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Four ways of tackling debt woes


Thanong Khanthong and Anoma Srisukkasem look at four varying approaches to tackle the massive debt load of the Financial Institution Development Fund.

The divisive debate between the Ministry of Finance and the Bank of Thailand swirls around different viewpoints on how to tackle the massive debt, amounting to Bt800 billion to Bt900 billion, of the Financial Institution Development Fund. So far four approaches have been proposed.

Finance Ministry proposal: Finance Minister Tarrin Nimmanahaeminda and most finance officials are eyeing the net foreign exchange gain expected from the planned consolidation of the Bank of Thailand's reserves accounts as a new source to help pare down the FIDF's debt and thus lessen the nation's fiscal burden.

Finance officials estimate a windfall of about Bt400 billion from consolidating the books of the note issue department and the banking department of the central bank -- more than the bank needs for its internal use. After this amount is deducted along with other operational requirements of the central bank, some Bt10 billion to Bt100 billion should be left for the finance ministry to stick its fingers in.

Reluctant as it is to part with any portion of the proceeds, the central bank said it could make available about Bt70 billion to Bt77 billion of the gain if the finance ministry is desperate for the money to reduce the debt load of the FIDF, which incurred massive obligations from its bailout of the financial system.

Dr Somchai Ruchuphand, director-general of the excise department, has argued that economically and ethically there is nothing wrong with the government's using the proceeds from the central bank to resolve the problems of the financial industry. Finance officials believe that if it can be avoided, Thais now and future generations should not be saddled with an additional burden from higher taxes or higher government debt.

Central bank proposal: MR Chatu Mongol Sonakul, the central bank governor, views the diversion of exchange gains to offset the FIDF's losses as a breach of monetary discipline. An injudicious injection of money from the central bank into the financial system will create "high power" money that will add to inflationary pressure. In the end the common folk, particularly low wage earners, will suffer from higher prices. Siphoning off reserves from the central bank would also leave the institution weak and unable to perform its function of managing price and foreign exchange stability.

Chatu Mongol has suggested that the Finance Ministry should issue public bonds worth up to Bt800 billion to Bt900 billion, with a maturity of 15 to 20 years, to absorb the FIDF's debt, which is currently Bt1.3 trillion. When the Bt500 billion in bonds earlier approved by the parliament is taken into account, the FIDF would have Bt800 billion to Bt900 billion left to take care of.

He argues that the net present cost of issuing bonds will not be that high and their massive volume will also promote the development of the overall capital market. Long-term government bonds will act as a benchmark for the fixed-rate market in the same way that US Treasuries do in the States. Furthermore, the central bank should not be the agency responsible for fiscalising the financial burden of the finance ministry.

But the ministry is reluctant to explore this approach because of the political implications in an election year. It would not want to be in the embarrassing position of having to explain to the electorate why the government has to create a public debt of almost Bt1 trillion on top of its bailout of the rich (insolvent banks and finance companies).

Status quo proposal: Vijit Supinit, the former central bank governor, has voiced his opposition to combining the books of the central bank's reserve accounts. He says there is no pressing need to overhaul central bank law, since the present framework serves the bank well.

Instead, he said the FIDF could issue bonds to the central bank to finance its own debt -- the same as the current practice. The FIDF could postpone repayment of the bonds to 15 to 20 years out when economic conditions are expected be better.

As for the exchange losses of the banking department from its failed defence of the baht in 1997, the central bank can simply write them off over time.

If need be, the law could be amended so that the central bank can use the exchange gains of about Bt800 billion from the special reserves account of the note issue department to offset the exchange losses of the banking department. The note issue department will reap exchange gains because it has been accumulating US dollars since 1958 while the baht has been relatively strong against the dollar.

Compromise proposal: Dr Supachai Panitchpakdi, the deputy prime minister, has suggested that the central bank and the Finance Ministry should meet halfway. Some of the central bank's exchange gains should be used to help out the FIDF.

The finance ministry should also float some public bonds to finance the FIDF's debt. He said it would harm the economy if the finance ministry were to issue bonds outright worth Bt800 billion to Bt900 billion.

A public hearing on this contentious issue was originally scheduled for April 30. But it has been cancelled after the row between the central bank governor and the finance minister escalated to a fever pitch.



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