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Central bank governor's last option: quit

TOP finance officials were amazed by the idiosyncrasy of MR Chatu Mongol, the Bank of Thailand governor. Chatu Mongol boarded the wrong aircraft when he made his foreign trip. Instead of heading to Washington DC to participate in the spring meeting of the World Bank and the International Monetary Fund, Chatu Mongol flew to London to attend a Merrill Lynch Investor Conference.

"I don't understand why he went to London because he should have come home quickly to work on the more pressing problem of the Financial Institution Development Fund or gone to Washington DC to attend a more important meeting of the IMF," said Supachai Pisitvanich, the permanent-secretary for finance.

At home in Bangkok, on Tuesday, the Cabinet approved a bailout plan for the Krung Thai Bank, which will be dumping Bt537 billion of its bad debts into an asset management company bankrolled by the FIDF. This rescue mission of the state-controlled bank is very important in restoring confidence to the Thai banking sector, hampered as it is by high non-performing loans and snail-pace restructuring. But the governor, as chairman of the FIDF, was not there to do his job.

Anyway, Chatu Mongol was supposed to represent Thailand at the important IMF meeting in Washington DC, held in the middle of this week. But he apparently avoided a face-off with Tarrin Nimmanahaeminda, the finance minister, who was slated to chair a development committee of the Group of 22 countries. For over a month, Chatu Mongol has incurred the wrath of Tarrin and the Democrats. Their conflicts range from the legal reform of the Bank of Thailand, the method by which the FIDF's debt should be compensated, the status of Luangta Mahabua's fund and, most recently, the charges the governor filed against Sirin Nimmanahaeminda, the finance minister's younger brother. These conflict have intensified to the point that the governor's job is being jeopardised.

The feud between the governor and the finance officials reached fever pitch on Tuesday when Chatu Mongol made scathing remarks against the Finance Ministry at the Merrill Lynch Investor Conference. He made it clear that the Finance Ministry would be undermining the stability of the central bank in the long run if it opts for a short-term gain by using the excess reserves to relieve its fiscal burden. (There would be excess reserves of about Bt10-Bt100 billion after the merger of the accounting books of the central bank's Note Issue Department and Banking Department.)

"Weakening the central bank resources so substantially that the fiscal burden would significantly be reduced is probably a self-defeating proposition," Chatu Mongol said. "Because a weak central bank would cause much more problems than a large fiscal burden."

He added: "The central bank is not the agency fiscalising these problems, and it is the Ministry of Finance which has the duty of doing this. We have indicated these ideas but they are going to have to do the calculations and convince themselves.

"I don't think the minister, as an ex-banker and one who worries about the country, is going to really weaken the Bank of Thailand just so that you could get away with a small fiscal burden in the beginning but probably not in the end, because a weak central bank is the most expensive proposition you can force on a country."

Then he went on to outline a number of issues which he believed might undermine the central bank's stability if the excess reserves are used for fiscal purposes. Exchange gains happen because the baht has weakened against the US dollar. But in the event of a baht appreciation, the governor said he was afraid that he might have to book foreign exchange losses.

The entire affair greatly disturbed the finance officials, including Tarrin who received a faxed copy of the governor's statement.

At home, when the governor had been asked to clarify the whereabouts of the charity fund and the impact of using excess reserves to pay off the massive debt of the Financial Institution Development Fund, he was very economical with his words. This created widespread confusion in the country since the issue of foreign exchange reserves is very complex.

But when he went to London on his own, the governor provided a systematic and comprehensive argument to a foreign audience over why he disagreed with the use of excess reserves. His London appearance made him look good among the international bankers and investors while the finance minister and his aides were painted as the bad guys, who did not understand the integrity of the central bank. Ironically, Chatu Mongol spent his entire career in the Finance Ministry before crossing the line to become governor of the central bank in 1998.

More importantly, Chatu Mongol's remarks have defied the Cabinet's resolution. In Thai bureaucratic practice, a Cabinet resolution is a Bible that has to be followed strictly. On Feb 29, the Cabinet approved a proposal to use the excess reserves to pay off the FIDF's debt. In March, the central bank formally held a news conference to endorse this practice. So Chatu Mongol's London remarks against the resolution amount to a shower of contempt over the Cabinet. He might be right that the excess reserves should not be used - or wrong. This is an academic problem that can be debated forever and in the end nobody knows the definite answer. But Chatu Mongol cannot defy the Cabinet's resolution. The only weapon he has is to resign to send a message of defiance against the government's policy. It is no longer appropriate for him to continue to keep his job when he is certain that he can no longer work with the government. This is what independence in central banking is all about.




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