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New regime of fiscal discipline starts today

 

What are the implications of the IMF package due to be approved in Washington today? Thanong Khanthong takes a look at the road ahead.

Thailand will today officially gain admission into what Deputy Prime Minister Virabongsa Ramangkura calls a ''reform school" run by the International Monetary Fund (IMF) to correct the country's reckless behaviour in living beyond its means.

The IMF board of directors is expected to approve a US$4-billion (Bt128 billion) stand-by arrangement for Thailand, which also stands to receive another staggering $16 billion from other governments and international institutions.

The proceeds will be used largely to shore up Thailand's foreign exchange reserves, but part of the money will also be spent on restructuring its shabby financial system and bolstering its industrial competitiveness.

The IMF's financial and economic reform programme for Thailand will be harsh and painful, as should be expected for any country facing economic ruin.

To correct past mistakes and regain the confidence of the international community, Thailand which has saddled itself with almost $90 billion in foreign debts and now faces the risk of default will have to undergo the IMF-prescribed shock treatment to rectify macro-economic imbalances.

At the heart of the three-year IMF programme aimed at restoring confidence lies painful surgery to contract the Thai economy to a level that will see a symmetry between domestic savings and investment demand.

The current account deficit Thailand has been running is close to a world record. About Bt350 billion in foreign savings, or eight per cent of the gross domestic product, was needed last year alone to finance the current account deficit.

Most of the capital inflows have been spent unwisely on buildings that nobody wants to live in, on empty golf courses, and on ''fat cat" projects that do not yield viable returns. Easy money came and easy money went. Now it is time to pay, but since nobody in the private sector is showing up to foot the bills, the government will have to step in with the help of international aid to bail out the country.

Shrinking the economy from a current account deficit of eight per cent last year to five per cent this year and three per cent in 1998 will certainly create economic dislocations. More factories will be closed and unemployment will soar, exacerbating the social problems.

Virabongsa has expressed his support for the harsh treatment, viewing that if Thailand can reduce imports by at least 20 per cent next year it will stand to recover quickly from the present malaise. ''Without the IMF we still need to swallow all these bitter pills," he said.

Among the harshest IMF measures will be the reform of the financial system. A total of 58 finance companies have been closed and some Bt1 trillion in non-performing loans still needs to be tackled. The finance and monetary authorities will need to follow up with a credible plan to protect the public's deposits, possibly by putting them in a safe haven.

The next step is to separate the finance companies' good and bad assets. Good assets must be supported with a continuing flow of liquidity to keep the companies going, otherwise it will wreak havoc on the system. Bad assets, temporally stalled or forever rotten, will have to be tackled cautiously. It took the US five years to clean up the mess in its own savings and loan industry.

The 10-per cent VAT increase, coupled with the government's fiscal tightening, will amount to a fiscal consolidation. On top of the almost 30 per cent baht devaluation it will contribute to cost-push inflation. Yet the target is to tame inflation at seven per cent to eight per cent this year and next.

The full-blown effect of the IMF medication will be felt next year, but the government so far has not given the right signal to private businesses or the Thai public to adjust. Nor has it prepared support measures to relieve the people from some of the pain.

The country's term in the reform school will be unpleasant indeed, for rich and poor alike.

 

 

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