Bank of Thailand Governor MR Chatu Mongol Sonakul is facing a damned if you do, damned if you don’t dilemma. If he goes along with Prime Minister Thaksin Shinawatra by reversing the interest rate trend, he would be seen as compromising the integrity of the central bank’s independence. If he disagrees with the prime minister, on the other hand, he would be seen as a “crocodile stretching its long body across the klong” – intransigent.

Politically, this conflict has arrived at a dead end sooner than most people would have thought. To the popular Thaksin, who has mustered an unprecedented political mandate, it is only a matter of time before he removes the governor. Their relationship quickly turned sour during the formation of the government because the governor did not get the finance portfolio as promised. Ever since, the two have been at loggerheads.

Polls have shown that Thaksin is the most popular Cabinet member. So he can do anything he wants now without having to fear a public backlash.

Indeed, he and his inner circle of advisors have already discussed the prospect of sacking Chatu Mongol if it becomes clear that they cannot work with the governor. The only deterrence is that the baht could slide out of control if the governor were to be replaced. For Chatu Mongol, in spite of his idiosyncrasies and venomous remarks, commands respect and international prestige for his reform of the central bank and his management of macroeconomic policy.

By any standard, the governor’s credit rating is higher than that of the government. You might not like him as a person, but you must admit that he is a genius. Moreover, the governor has been known as a “survival animal”. He practised Machiavellian politics to battle artfully against former finance minister Tarrin Nimmanahaeminda and eventually outlasted the man who brought him to one of the most prestigious offices of the land.

There has been talk that if he decides to part with Chatu Mongrol, Thaksin plans to send Dr Thanong Bidaya, his top aide and a former finance minister, to the Bangkhumphrom headquarters of the central bank. With Dr Somkid Jatusripitak looking after the Finance Ministry and the prospect of Thanong going to the central bank, Thaksin would be completely in charge.

The conflict between Thaksin and Chatu Mongol over the interest rate policy is simply a smokescreen. The real motive is to apply political pressure to the governor until circumstances make it impossible for Chatu Mongol to hang on to his job.

However, Thaksin also has his own convictions about the interest rate policy, which needs to be adjusted to stem capital flight from the country. At least, deposit rates should be raised equal or higher than US rates to make the baht more attractive to hold. Otherwise, the country will continue to suffer from financial bleeding and new money will never come back.

The prime minister is believed to have developed this conviction out of his consultations with Dr Virabongsa Ramangkura, the macroeconomist who had expressed alarm over the central bank’s mismanagement. Virabongsa views that if macroeconomic conditions are not stable, there is no way the Thai economy can recover.

Chatu Mongol, with his back to the wall, has hit back. Capital is fleeing Thailand at a rate of US$1 billion (Bt45 billion) a month as a result of banks or corporations paying down their foreigncurrency debts. Capital outflows have also proportionately reduced the country’s external debt, improving the balance sheets of both the private and public sectors. At the peak of the crisis, Thailand’s external debt stood at US$112 billion. Now the debt is more manageable at US$78 billion, given foreign exchange reserves of US$32 billion. Raising the deposit rate would not make any difference because the country is locked in a liquidity trap.

Eventually it boils down to how the government can get the economy going again. Both the prime minister and the governor realise that Thailand is facing a liquidity trap. People or corporations are more inclined to save money than to spend, resulting in Bt600 billion in excess liquidity in the banking system. The fact that companies are operating at 60 per cent of their capacity lends weight to the lack of demand. So the government will have to spend its way to blaze the trail, and hopefully the private sector will follow suit to break this cycle of liquidity trap.

With the widening of their differences in policy and personality, it remains to be seen how much longer the prime minister will tolerate the governor. Chances are that he will not tolerate him for too long.

Thanong Khantong