He went along with a recommendation from his economic czar, Dr Amnuay Viravan, to cut the fiscal budgets for 1997 and 1998 by Bt50 billion each year. By doing so, the government is recognising, at long last, that Thailand has a current account deficit problem that cannot be tackled by monetary policy alone, but must be accompanied by fiscal restraint.

The financial market was indeed surprised by Chavalit's bold action because the cuts hit directly at the pocketbooks of state enterprises and the military, which have always been spared drastic budget reductions.

But the important question is will the Chavalit administration follow through on its commitment to trim the budget. Any failure to reduce spending will disappoint the market, which has been questioning Thailand's habit of living beyond its means.

Government spending accounts for about 35 per cent of the import sensitive bills which give rise to the trade and current account deficits. By cutting military, Thai Airways International and big-ticket infrastructure spending, the government stands to save foreign exchange, the loss of which might otherwise put further pressure on the current account deficit.

Thailand's current account deficit reached a record 8.2 per cent (about US$16 billion or Bt400 billion) of the gross domestic product last year. This high deficit rate is not sustainable, given the slowdown of the economy and growing doubt about economic stability. Earlier, Bank of Thailand governor Rerngchai Marakanond indicated that if the government trims the budget by Bt40 billion, it would narrow the current account deficit from a forecast 7.9 per cent this year to around 7.5 per cent.

Rerngchai merely offered a non-confrontational suggestion, although privately he prefers deeper spending cuts in order to leave room for an easing of monetary policy, which has been punishing Thai businesses and the stock market. Nevertheless, a Bt50-billion reduction in the budget may not be deep enough for the central bank to relax monetary policy because it represents only $2 billion out of Thailand's total foreign debt of $88 billion.