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Pushing 'dual forex rates' as alternative to devaluation


Maybe it would be worthwhile to start exploring the possibility of adopting a dual currency system. Thanong Khanthong reports.

Perhaps it is time the Bank of Thailand seriously considered introducing a dual currency system as part of a pro-active policy to safeguard foreign exchange stability.

A dual currency system would allow the banking authorities to manage foreign exchange policy with more flexibility, possibly deterring further intense speculation against the baht.

Under a dual currency system, there would be a financial rate and a commercial rate for the baht. The financial rate would continue to represent exactly what the central bank is presently managing.

The commercial rate would be the rate that exclusively applied to exporters, who bring foreign exchange into the country.

In effect, there would be two foreign exchange markets in which the baht is quoted differently against the US dollar.

For instance, banks who sell the US dollar to the BOT may get a financial rate of Bt25.80, while exporters doing the same thing will receive a commercial rate of Bt30.

Intense debate is raging as to whether the BOT should devalue the baht to help jump start the economy. Most money market managers and bankers are against baht devaluation because it will trigger a financial crisis that will wreak havoc on the entire economy. Some economists believe a devaluation will restore the competitiveness of exports, a surge of which would quickly bolster confidence in the economy.

Introducing a dual currency system would be a compromise between the two opposing views.

The commercial rate the exporters enjoy would amount to a devaluation, which should help them to sell their goods more competitively on the world's markets.

By doing so Thailand will avoid having to devalue the baht as currency speculators would like.

There would be no subsidy involved in the commercial rate because it would represent just another foreign exchange rate mechanism.

A major technical problem for the banking authorities is preventing arbitrage between the financial rate and commercial rate markets.

BOT officials have been briefed on this proposal but they are too nervous to take any action on the foreign exchange rate mechanism at this juncture while confidence in the baht is at its lowest ebb. If they decide to widen the band of the baht/US dollar trading, the baht will hit the ceiling of the band.

So they will continue to rely on interest rate-led policy to defend the baht until there is more confidence in the macroeconomic conditions.

There is nothing innovative about a dual currency system. For eight years beginning in 1972, France and Belgium employed the dual currency system.

Between 1972 and 1993, South Africa successfully maintained a dual currency system, which helped its central bankers to manage foreign exchange more flexibly.

The BOT appears to be winning the second bloody currency battle of the year, though only with the help of intervention by other central banks in the region.

But the war is not over yet. The speculators will seek revenge because they have lost a lot of money trying to break the trading band of the BOT's foreign exchange mechanism.



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