Apart from its failure to stem the massive influx of foreign capital over the past three years which led to a bubble economy, the policy designed to propel Thailand into a regional financial centre also contributed to the present financial crisis.

As part of the Financial System Masterplan intended to turn Bangkok into the region's top financial centre, banking authorities were to hand out offshore banking licences to foreign banks which would use Bangkok as a funding centre to mobilise Eurodollars for lending in the domestic (out-in) and foreign (out-out) markets.

This enterprise is known as the Bangkok International Banking Facility (BIBF) and then finance minister Tarrin Nimmanahaeminda hoped it would transform Thai businesses into sophisticated regional players through the sourcing of cheap Eurodollars to support their enterprises.

Yet little did he and the banking authorities realise that in Thailand's backyard was the formidable Republic of Singapore, which had already made significant headway in becoming a financial centre for Southeast Asia. All the big banks were there, just waiting to make their influence felt in Thailand even without the need for physical presence.

Offshore baht trading was to take off in full stride in Singapore, equipped with a freer financial environment and better telecommunications infrastructure. The foreign banks there would be more than happy to stuff dollars down Thailand's throat.

Now baht trading in the island republic is 14 times larger than that in Bangkok. Last year, daily trading of the Thai baht in Singapore reached US$14 billion (Bt350 billion), of which spot markets accounted for $5 billion and swap markets $9 billion.

With this kind of financial muscle, Singapore is holding Bangkok to ransom, dictating not only the foreign exchange markets in Thailand but also the money markets.

The flaws in the BIBF scheme lie in the failure of the Thai authorities to also promote the development of foreign exchange markets in Thailand, which, apart from banks, would include such players as finance companies and securities companies.

The authorities were then, as they are now, too cautious to allow non-banks to participate in the foreign exchange market, viewing it as solely the domain of banks.

The idea behind this policy was deeply flawed. In Singapore, most of the trading of foreign currencies is conducted by brokers.

While the BIBF scheme was in the making, Tarrin had to deal with the immediate problem of stock market manipulation. That was in late 1992. Tarrin uttered the words "bubble economy" several times at the height of the sensational crackdown on "stock king" Sia Song Watcharasriroj and his associates, reflecting his profound concern over the artificial wealth of the Thai economy.

Yet his statement fell on the deaf ears of financial and securities executives, bankers and property developers, caught in the illusory trap of the era of excess money. The Thai economy was invincible, or so it seemed.

With this sense of over-optimism, there was little attempt to pay attention to the causes of stability. Financial liberalisation, which took off with a great fanfare in 1992, would turn Thailand into a favoured place for hot money. Moreover, the fixed exchange rate regime also allowed the foreign capital to flow into Thailand without exchange risks.

As a result, the money supply has grown more than 20 per cent a year over the past three years. Net foreign capital inflow jumped from Bt265.89 billion in 1993 to Bt305.85 billion in 1994, to Bt545.12 billion in 1995 and Bt391.42 billion in the first nine months of 1996.

International reserves expanded from $21 billion in 1992 to $39 billion in 1996. The current account deficit, the gap between domestic savings and investment demand, has topped more than eight per cent of the gross domestic product (GDP) every year since 1994.

In the end Thailand racked up $89 billion in external debts. With this kind of spectacular monetary growth it was only a matter of time before disaster struck. Problem loans were ready to mushroom as a result of any jolt in the economy or wavering of confidence.

The BIBF banks would complicate the problems by booking massive assets in Thailand in order to impress Thai banking authorities, who were promising them full branch licences in return. Starting from scratch, the BIBF banks increased their out-in exposure to the Thai market from Bt192.5 billion in 1993, to Bt452.5 billion in 1994, 687.5 billion in 1995 and Bt788.24 billion in the first 11 months of 1996.

Worse still, more than half of the loans were short term, with a maturity of less than one year. The Bank of Thailand is rectifying its mistake by forcing the structure of the BIBF loans from short term to longer term. Now short-term loans account for 47 per cent of the total.