THE Thai economy is expected to contract by between minus 4 per cent and minus 6 per cent this year instead of 3.5 per cent projected earlier, Finance Ministry officials said.

The latest assessment has been made jointly by Thai authorities and International Monetary Fund officials as they work on the fourth letter of intent required as part of the Fund's US$17.2 billion bailout package deal.

There has been criticism against the IMF of its overdosing Thailand with the stabilisation policy, without balancing it with a stimulus policy to prevent the economy from going downhill too fast.

But Finance Ministry officials have argued that Thailand has no choice or freedom to pursue the economic policy it deemed most suitable because the financial markets have been keeping a close watch on its policy.

''Any signs of weakness or lack of commitment to follow strict fiscal and monetary policy would send a wrong signal to the market, which would have made it impossible for Thailand to arrive at this point,'' the senior Finance Ministry official said.

''The Thai Farmers Bank or Bangkok Bank would not be able to launch their international offering and would not have money to lend, if the macroeconomic framework had not been successfully put in place.''

There has been a growing chorus by the business sector and foreign financial analysts that the Thai government must now convince the IMF that both monetary and fiscal policies should be relaxed because Thai companies go bankrupt.

The fourth letter of intent, now under negotiation with the IMF and expected to be finalised on May 14, will focus on rehabilitating the corporate sector and improving liquidity to revive the private sector, officials said.

However, key economic indicators in the fist quarter of this year showed that the economy was still on a downward trend, prompting a revision of the economic forecast for 1998 to somewhere between minus 4 and minus 6 per cent.

In the third letter of intent, concluded in March this year, the IMF support programme set the target for economic growth at minus 3 to minus 3.5 per cent, based on economic statistics available in December 1997 and January 1998.

The sharp contraction of the economy can be attributed to capital outflow, which drains liquidity in the system, the banking crisis, which puts a hold on commercial lending, and the regional contagion effect. But since Thailand has been strictly following the IMF stabilisation programme, it has won a measure of confidence, as evidenced by successful capital-raising exercises by Thai Farmers Bank and Bangkok Bank in March and April respectively.

Besides, the trade balance has improved significantly, with a surplus of $1 billion a month. This helps to inject at least Bt40 billion into the system every month. In the first quarter of this year, export revenue surged in baht terms by 80 per cent against the corresponding period of last year, although in dollar terms it fell by 2.9 per cent.

''Exports are the best sector in this present economic crisis, and I don't see any legitimate reason for exporters to complain,'' the Finance Ministry official said.

This has encouraged the IMF and the Thai government to have more confidence in pursuing an expansionary fiscal policy and loosening somewhat the monetary policy to allow interest rates to fall in the fourth letter of intent.

On Tuesday the Cabinet approved a $402 million package, provided by the World Bank, to alleviate unemployment and poverty and pre-empt the social impact of the economic woes.

Michel Camdessus, the managing director of the IMF, signalled recently that it is time for Thailand to bring down interest rates after gaining confidence from its stabilisation policy.

However, the stumbling block of an interest rate cut lies in the Financial Institution Development Fund, which raises money in the short-term money market to bail out the financial system. Its presence has distorted the interest rate structure, dampening the prospect of a normal return of liquidity.

Finance Minister Tarrin Nimmanahaeminda has pointed out that the FIDF will soon be taken out of the short-term money market and will have to issue long-term bonds to raise money instead of fighting for scarce resources. The FIDF's outstanding borrowing in the money market has reached more than Bt400 billion, draining the most money from the system.