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On populist policies and fiscal discipline
Publication Date : 09-02-2013
The letter sent by Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong to the Bank of Thailand's (BOT's) board of governors accusing them of negligence for failing to impose a rate cut cannot be seen in any other way except a government attempt to intervene in the central bank's operations.
Kittiratt, in his capacity as finance minister, might be entitled to put pressure on the central bank, but there is an ethical question here as to whether the government is "threatening" the BOT to make certain decisions to serve the government's purpose.
Of course, governments elsewhere have tried to convince central banks to implement monetary policy to respond to their policy platforms. The Japanese central bank recently implemented "monetary easing" in response to Prime Minister Shinzo Abe's attempt to fix the sluggish economy. The US Treasury is pumping money into the system to tackle the massive deficit and unemployment, which were both high on the agenda of President Barack Obama during his election campaign.
But the decisions of those "central banks" are based on factual information and the thorough consideration of monetary experts. Economists may have different approaches when it comes to economic theory and how to boost sluggish economies. They may also be proved to be wrong later. But monetary decisions should be made in good faith to ensure the credibility of the fiscal policy. Any critical decision affecting a nation's financial interests should not be overly influenced by people in power.
Kittiratt said he was concerned over the BOT's accounting loss of over 530 billion baht (US$17.7 billion) at the end of 2012, largely incurred through foreign-exchange-stabilisation measures. Kittiratt said he wanted BOT chairman Virabongsa Ramangkura to relay his concerns over the huge loss to all members of the board. But it is obvious that the man in the hot seat is BOT governor Prasarn Trairatvorakul.
The letter from Kittiratt has only reaffirmed the market perception that the government is trying to rattle Prasarn's seat. Kittiratt has tried to deny this. But that might not matter, since the market has bought the perception, affecting the credibility of the monetary institution.
This doesn't mean Prasarn is error-proof. The BOT's approach to ensure monetary stability can be debated. The central bank might have to look at more effective ways to protect stability by, for instance, reducing the weight of US dollars on the movement of the baht, and placing more importance on regional currencies.
At any rate, independent economists and international institutions such as the International Monetary Fund have apparently approved the performance of the BOT and have not raised the issue of the bank's accounting loss as a severe matter. They generally believe that the process is transparent and explainable because it is a means to ensure stability.
In fact, a cut in the interest rate might not have a direct effect of weakening the baht, as Kittiratt hopes to see. An interest rate cut may not directly influence capital inflow. No one can guarantee if a substantive cut would prevent the inflow of foreign capital. If the timing of a rate cut is not right, especially if household debts are rising, it could soon lead to economic bubbles.
Kittiratt cited the issue of accountability in the letter to the BOT board. And this is the same question that should be asked of the Finance Ministry regarding losses at the state-run bank. The government is facing dire losses at the Small and Medium Enterprise Development Bank (SME Bank) partly because of its extravagant populist policies. In addition, politicians tend to put pressure on state banks to relax loan requirements to some borrowers who might not have the capacity to service their debt. This has led to a proposal to fix high non-performing loans at SME Bank by merging it with another state bank, the Government Savings Bank.
The Finance Ministry will have to be fully accountable for the losses of state banks like SME because the banks' staff has to follow the instructions of the government, which aims only for short-term results. The Bank for Agriculture and Agricultural Cooperatives is also facing huge losses because of the government's rice price subsidy policy, which is also believed to be blighted by massive corruption.
These state-run banks are directly under the supervision of Kittiratt. And his accountability and responsibility are called for. Instead of sending letters to the central bank, Kittiratt should spend time looking into these state-run banks before their non-performing loans increase and affect the credibility of the entire system.