Incidentally, Ivory Tower, an anonymous economist, did not write his article on April Fool's Day, otherwise his recommendation for sharp surgery on the Thai economy through a one-time devaluation would have been dismissed as a joke.

However, Ivory Tower's article, which appeared in the Bangkok Post on April 30, should be treated with respect, for his opinions largely reflect the old guard in Thailand's economic community. His comments add to the polarisation of opinions on the management of Thailand's foreign exchange policy.

Ivory Tower believes that the baht is overvalued, judging by the fact that Thailand's inflation has been running ahead of US inflation since 1987, to the effect that the baht is now probably overvalued by 10 to 15 per cent.

''When there is an over-valuation, as appears to be the case with the baht now, a devaluation is the simplest way to bring the Thai structure of wages and prices back into line with the rest of the world," he argues.

He points out that the government is faced with two choices. One is a sharp surgical operation and the other is a stay-put strategy to prolong the pain and hope that the problems will go away after prices over the next few years are realigned with the rest of the world. The sharp surgical operation will entail a baht devaluation, which must be skillfully managed.

''For once it is done, you must convince the market, particularly the foreigners, that no more devaluation is on the cards, at least in the next four to five years, and that you can manage the fallout from the devaluation. If this can be done, then there is no reason why the economy should not pick up smartly within a short period of time [less than a year], fuelled by a recovery of exports," Ivory Tower says.

Ivory Tower's article fails, however, to address the real, more immediate problem Thailand is facing, which is the financial system crisis. In relative terms, Thailand is not having any problems with the real economy. This year the economy is still going to register decent inflation-adjusted growth of at least five per cent. Exports have slowed down due largely to cyclical factors and the loss of competitiveness in labour-intensive industries.

The monetary officials cannot forever manage their foreign exchange policy to boost exports, which must adjust themselves by moving up the value-added ladder.

Rather, the Thai economy is now burdened with a high interest rate policy, which is aimed principally at defending the baht and attracting foreign capital to fill in the investment/savings gap of around Bt300-Bt400 billion a year. And Thailand is paying a high price for its mismanagement of monetary policy, a remnant of which is the high cost of borrowings.

Lax monetary policy in the past, fuelled by overconfidence in the invincibility of the Thai economy, led to a sharp inflow of foreign capital which increased Thailand's debt burden and set the stage for a bubble economy.

Only in 1994 did the monetary policy begin to address the widening current account deficit by making the cost of borrowing expensive. As a result, a high interest rate policy has remained in place. Saddled with high costs, the speculative property sector was the first to go under, followed by the stock market. When the Thai export machine registered no growth at all in 1996, the economy went bust. (It is not clear to what extent high interest rates have contributed to the export sluggishness.)

The fallout of that episode brought about financial sector distress. Thai banks and finance companies have watched almost half of their Bt800 billion loans to the property sector go sour. Without confidence, the financial institutions, particular finance companies, cannot get their hands on liquidity to keep their businesses going. They are now undergoing a painful mergers and acquisitions process. To complicate macro-economic management, foreigners began early this year to attack the baht. This has forced the monetary officials to come up with another excuse: interest rates must be kept high to defend the baht.

The Bank of Thailand (BOT) is facing a dilemma between managing economic stability and preventing the economy from sinking into a recession. Now it appears that economic stability has been painfully achieved with the bitter pills, with the current account deficit expected to fall below six per cent of gross domestic product and inflation hovering around four per cent. Yet, it could face an economic recession if the cost of loans remain prohibitive.

There is no way to tackle economic stagnation by keeping interest rates high. This means the BOT's high interest rate policy is aimed at addressing some other critical issues. It can only mean that the authorities are afraid that lowering the rates will trigger another round of a baht attack, create an outflow of foreign capital and precipitate a crisis of confidence in the Bank of Thailand's international reserves.

The BOT is managing the foreign reserves of US$38 billion (Bt988 billion), having spent more than $2 billion earlier this year to defend the baht. The authorities are also afraid that if reserves fall too quickly, it will cause panic.

However, it is now widely held that international reserves of $38 billion are not necessary for Thailand at this stage. If reserves are to fall further, so what? Inflows of foreign money have slowed because only the Thai government, the state enterprises or the cream of Thai corporations are in a position to borrow at the more viable rates.

So the answer to Ivory Tower's article is that the priority of the authorities must be to lower interest rates first. The authorities have succeeded in bringing down the short-term rates, but they are still too nervous with the spectre of a baht attack to cut the long-term rates.

The foreign exchange policy adjustment is not a priority and must only be implemented when there is more confidence in the Thai economy. Once the macroeconomic distress has improved, the banking authorities may adopt a more flexible baht policy by allowing the value of the baht to move up or down according to the capital movements.

Further easing of interest rates will set a broader stage for soothing the property and financial crisis, healing the stock market, lowering the debt burdens of corporations and jump-starting the economy as a whole before it risks going into a recession.

If capital flows out of the country as a result of the lower interest rates, the government or the state enterprises, with higher credit ratings, can always go overseas to borrow the money on behalf of the private sector. A recent $600-million Yankee bond is a good example. Liquidity can then expect to be improved.

If the baht is subject to another attack, the short-term rates can be raised sky-high, as a policy fine-tuning, to punish the speculators.

Is the Thai baht overvalued as Ivory Tower claims? The BOT has maintained that the baht is not overvalued. Merrill Lynch in its January report also asserted that the baht is not overvalued.

Having a weight of 85 per cent on the US dollar, 7.5 per cent on the Japanese yen and 7.5 per cent on the German mark, Merrill Lynch worked out a trade-weighted index over the past 10 years. It showed that the baht trade-weighted index fluctuated within a bandwidth of plus or minus 0.4 per cent and the band seemed downward sloping at 0.3 per cent per annum. At a baht/US dollar rate of 25.66, the trade-weighted index appears very much within the band, which has been in practice since 1990.

The reason that the baht has dropped to Bt26.10 in recent days is because of the sharp dollar appreciation, which influences the basket of currencies. This is something beyond anybody's control. If the dollar climb is unstoppable, then there will be grounds for the baht to devalue.

However, a baht devaluation should be ruled out now because it is not the last resort. Nor can it cure Thailand's present property and financial sector distress. On the contrary, it will worsen the financial crisis. The following are a number of points that should be taken into account in weighing the risks associated with devaluations:

• Instead of inflicting one-time pain on the entire economy, a devaluation will ruin the Thai economy and leave it with a chance for recovery in 10 years. In this era of globalisation, no investor will ever want to do business with Thailand again.