Rising public debt challenges govt

May 5, 2000

CHIANG MAI - Even if the government ceases to create any new debt, the budget deficit will peak at Bt220 billion by fiscal year 2004, said Poonsap Piya-anant, director of the Budget Bureau.

"This deficit alone will be equivalent to the investment portion of the budget to finance economic growth," he said.

Managing the rising public debt is the most challenging policy issue facing the government. The budget for fiscal 2001 has been set at Bt910 billion, of which Bt105 billion accounts for deficit spending. Of the total budget, more than Bt100 billion will go toward interest payment and other obligatory expenditures, while Bt12 billion will go toward debt repayment.

This high level of public debt, now standing at Bt1.8 trillion, or 39 per cent of the gross domestic product, has sent Finance Ministry officials scrambling for money to bring fiscal policy under control.

"I don't think we should try to create any new debt for new projects because without sound project evaluation, the money that has been borrowed would not be used anyway," the Budget Bureau director added.

"Besides, the existing budget must be used in the most cost-effective way to benefit the economic recovery."

The rising public debt, incurred largely through the Financial Institution Development Fund's attempted rescue of the financial system, has created tension between the Finance Ministry and the Bank of Thailand. Earlier this year, Finance Minister Tarrin Nimmanahaeminda, in a discussion with his deputy Pisit Lee-artham, came up with the idea that "excess money" from the central bank's foreign exchange reserves should be used to reduce the burden of the FIDF.

At the same time, the central bank was looking at ways to clean up the balance sheet of the Banking Department, which lost heavily - about Bt380 billion - from its defence of the baht and its subsequent devaluation. However, the central bank's Note Issue Department, which holds the dollar reserves, made huge foreign exchange gains from the baht devaluation - Bt800 billion by one estimate.

If the accounts of these two departments are consolidated through legislative amendments, it would wipe out any book losses of the Banking Department. BOT Governor MR Chatu Mongol Sonakul has been keen on this reorganisation the central bank's accounting system.

The conflict flared up when he was informed that the finance minister would like to use part of the proceeds from this account merger to pay off the FIDF's debt, which has reached Bt1.3 trillion. It was not until last Friday that both Chatu Mongol and Tarrin came to an agreement on the use of the excess reserves to compensate the FIDF. But since the government has agreed to compensate the loss with a Bt500-billion bond issue, there is an outstanding debt of more than Bt775 billion to be settled.

Deputy Finance Minister Pisit said the Finance Ministry is looking at excess money of at least Bt100 billion to compensate the FIDF. "The damage of the FIDF would have to be paid any way. The only problem is how," he said.

He argued that the fiscal policy is very crucial at this juncture since, the sooner it is brought under control, the better the Thai economy's prospects for a healthy recovery. "If the government raises tax to pay off the FIDF, it would create a contractionary effect to the economy. If the excess reserves from the central bank are used, it might create inflationary pressure, but the central bank has a duty to manage financial stability anyway," he said.

Pisit played down fears that high power money from the reserves used to pay off the FIDF debt might lead to higher inflation and weaken the baht. He said the inflationary pressure could be accommodated by the central bank's issuing bonds to absorb the liquidity. At the same time, the BOT would not want the baht to weaken since over the next three years it will need to repay the US$13 billion (Bt496.6 billion) loan to the International Monetary Fund.

With the present foreign exchange reserves standing at $32 billion, he said the central bank would be making sure that for every $1 billion of debt repayment, it could buy the same amount back from the foreign exchange market without undermining the overall financial stability of the country.

For this reason, confidence in the country's overall economic conditions, including the sustainability of the fiscal policy, is very important to help the BOT manage its foreign exchange reserves and monetary policy.

Meanwhile, speaking at a seminar here ahead of the Asian Development Bank conference, Chatu Mongol said the central bank is awaiting a final report from the Finance Ministry on the projected losses of the FIDF before delivering its excess reserves to pay off the Fund's debt.

He said the government has yet to come out with the final figure, but said the central bank's figure calculated in January is the most accurate. The central bank had projected the losses of the FIDF at Bt1.4 trillion and conveyed this to the Finance Ministry the same month.

"We think we got the number very accurately," Chatu Mongol said.

The estimate is also based on the loss-gain sharing of the FIDF with the four privatised banks, three of which have reached agreements with the authorities.

But Chatu Mongol said there was as yet no formal discussion between the central bank and the Finance Ministry on the final figure.