Arguments between two schools of thought on the use of monetary policy to target growth or stability have become intense. However, some have floated the idea of using a “mixed” policy as an alternative.
Thailand should not focus on weakening the baht, as the strong currency reflects solid economic growth amid forecasts of a further global slowdown in growth next year, according to the chief of the United Nations Conference on Trade and Development (Unctad).
Speaking on “New Challenges for Thailand in the New Era of Global Trade and Investment” in Bangkok yesterday, Unctad secretary-general Supachai Panitchpakdi said the global economy is expected to see another slowdown next year, with an expansion of only 2.5 per cent.
He said that this year, the economy will not grow as forecast by the International Monetary Fund. Global trading will face slower growth to only 4 per cent from 5-per-cent expansion in 2011.
“The US economy and the euro-zone crisis will get worse. Hence, Thailand and Asian countries should strengthen cooperation through Asean+3 [China, Japan and South Korea] and Asean integration, as the region is a key global economic driving zone, accounting for more than 50 per cent of the world’s trading,” said Supachai.
Although policy-makers have a right to criticise the Bank of Thailand, the government should allow the central bank to work independently and discharge its responsibilities, he said.
He said the central bank has its own agenda to administrate the financial system and there should not be any political intervention.
His comments came after Virabongsa Ramangkura, the newly appointed chairman of the central bank’s board and a former finance minister, called for a change in monetary policy with a view to boosting economic growth.
Supachai said that inflation and the exchange rate could be managed alongside one another. The central bank has a duty to manage inflation for which it should balance the weighting of goods prices, and spending. So far, inflation is under control and the policy interest rate is also suitable for the economy. The government should continue policies to facilitate economic growth.
In addition, Supachai expressed concern about populist policies, which he feared could create problems for the government’s income in the future.
“Although Thailand has not yet faced a high debt problem, the country will continue to lose income due to many government measures to reduce taxes. The government should start to worry about how to increase revenue in order to ensure liabilities did not exceed revenue, otherwise Thailand could become like Greece,” he warned.
Supachai added that the government would need to reduce the income gap and restructure the taxation system such as by increasing the assets tax.
The government should also be careful about the pledging policy, as it has spent a huge amount from its budget, which is collected from the citizens. To promote sustainable development of the farming sector, it should focus on production development rather than price targeting.
Bank of Thailand Governor Prasarn Trairatvorakul said yesterday that a meeting on Thursday between the BOT’s board members and Monetary Policy Committee saw an exchange of ideas on inflation targeting. The meeting also discussed the assessment results of experts, including an IMF letter that said Thailand’s use of this tool is effective. There is a clear process and we’re able to communicate with the public clearly, he said.
After discussions with BOT board chairman Virabongsa at the Thursday meeting, it was unclear whether he wished to use the exchange rate to take care of inflation, as he participated in the meeting for only an hour because of other commitments, said Prasarn.
“Using the exchange rate as a tool might have some risks. Thailand used that policy to counter the financial crisis in 1997. The BOT targeted the exchange rate and its efforts to protect the rate led to a huge drain of international reserves,” he said.
He added that the BOT has not taken care only of inflation, although it calls it “inflation targeting”. The BOT would also oversee economic growth and the monetary tools it used include the exchange rate.
Former finance minister Thirachai Phuvanatnaranubala said the IMF’s letter to the BOT cited inflation targeting as suitable to Thailand. He told Krungthep Turakij TV’s “Morning News” programme that the government’s focus on populist policy and bringing the policy interest rate down could be difficult.
In his view, if the BOT lacked independence, foreign investors would lose confidence. He also said he agreed with the BOT’s use of inflation targeting as a monetary policy. However, he believes there should be a mixed use of monetary policy.
Supavud Saichuea, managing director of Phatra Securities, said monetary policy could control inflation, depending on whether interest or exchange rates were used as tools to control inflation to be in line with the economic situation of each country.
Exports account for 72 per cent of Thailand’s GDP, while imports are 70 per cent. Hence this should be taken into account while using whichever monetary tool is most appropriate to control inflation. If the country targets export growth at 15 per cent per annum continuously, its export growth in the future might reach 100 per cent.