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IMF expected to impose tough conditions


Vatchara Charoonsantikul and Thanong Khanthong offer a guide to the International Monetary Fund's stand-by credit line as part of a support package to Thailand's economic and financial reform programme.

Thailand will be seeking stand-by credit from the International Monetary Fund (IMF) to cure its economic ills. What does this IMF aid package mean?

The IMF will be approving a stand-by credit line for Thailand in support of the government's economic and financial reform programme. The stand-by credit line will authorise the government to draw an amount of money, yet to be determined, in the IMF's currency, the special drawing right, or SDR. Drawing on this money will take place annually until the end of the programme, which may last three to five years. Virabongsa Ramangkura, a former finance minister, believes that the economic and financial reform programme may last five years.

How is the IMF money going to be spent?

Finance Ministry officials working on this debt creation programme are grumbling that fiscal discipline, in principle, will be flouted with this borrowing since the government has no need to use the money at all.

The government owes about US$20 billion in foreign debts, all of which are long term. But the private sector is broke and is due to repay over the next few months some US$20 billion to US$50 billion in short-term debts to foreign creditors. This amount already exceeds the country's international reserves, putting the country at risk of default.

The IMF's stand-by credit line will assure foreign creditors of Thailand's creditworthiness, so that they will have more confidence to roll over their loans or keep the money in Thailand.

The Bank of Thailand will take delivery of the IMF's stand-by credit, which will become Thailand's international reserves. Backed by the IMF's stand-by credit, the central bank will have some breathing space to print money.

What is going to happen with Thailand's fiscal and monetary policy under the IMF's guidance?

The IMF will certainly advocate fiscal consolidation. The government must try to achieve a balanced budget, by either making spending cuts or implementing a tax hike.

The government may bargain for a budget deficit, but it must have a specific time-frame to balance it. There will no more government subsidies for any white elephant projects.

There has already been talk of raising value-added tax (VAT) from seven per cent as a means to increase the government's sagging revenue. Tax experts have warned that a VAT increase to eight or nine per cent may be tolerable, but a 10 per cent increase would trigger a tax revolt.

Other government revenue enhancing programmes are severely limited amid the economic downturn. Upward pressure of personal income tax, corporate income tax or the withholding tax is likely to be futile.

On the monetary side, interest rates will have to be kept high to promote savings and curb inflation. Money supply will be put under surveillance, growing possibly at two-to-three per cent a year above the nominal economic growth.

This is aimed at reining in inflation. Now every Bt1 million pumped by the Bank of Thailand into the system will erode the value of the baht by 20 satang.

The IMF will also provide technical assistance to the central bank in its effort to reform its supervision and regulation of the banking system. An economy cannot function efficiently without a strong banking system. Unlimited credit line support to ailing finance companies will have to come to an end.

Will the IMF's package help stabilise the baht?

The financial markets reacted positively to the Thai government's announcement that it will work with the IMF to undertake economic and financial reform. Yesterday the baht eased up to Bt31.80-Bt31.90 against the US dollar in local spot trading, up from the morning session of Bt32.05-Bt32.20/US dollar.

The presence of the IMF will shore up investors' confidence in the government's economic stabilisation package, scheduled to be approved by the Cabinet on Aug 5. With the IMF's endorsement, the government will have foreign investors' confidence to pursue its economic stabilisation programme.

What is going to happen to Thai businesses or the labour market in particular?

Forget about economic growth, which will shrink to two-to-three per cent, if not negative growth. There will be widespread corporate bankruptcies due to the sharp contraction of the economy. The government will have to be prepared for the worst, particularly unemployment, which will trigger political tension and social strife.



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