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BOT POLICY ROW: IMF stands firm behind governor

May 24, 2001

The International Monetary Fund has lent some heavyweight support to the Bank of Thailand's low interest-rate policy, saying it is appropriate in the face of a weak, but recovering economy.

The IMF's Asia and Pacific department director, Yusuke Horiguchi, said the IMF team approved of the central bank's approach, which supported economic recovery.

Horiguchi offered his comments as debate raged about whether deposit rates should be raised to stem capital outflow, and to reward savers.

Prime Minister Thaksin Shinawatra has ordered the central bank to conduct a complete review of its monetary policy, and on capital movements, to determine whether its low interest-rate policy is still relevant given present macroeconomic conditions.

Apparently, the prime minister and his economic advisers believe the low interest-rate policy, in place since late 1998, might be "overdone", and has caused capital outflows.

Speaking after IMF consultations with Thai authorities, Horiguchi said he was not concerned about the capital outflow, since it was largely corporations paying off their external debts.

He said reducing the external debt burden would not only improve corporations' balance sheets, but also the country as a whole.

It would also reduce Thailand's vulnerability to external shocks.

He said even though hiking the interest rate earned on savings would make the baht more attractive, it would not significantly add to the wealth of a majority of people with savings. Most accounts with at least Bt10 million in them were concentrated in the hands of a select few.

Horiguchi described the first step towards developing a working relationship with the Thaksin government as "constructive".

After talks with the prime minister and Finance Minister Somkid Jatusripitak yesterday, Horiguchi said Thaksin had assured him the central bank would have the final say on interest-rate policy. The bank's independence would be honoured.

He also suggested that although Thailand's public-sector debt was not a source of concern at the moment, the Thaksin government should send out a signal about its willingness to gradually move towards fiscal consolidation in the medium term.

The IMF maintains that a fiscal deficit of 3.5 per cent at central government level is achievable this year. But down the road, Thailand would have to bring its financial house in order when it came to reducing public-sector debt, he said. That debt is currently equivalent to 58 per cent of gross domestic product.

Thaksin told the IMF delegation he expected Thailand to achieve a balanced budget within four to five years. As for the prospects of economic growth this year, Reza Moghadam, who is in charge of the IMF's Thailand desk, said growth was likely to be at the "lower end of the central bank's range". The central bank has projected growth to settle within a range of 2.5 to 4 per cent this year, while the National Economic and Social Development Board forecasts growth of 3 per cent.

Thanong Khanthong






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