage prudent lending practices.
If the BIS standard were relaxed, it would give the banks more room to
But the central bank governor saw differently. Since the Thai economy
is caught in a liquidity trap, with companies operating at only 60 per
cent of capacity, banks are unwilling to lend money. Scaling back the
banking standard would give them little impetus to build up their loan
The banking system already has Bt600 billion in excess liquidity. In
the meantime, the central bank let banks buy foreign-currency securities
as a way to park their excess funds.
Fourth, Thaksin's advisers also favour a re-pegging of the baht, as fiscal
stimulus measures would not work if capital continues to flow out of the
country and the central bank continues to maintain a floating exchange-rate
regime. Keynesian fiscal stimuli will only work in a fixed exchange-rate
But Chatu Mongol believed that the country should not repeat the past
mistake of pegging the currency, which was proven unsustainable by the
currency crisis of 1997. The floating exchange-rate system suits an open
economy like Thailand's, he believed.
Finally, Thaksin had ordered the central bank to review its low interest
rate policy. The government would like to stimulate the economy through
fiscal spending, yet doing so at the same time capital was pouring out
of the country would be akin to flushing money down the drain. If the
level of domestic interest rates were kept up at least as high as US dollar
interest rates, it would help stabilise economic conditions.
Then fiscal policy could be effectively put into action, coupled with
support from the economic and social programmes of the Thai Rak Thai to
rescue the economy from the liquidity trap.
But Chatu Mongol insisted on keeping interest rates low, a signature
BOT policy since late 1998. Low interest rates not only helped corporations
reduce their foreign-debt load, they also facilitated debt restructuring
and kept the cost of carrying bad assets of banks and the Financial Institutions
Development Fund down.
All of these irreconcilable differences led to the release of the governor
yesterday, paving the way for the prime minister to consolidate his power
and allowing him to manage monetary policy more in tune with fiscal policy
- and ultimately with the Thai Rak Thai's social agenda.
See also PM