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Easing social pressure with deficit of 'prudence'


Thanong Khanthong says an expansionary fiscal programme for 1999 is not Keynesian-style of public sector expenditure to spend Thailand out of the economic recession.


The Thai government's decision to post a spending deficit of Bt25 billion on top of the Bt800-billion 1999 fiscal budget is hardly Keynesian-style public sector spending to lift Thailand out of the economic crisis.

For the spending deficit represents only half a per cent of the Bt5-trillion Thai economy. This amount is by far not large enough to stimulate the economy, which is badly in need of a bigger dose if it is to avoid suffering from a depression. If the spending deficit is to make a real difference, it must amount to at least Bt400-Bt500 billion to fill in the liquidity crunch.

Rather this slight expansionary fiscal policy will be aimed at easing the social pressures arising from growing unemployment, falling incomes and the higher cost of living. The spending deficit will be strengthened with Bt21 billion in external aid from the World Bank, the Overseas Economic and Cooperation Fund and other organisations. The foreign aid will flow into the country by next month.

Overall, the Thai government still demonstrates its commitment to walk the tough road by sticking to fiscal and monetary discipline as prescribed by the International Monetary Fund. In the initial phase of the IMF support programme, designed in August last year, Thailand was required to post a 1 per cent budget surplus equal to the GDP. This surplus was intended to pay for the cost of financial sector restructuring and to show foreign investors that Thailand was willing to live within its means.

But a radical fiscal consolidation has proved counter-productive to the private sector-driven Thai economy, forcing the IMF and the Thai government to rethink the support programme by deciding to give the fiscal policy more breathing room. The third letter of intent, worked out in February this year, allowed the Thai government to post a 2 per cent budget deficit in order to help reduce the social tension.

Monday Prime Minister Chuan Leekpai would not spell out how his administration plans to finance the budget deficit nor would he disclose the programmes that the Bt25 billion deficit would be earmarked for. But it is likely that the deficit will be financed by the treasury reserves and the spending will go to supporting social programmes under the jurisdiction of the Agriculture Ministry, the Interior Ministry, the Labour and Social Welfare Ministry and the Education Ministry.

The spending deficit marks for the first time in more than a decade that the Thai government has had to dip into the red to relieve the domestic pressure and to give the economy a slight fillip. For the IMF, there is a danger of rushing to flout the fiscal discipline at a time when foreign investors' confidence has yet to be fully restored. An argument has been put forward that the tightened fiscal and monetary policy introduced since the outset of the programme has succeeded in bringing stability to the Thai economy to a certain level, with a measure of foreign investors' confidence. This can be seen by a stable foreign exchange rate at Bt38-Bt39/US dollar and a successful equity launch of the Thai Farmers Bank and Bangkok Bank in March and April respectively.

''We have walked the right path,'' said Dr Phisit Lee-ahtam, the deputy finance minister in a recent interview. ''We actually would have liked to have a easier fiscal policy from the start but the financial markets would not allow us to do so. That was the constraint. By sticking tight to the IMF support programme, we have been able to prove to the foreign investors and creditors that Thailand really has a future. Otherwise, the Thai Farmers Bank and the Bangkok Bank would not be able to raise their capital in the international market.''

Now is the time to release the tight grip, but very gradually in both the fiscal and monetary policy and also in view of the political and social turmoil in Indonesia. The tough policy remedies will be gradually eased, which is likely to be evident in the fourth letter of intent that the Cabinet is scheduled to deliberate on Tuesday.

Already MR Chatu Mongkol Sonakul, the Bank of Thailand governor, signalled that interest rates will remain high to tackle foreign exchange stability and to address the country's foreign debts of more than US$90 billion. But he said short-term rates have fallen gradually according to the economic conditions, as evidenced by a fall of the repurchase rate from 25 per cent to 17-18 per cent.

''The trend of interest rates is to go down further. If we consider the foreign debt level and inflation, we can expect that over the next two months, price pressure will reduce, which will allow the authorities to ease the interest rates,'' Chatu Mongkol said.



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