Politics won't slove policy disputes

THE policy dispute between Finance Minister Tarrin Nimmanahaeminda and Bank of Thailand Governor MR Chatu Mongol Sonakul has rapidly and sadly deteriorated into a personal conflict that can not be mended.

Over the weekend Tarrin tried to calm nervous financial markets, saying he had no intention of removing Chatu Mongol from his post - at least for now. But it remains difficult to imagine how the two can continue to coordinate fiscal and monetary policy.

They have been openly colliding over a rescue programme for banks, the management problem at Krung Thai Bank, the overhaul of the Bank of Thailand Act and finally how to pay off the losses of the Financial Institution Development Fund (FIDF).

But the final straw was a threat issued by Chatu Mongol on Friday that the central bank was about to file criminal charges against Sirin Nimmanahaeminda, Tarin's brother and a former president of the Krung Thai Bank. The timing of this dramatic episode was what mattered most.

Sirin believes that the move against him is politically motivated and is part of the heightening tension between Chatu Mongol and those members of the Democrat Party who want to dismiss the governor for his stubbornness, a source close to Sirin said.

There was speculation that Chatu Mongol might be fired today when the Cabinet, according to its schedule, will consider and approve Krung Thai Bank's plan to form an asset management corporation.

Chatu Mongol's threat to file charges against Sirin temporarily strengthened his position. Any attempt to dismiss him now would seem like retaliation by the finance minister.

Legal officers of the central bank completed the case against Sirin, alleged to be involved in a loan scandal, about a month ago, a report said. However, it was not until Friday that Rattakorn Nimwattana, the central bank's assistant governor of legal affairs, pulled this case out of the drawer. In the matter of timing, Chatu Mongol enjoys the ultimate say as to when a suspect in financial irregularities is brought before the courts.

It was also reported that the central bank had already filed the criminal case against Sirin on Friday, but this report was unconfirmed.

With the conflict between Chatu Mongol and Tarrin reaching a head, there is no easy way out. Tarrin's position would be further weakened if Chatu Mongol continued to stay at the helm of the central bank.

Last week a rare confrontation took place when top officials of the Finance Ministry, led by permanent-secretary Supachai Pisitvanich lined up to assault the central bank. Finance officials said that it was selfish of central bankers to insist on keeping money from the consolidation of central bank accounts for their own use without transferring some to the government. The government needs the money to relieve its rising budget crisis.

How did Tarrin and Chatu Mongol sever their friendship so easily? It was Tarrin, in fact, who appointed Chatu Mongol as central bank governor in the mid-1998. Before then, Chatu Mongol had spent his entire brilliant career at the Finance Ministry. At the time of his appointment, the central bank was still rolling under the scandal of its mismanagement of the financial system and foreign exchange policy.

Tarrin picked Chatu Mongol because he was the most qualified candidate at that time and was, in fact, revered. Chatu Mongol was entrusted with the task of reorganising the central bank and returning confidence and credibility to it.

From the outset, Tarrin and Chatu Mongol had significant differences over how to rescue the crisis-hit economy. Chatu Mongol, rightly, advocated fiscal expansion to reverse economic recession. He also played a key role in stabilising the baht and lowering interest rates, which had peaked at more than 20 per cent. He and his team succeeded in bringing monetary policy under control, with foreign exchange reserves recovering to pre-crisis levels and inflation restrained.

Chatu Mongol also worked to assure foreign bankers and investors that the government's management of policy could be trusted. As a result, macroeconomic conditions have stabilised.

Chatu Mongol's next goal was to minimise the cost of the FIDF's wholesale bailout of financial institutions. To persuade foreign buyers to buy nationalised banks, he argued that they should be given guarantees that would limit their responsibility for losses created by the "black hole" or minus net worth of the banks. A gain and lost sharing scheme was implemented in the sell-off of the nationalised banks.

This marked one of the earliest conflicts between the central bank governor and the finance minister. Chatu Mongol wanted to guarantee some losses in Nakornthon Bank, a take-over target of UK-based Standard Chartered Bank. The cost in guaranteeing part of the losses of Nakornthon Bank, considered insolvent because its assets were less than its liabilities, should be born by the FIDF, he said.

But Tarrin disagreed. Then, the cost was estimated at Bt3 billion. Within one year, it skyrocketed to Bt13 billion as losses in the bank's loan book worsened.

Their second major conflict was over Krung Thai Bank. After Sirin resigned as president, Tarrin delegated the authority to tackle the state-controlled bank to Chatu Mongol. Chatu Mongol brought in Mechai Viravaidya as chairman and instructed him to form a new management team. But Krung Thai Bank's problems did not work out as Tarrin had expected, forcing him to bring the bank back under his oversight. Chatu Mongol also transferred all the FIDF's equity in Krung Thai Bank to the Finance Ministry.

The next conflict was over amendments to the Bank of Thailand Act. Chatu Mongol wanted the law to precisely spell out the central bank's independence. But Tarrin's position is that the central bank's independence must also be earned by winning trust from the public for its efficiency, honesty and integrity. Chatu Mongol and Tarrin crossed swords openly over the issue of independence, which would see the central bank's scope reduced to inflation targeting and maintaining the stability of the financial system. In the end, Chatu Mongol got most that he wanted.

In the process of overhauling the Bank of Thailand Act, the central bank would consolidate the separate accounts of its Note Issue Department and its Banking Department. In so doing, there would be foreign exchange gains, some of which Tarrin would like to use to pay down the FIDF's debt of Bt1.3 trillion. Deputy Finance Minister Pisit Lee-ahtam said that there would be gains of Bt700 billion. Others said the gains were only Bt200-Bt300 billion. The central bank's account was even less - Bt70 billion.

However, Chatu Mongol and his officials opposed any attempt to use proceeds from the central bank's account consolidation to pay off the FIDF's debt. The issue became politicised when Luangta Mahabua, a revered monk from Udonthani, was drawn into the controversy. Through the Thais-Help-Fund Fund, Luangta Mahabua donated about BT1.7 billion to the central bank, which used the proceeds as foreign exchange reserves. Luangta Mahabua came out to attack the government over any attempt to use the proceeds to pay off the debt of the FIDF.

The episode greatly disturbed the Democrats who feared a loss of popularity from the revered monk's attack. That was when rumours emerged that Chatu Mongol would be removed for politicising the central bank.

Now, Tarrin and the Democrats are weighing their options on how to deal with Chatu Mongol. But it is certain that they can no longer work with each other. The question is when or how Chatu Mongol will be forced to leave his post to bring the confrontation between the Finance Ministry and the central bank to necessary close.