New anchor for Thai economy

May 10, 2000

THE focus of Thai macro-economic policy will change from the performance criteria recommended by the International Monetary Fund to inflation targeting after Thailand formally graduates from the fund's support programme, according to the fund's senior resident representative.

Shogo Ishii said the IMF supported a move by Thailand to adopt inflation targeting as the anchor of its macro-economic policy now it was about to graduate from the fund's two-and-a-half-year support programme.

Meeting in Washington DC, the IMF Executive Board of Directors on Monday approved the final review of Thailand's programme, to be formally completed on June 19.

"Under the IMF programme, the anchor of macro-economic policy is the performance criteria that Thailand has agreed with the IMF. Without the criteria, you will be moving on to inflation targeting," he said.

Thailand sought a US$17.2-billion (Bt653.6-billion) rescue package from the IMF in August 1997 after the collapse of the baht under the fixed-exchange-rate system and the depletion of its foreign-exchange reserves. Before the baht was floated on July 2 that year the anchor of Thai macro-economic policy was the currency peg, installed in 1986.

Under the currency peg the baht provided a stable macro-economic environment which held inflation in check and gave confidence to foreign investors. But the peg outlived its usefulness in the early 1990s when its rigid regime induced massive capital inflow following the liberalisation of financial markets. This led to asset-price bubbles and the subsequent collapse of the Thai economy.

The baht, under the floating-exchange-rate regime, can no longer be the anchor of macro-economic policy. Instead the performance criteria under IMF-guided policy conditionalities such as money-supply targets, inflation targets, exchange-rate targets, interest-rate targets and foreign-exchange-reserves targets have become the anchor.

Thailand's graduation from the IMF support programme marks another milestone in its economic development, with a costly lesson from the financial crisis hanging over the past two and a half years. Ever since, it has been undertaking financial and economic reform geared towards sustainable economic growth in the future.

"I would like to congratulate the Thai government and the Thai people for successfully completing the IMF support programme," said Kunio Saito, the director of the fund's regional office for the Asia Pacific region.

But graduation does not mean Thailand should slow down its structural reforms, Saito said, adding that the

IMF would continue to provide technical support to Thailand in the post-support programme.

Stanley Fischer, the IMF's first deputy managing director, said the IMF supported the Bank of Thailand's move to undertake inflation targeting, which he said would provide monetary policy with "a clearer sense of direction".

"Prospects for this new strategy would be considerably enhanced through greater central bank independence and accountability. The authorities' intentions in this area were welcome," Fischer said.

Bank of Thailand governor MR Chatu Mongol Sonakul has already set into motion a policy framework under which the monetary authorities will stick to inflation targeting as the hallmark of their macroeconomic policy. Although the laws have not been revised for a more independent bank, Chatu Mongol has formed the monetary policy committee, chaired by himself, to set targets for inflation in the medium term at around 2 to 3 per cent and undertake monetary policy to try and achieve those targets.

Given the time constraint, it is not certain that the Bank of Thailand Act will be revised during the present Chuan government. "I am not sure that the legislative amendments of the Bank of Thailand Act, which will include the consolidation of its internal accounts, will be completed in time during the present government tenure," said Finance Ministry spokesman Sathit Limpongpan. "But we'll have to move on."

Crisis-hit Thailand has gone through one the most turbulent periods of its modern history. The economy contracted 1.8 per cent in 1997 after averaging a growth rate of more than 7 per cent over the past three decades. In 1998, the economy collapsed to minus 10.4 per cent. A recovery was experienced last year with a resumption of growth, at 4.2 per cent.

This year the IMF projects Thai growth to reach 5 per cent, but it will take a number of years before growth returns to pre-crisis levels.

Thailand has completed nine letters of intent, the last of which was concluded by the IMF mission in February this year. During the crisis period, which saw the baht sink to 56 to the US dollar in January last year, the Chuan government implemented various monetary and fiscal measures focusing on maintaining macroeconomic stability, reviving confidence in the economy, stimulating sluggish domestic demand and addressing social discontent.

Now macroeconomic stability has been brought under control, the only major problem facing the Thai economy is the ailing banking sector and the high level of nonperforming loans, which stood at 37 per cent of total loans as of March this year.

BY THANONG KHANTHONG