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Low inflation a boon to recovery

June 16, 2000

THANKS to subdued inflation, Thailand should be able to maintain its low interest rate environment over the next one to two years to support the economic recovery, said Ranjit Teja, division chief of the International Monetary Fund's (IMF's) Asia-Pacific Department.

Thai inflation, despite higher oil prices, is likely to fall below 2 per cent this year, compared with a previous estimate of 2.5-3 per cent. This inflation level will give the country's monetary authorities breathing room to maintain a low interest rate environment, Teja said.

"NPLs (non-performing loans) will not be a binding constraint on the economic recovery. We don't see the recovery as being interrupted by the NPLs." Ranjit Teja

Teja is heading a mission to monitor the progress of the IMF's support programme for Thailand.

On Monday Thailand will formally graduate from the three-year programme, which was designed to restore confidence in its balance of payments and to reform its financial and economic system.

Over the period, Thailand has withdrawn about US$14 billion (Bt546 billion) in standby credit from the total IMF rescue package of $17.2 billion.

Thailand's economic recovery is on track, with a growth rate estimated at 4.5-5 per cent, Teja said. He added that the figure could end up being higher.

The Bank of Thailand is scheduled on Monday to release data on Thailand's economic performance during the first quarter of this year. Data on first-quarter performance will help authorities provide a more accurate forecast for the entire year.

Teja said the recovery has been driven by exports and domestic consumption and was possible despite persisting problems in the banking sector and with corporate debt restructuring.

"NPLs (non-performing loans) will not be a binding constraint on the economic recovery. We don't see the recovery as being interrupted by the NPLs.

"But that does not mean that Thailand can become complacent. The problem will have to be addressed seriously over the next three years," he said.

Post-IMF programme, Teja added, Thailand will need to further address banking sector reform, reduce corporate debts and get the corporate sector going again.

On the fiscal side, Thailand will need to bring down its budget deficit from the current 5-6 per cent of gross domestic product (GDP) to 2-3 per cent, Teja said.

Furthermore, it will also need to improve the efficiency of its tax system as part of this fiscal consolidation, he said.

Teja did not ring an alarm bell over the rising public sector debts, which have reached 60 per cent of GDP. He admitted this is a high figure but not necessarily exorbitant.

If the economic recovery remains on track, the country will be able to bring the public debts down to a more manageable level over the next four to five years, he said.




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