With his choice of MR Pridi-yathorn Deva-kula as the Bank of Thai-land's new governor, Prime Minister Thaksin Shinawatra has signalled his intention to incorporate fiscal and monetary policies, plus the Thai Rak Thai Party's social platform, into a grand plan for the economy.

The prime minister yesterday sacked MR Chatu Mongol Sonakul as BOT governor, effectively ending their tension and conflict.

Pridiyathorn, president of the Export and Import Bank of Thailand, pledged yesterday to maintain the central bank's independence while working together with the government.

Chatu Mongol signed his own death warrant on Friday, when he challenged the government by sending an e-mail to analysts worldwide, asking they support his low-interest-rate policy. This followed an order from the prime minister last Monday for him to review the low-interest-rate policy, which he blames for causing capital outflows and macroeconomic instability.

The prime minister, riding a wave of popularity in spite of his ongoing trial in the Constitution Court, was furious at Chatu Mongol's lobbying tactic.

On Monday, in a meeting with Finance Minister Somkid Jatusripitak and Virabongsa Ramangkura, the conservative macroeconomist who has come to have enormous influence over the Thaksin government's policymaking, he discussed sacking the BOT chief. They decided to go for Pridiyathorn.

The prime minister's biggest challenge is to get the country out of a liquidity trap and deflationary trend. Amid signs of dwindling exports, he is aiming to introduce fiscal measures to jumpstart the economy.

These would be followed by several measures from Thai Rak Thai's policy platform - from the Thai Asset Management Corporation, the village fund, the People's Bank, and debt-suspension programme for farmers, to various measures for small- and medium-scale enterprises.

To achieve its goals the government will need policy coordination from the central bank, which manages monetary policy. Chatu Mongol's low-interest-rate policy, implemented over the past three years, is seen by the prime minister and his advisers as having caused capital outflow. They believe BOT deposit rates should be raised at least 1.50 percentage points to keep equal to US interest rates.

Thaksin and his advisers believe that if capital movements are not stable, any attempts at fiscal stimulation would be obsolete. Moreover, fiscal stimulation in a floating exchange-rate regime can be ineffective.

Some central bank officials yesterday speculated that the Thaksin government might go for a fixed exchange rate regime, in the style of Malaysia, in order to concentrate on inflating the domestic economy.

Malaysian prime minister Mahathir Mohamad, after sacking his political rival Anwar Ibrahim, imposed capital controls in September 1998, pegging the ringgit at 3.80 (about Bt45) to the US dollar.

There is an increasing likelihood that Thaksin might be tempted to embrace this unorthodox economic policy, as advised by Virabongsa. The game plan is to raise deposit rates, which would not affect the banks' bottom line, since they would be assisted by the Thai Asset Management Corp. Set up to buy out the banks' problem loans, the TAMC will be operational in June.

Analysts say the finance minister has the power to order commercial banks to raise their deposit rates - a prerogative exercised through the central bank.

After achieving a degree of macroeconomic stability, the prime minister could focus on fiscal stimulus, coupled with the economic and social platforms of the Thai Rak Thai.

According to its schedule, the TAMC will start buying out the first of Bt1.2 trillion in non-performing loans in June. State-controlled banks have already been ordered to lend a combined Bt100 billion into the economy. And the People's Bank will be operational in late June, providing micro-lending of Bt15,000 for a one-loan application.

The village fund, which aims to inject Bt10 billion to Bt20 billion into local development in its first year, is likely to provide working capital to villages in July. The debt-suspension programme for farmers has already been implemented. And the flat Bt30 health-care fee has been started in provincial hospitals. Lending to small- and medium-sized enterprises will be boosted soon. There are also plans to boost the capital market by Bt100 billion in matching funds.

Along the way, analysts say, Thaksin is looking to abolish the inflation-targeting policy of the central bank, initiated by Chatu Mongol. He and his advisers are clearly aiming for high growth and maximising social welfare.

"What does inflation targeting mean, when we really have this low growth?" one of the prime minister's advisers pondered.

The last piece of Thaksin's agenda, according to some analysts, could be printing more money in order to "inflate the Thai economy out of recession".

Analysts say the prime minister is taking a big gamble with such an agenda in the hope of winning popular support at the grass-roots, where his policies appeal most. If, through such massive prime-pumping of the domestic economy, the country can escape the liquidity trap and eventually get on the road to recovery, Thaksin will, in theory, emerge as the man who saved Thailand from its economic crisis.

But analysts are quick to warn there are major risks should the entire programme fail to deliver. The result, they say, would be a second crisis: the baht falling through the floor, investors fleeing the country, inflation rising sky-high and public debt going out of control.

Wichit Chaitrong,

Thanong Khanthong

See also A casualty of independence