IT almost boils down to an either/or question in any noble attempt to tackle the massive debt burden of the Financial Institution Development Fund (FIDF).

If the FIDF's debt is not tackled, there will be a fiscal crisis looming ahead. Yet if the money from the Bank of Thailand's international reserves is used to compensate the FIDF's debt, it will create high-power money that will subsequently have an impact on price pressure.

Speaking at a roundtable discussion organised by The Nation/Krungthep Thurakij yesterday, Dr Nimit Nonthapunthawat, chief economist at Bangkok Bank, argued that if the FIDF's debt arising from its bailout of the financial institutions is not settled adequately, it will trigger a fiscal crisis in coming years.

He said experience in most countries has shown that after they face a financial crisis, they have to deal with the fiscal crisis that dampens economic growth, due to the burden of having to "fiscalise" the cost of financial sector restructuring.

He stressed that the overall objective of the government is to ensure that economic growth of at least 4 per cent is achieved, otherwise the country will face a fiscal crisis. "I share the view that the FIDF's debt has to be settled by the money from the central bank because I am concerned about the fiscal crisis. But I agree that it must be a one-time affair," he said.

A fierce debate has been raging over how to settle the FIDF debt, an issue that has polarised the Finance Ministry and the Bank of Thailand. The central bank is in the process of consolidating its accounting books from the Note Issue Department and the Banking Department, a process that will produce some unrealised foreign exchange gains.

It is estimated that the Note Issue Department will have a gain of about Bt800 billion, compared to a loss of more than Bt380 billion in the Banking Department due to its defence of the baht ahead of the 1997 crisis. The Finance Ministry would like to use part of this more than Bt400 billion in unrealised foreign exchange gains to pay off the FIDF's debt.

Thailand's biggest problem now is the rising public sector debt of Bt2.4 trillion and how to compensate the debt of the FIDF of Bt1.3 trillion. The central bank is reluctant to hand over the proceeds from the exchange gains to the Finance Ministry, saying that it will have a surplus of only little more than Bt70 billion because it will need the rest for strengthening its foreign exchange reserves management and other internal operations.

Suparat Khawatkul, director-general of the Fiscal Policy Office, said the move to consolidate the accounting books was initiated by the central bank itself because it would like to have more flexibility in managing its operations and to write off its accumulated losses from the baht devaluation.

This proposal, which will have to be endorsed by Parliament, is tied together with a reform of the Bank of Thailand Act as a whole. Suparat said there is a general understanding from the Finance Ministry that after the account consolidation, the central bank must have a comfortable level of foreign exchange reserves to ensure the stability of the baht and to maintain the health of the financial system as a whole.

Any surplus left from the account consolidation then should be passed on to the Finance Ministry to reduce the burden of the FIDF. "It's a national problem that we have to deal with," Suparat said.

Vijit Supinit, a former Bank of Thailand governor, warned that since the government has failed to keep up with its target and timing in tackling the overall economic crisis, any attempt to pay off the FIDF's debt would not make any big difference.

"It is like what the banking sector is now facing. The non-performing loans that were resolved have come back into the system again because the fundamentals of the economy are not tackled properly," he said.

Vijit said the government should pay more attention to tackling economic fundamentals rather than messing with the legal or accounting structure of the central bank, which already has a good system.

He disagreed with a move to overhaul the legal structure of the central bank to tackle the immediate problem of the FIDF. For if the crisis is to come back again in future, the central bank won't have the resources to deal with the problem, he said.

Besides, using the international reserves to pay off the FIDF's debt will amount to injecting high-power money into the system, which can create inflationary pressure later on, Vijit said. He said it is not necessary to tackle the FIDF's debt or the central bank's accumulated losses immediately because the problem can be addressed in the long term through better management.

But if a middle ground is to be struck, Vijit said the central bank may revise its law to use money, in a one-off move, from the special reserve account to pay off the FIDF's debt. "But it is not appropriate to overhaul the legal structure and the accounting system for this purpose alone," he said.

Dr Somchai Ruchuphand, director-general of the Excise Department, supported a move to use the proceeds from the central bank's foreign exchange reserves to pay off the FIDF debt, which will relieve the fiscal burden on the government. He said the consolidation of the central bank's accounts is designed to improve flexibility in the BOT's management of foreign exchange reserves.

"The validity of the argument is to reduce the barriers between the different accounts of the central bank," he said. "It is not necessary to offset the losses within the central bank. But the byproduct of this process will also create some foreign exchange gains, the surplus of which should be used for a useful purpose."

Somchai argued that since the damage in the financial sector needs to be fiscalised by the government, it is not a paradox if the money from the financial sector is used to tackle the problem in the financial sector itself.

He agreed that the central bank should have enough reserves to back the baht and create confidence to the Thai macroeconomy, but it will be a waste if the central bank has more reserves than it actually needs and that money is not used.

"It is like building a dam to hold the amount of water we need. If there is more water than the dam can hold, it should be used for other purposes," he said.

Dr Surakiart Sathirathai, the former finance minister and now deputy chairman of the Thai Rak Thai Party, disagreed with the idea of using the international reserves to pay off the FIDF's debt, both in principle and timing. He said it remains uncertain whether the Thai economic fundamentals are strong enough to cope with the fluctuations and capital outflow if difficult times return.

He said there is not need to rush into paying the debt of the FIDF with the international reserves because it amounts to a flouting of monetary discipline. Rather, the FIDF should be compensated by better management from its stockholding in financial institutions and from the proceeds of privatisation of state enterprises. Besides, it is not urgent either to write off the losses of the central bank's banking department because it is simply an accounting manoeuvre, he said.

The Note Issue Department, which accumulated the foreign exchange reserves since 1958, would gain Bt800 billion, while the Banking Department would lose Bt360 billion. Once the consolidation takes place, there might be some Bt400 billion in gains.

Surakiart said that since the government has approved the issue of bonds worth Bt500 billion to compensate the FIDF, there remains a balance of about Bt800-Bt900 billion. Of this, some money will come from proceeds of the auction of the bad assets of defunct finance companies by the Financial Sector Restructuring Authority, which has mustered about Bt200 billion. The August 14 Banking Restructuring Programme also has some Bt200 billion left.

"So there remains about Bt400 billion that would have to be settled," Surakiart said.

Supavut Saichua, an investment bank analyst at Merrill Lynch Phatra Securities Co, said since the FIDF has a negative net worth, it has to be compensated because it is a government body. Where will the money come from?

It can come from the Finance Ministry, which may issue bonds or raise taxes to pay for the FIDF. Or it can come from the central bank, which can print money for the purpose. But the consequence of printing money will create upward price pressure, which will affect the low-income Thais nationwide because they will have to pay more for the same goods or services.

Besides, using money from the reserves might lead to a flouting of discipline. In the case that it has less reserves that it actually needs, the central bank might pursue a weak baht policy to reduce the amount of reserves needed to back the baht. On the contrary, if the baht appreciates, the central bank will need more reserves to back the baht.

He said at present, the central bank needs at least US$14 billion to back some Bt400 billion in circulation.

Supavut did not agree with the idea to have the BOT bail out the FIDF, saying that the central bank should rather concentrate its task of managing price stability.

Roongrueng Bhidayasiri, lecturer at Mahadol University, did not agree with the Finance Ministry plan to transfer central bank reserves to cover the FIDF's loss, through the central bank account consolidation.

" I don't agree that the central bank surplus reserves accumulated from international trade should be used to pay off the FIDF loss; the government should take responsibility for the debt payment of the FIDF, since the loss was caused by the administration," Roongrueng said, referring to the Chavalit government's order to the FIDF to inject a massive dose of liquidity into the ailing banking sector.

Moreover, there will not be much reserve surplus from the account consolidation left for other spending, after deducting the central bank's obligation to pay the International Monetary Fund, cover the loss of the Banking Department and to support the central capital base, according to Roongrueng.

He suggested that the government should instead borrow from both the domestic and overseas markets by issuing bonds to finance FIDF loss.

He also suggested that the government set up an asset management company to manage the bad loans of banks which will in turn will help the finance institutions to lend to the real sector.

When the real economy fully recovers from the slump, it will automatically facilitate the debt recovery of the FIDF, he said.