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The day Thailand lost sovereignty to IMF

 

Thanong Khanthong and Vatchara Charoonsantikul say Thailand has lost its sovereignty since the former Chavalit government, without parliamentary or public scrutiny, committed the country to the IMF programme in August 1997. (First of a series).

 

OPPOSITION leader Gen Chavalit Yongchaiyudh will be directing the impeachment campaign against the Chuan administration for possible constitutional infringement.

As accused by one of Chavalit's top advisers, Dr Likhit Dhiravekin, the Cabinet has failed to consult Parliament before committing the Sixth Letter of Intent with the International Monetary Fund.

Rather than focusing the debate on the substance of the LOI, the framework under which Thailand is banking on economic recovery, Chavalit and his political followers elect to play on the technicality of the Constitution.

Likhit argues that Article 224 of the new Constitution requires the executive branch to consult Parliament before signing a treaty. In his eyes, the LOI is a treaty -- similar to the Thai-US Treaty of Amity and Cooperation -- whose passage requires parliamentary approval.

But Dr Phisit Lee-ahtam, the deputy finance minister, says the LOI, a quarterly financial and economic reform programme designed after consultation between the Thai government and the IMF, is simply a prescription of remedies Thailand is willing to undertake to tackle the economic crisis.

''The government has consulted a number of legal experts, who agree that the LOI is not a treaty. They share the view that the LOI is simply a commitment that the government has stated it is willing to follow as part of the economic reform,'' he said.

In fact, it was the Chavalit government which committed Thailand to the IMF support programme without parliamentary approval or public scrutiny. The fashion by which it accepted the tough conditions prescribed by the IMF was also treated with secrecy. But, unlike people in other countries, the Thai public at that time supported the IMF programme at the expense of sovereignty because they realised that the country had come to a dead end and only external help could pull the country out of the economic crisis.

Still, nobody outside the top policy-making and central banking circle realised that Thailand was insolvent because the central bank had already lost all of its foreign exchange reserves in the disastrous baht defence. The Thai public had little understanding on the far-reaching consequences of the IMF programme, which sought to shake up the entire financial, economic and legal system in one stroke.

On Aug 2, 1997, Hubert Neiss, the director of the IMF's Asia and Pacific department, sent a brief note to Chaiyawat Wibulswasdi, the then governor of the Bank of Thailand, informing him about a meeting he would have with Chavalit that evening on the IMF's preliminary assessment of the Thai crisis and its policy proposals. He earlier had talks with Dr Amnuay Viravan, the then finance minister, over the tentative prescriptions the IMF would impose on Thailand in return for some $10-$15 billion in international financing support. The package was eventually enlarged to $17.2 billion.

Neiss, an Austrian-born economist with the IMF for more than two decades and who would stamp his personality on the Asia crisis, wanted first to talk with Chaiyawat in the afternoon before going to see Chavalit. As it turned out, the meeting between him and the prime minister did not take place.

As the basis of that discussion, Neiss attached a preliminary assessment by the IMF team of the Thai economic and financial situation, the outline of the policy package and areas where political decisions were needed to carry out the proposals.

In the IMF's preliminary assessment, Thailand's economic and financial structures were already in deep crisis and the situation in the near term was precarious. First, foreign exchange reserves dropped by $13 billion to $25 billion on July 25, 1997. There were also forward liabilities of the central bank of a similar magnitude.

Second, half of all finance companies were insolvent and were kept operating through massive liquidity support by the central bank. The latter had already reached Bt400 billion, and was coming close to half of annual tax revenues. The outflow or deposit run was continuing at Bt15-Bt20 billion a week.

Third, the commercial banks were undercapitalised and ill-prepared for the difficult period ahead. Their asset quality would deteriorate further as economic growth was slowing down and real estate prices were falling. A few small banks could already be insolvent.

The IMF team believed that to avoid further deterioration, which carried the risk of a full-blown banking and foreign exchange crisis, a comprehensive policy package should be announced and put in place without delay. The action, it said, would restore confidence in the financial market and ensure that international financial support was forthcoming. Thailand needed $10-$15 billion in financial support from international donors in that preliminary review.

Neiss went on to outline the policy package or the bitter medicines Thailand should swallow. First, restructuring the financial sector would require closure of an additional 50 insolvent finance companies, including the 16 already identified; removal of the existing management; and commitment to guarantees on all remaining financial institutions.

Second, on the fiscal side, the government's 1997-98 budget was required to pose a small surplus to help reduce the current account deficit and account for the financial restructuring costs. The VAT would be raised from 7 per cent to 10 per cent.

Third, the floating of the exchange rate should continue with limited intervention and it was expected that the baht would stabilise after the announcement of the policy package.

Fourth, monetary policy would remain tight. Liquidity provided by the Financial Institution Development Fund should be limited to solvent financial institutions and tied to stringent criteria, including penalty interest rates.

To implement these measures, Neiss realised that tough political decisions would be needed before the entire policy package could be finalised. The areas of political decisions included closure of all insolvent institutions immediately, provision of guarantees to all depositors and to creditors of remaining viable institutions; cessation of liquidity support from the Financial Institution Development Fund to insolvent financial institutions; and an immediate 3 per cent VAT increase to achieve half of the necessary fiscal package.

As it turned out, Chavalit and the Thai policy-makers at the time accepted these tough conditions without any bargaining power. Thailand lost its sovereignty on Aug 14, 1997, when the final IMF package was announced.

Next: Chavalit's attempt to avoid the IMF programme and the trauma of Chaiyawat.

 

 

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