Thais tackle their economic problems

Press, 11 April 1978, Page 16

Thais tackle their economic problems

By

RICHARD NATIONS,

Bangkok correspondent for the “Financial Times'”

After successful initiatives to improve relations with Thailand’s Communist neighbours in Indo-China, the four-months-old Government of Genera) Kriangsak is now turning to the country’s chronic economic problems. The rupture of the 15-year link between the dollar and the Thai baht, combined with a stiff new schedule of tariffs on “consumer luxuries.” is directed at what planners consider Thailand’s most urgent economic problem — its rising oil bill and withering foreign exchange reserves.

Hints from the country’s economic planners suggest that these measures will soon be followed up by a comprehensive incomes' policy to raise industrial and agricultural wages as well as tough measures to save fuel.

Dr Phisit Pakkasem, a director of Thailand’s Economic and Social Development Board and one of the key architects of the new policies, lays the blame for the current balance of payments “crisis” squarely on the escalating price of oil. Before the “O.P.E.C. shock” four years ago, Thailand’s oil bill accounted for only 4 per cent of total imports. Last year the figure was 23 per cent, at $l.l billion. By the end of the decade at current rates of consumption, the cost of petroleum is expected to account for a third of all imports. “There’s really not that much more we can do on the export side. Last year we

sold abroad almost everything we’ve got except my underwear,” a leading foreign trade official commented. Moreover 1976 saw the last of over a decade of about $1.5 billion in American military aid transfers. There is thus little promise that future capital inflows will offset the growing trade deficit.

With $l.B billion at the end of last year. Thailand’s foreign reserve position was healthy by any standards. But there is alarm that the current drain of reserves will reduce the country to the equivalent of less than two months’ imports by the end of this year. It is to staunch the haemorrhage — perhaps exaggerated by the central bank itself — that the Government feels it has little choice but to raise tariffs against the broad range of middle-class consumption items from Mercedes and air-conditioners to household appliances; footwear, textiles, motor parts and other imports with domestic substitutes have also had duties imposed on them of up to 100 per cent.

Thais are keenly aware that they would be' the net losers if protectionism took hold world-wide, and they certainly do not want to provoke retaliation. However, as Mr Sunthorn Hongladarom, Deputy Minister for Economic Affairs, pointed out, “ours is a small, exportoriented, and open economy. Even with these increased tariffs we remain one of the

most liberal economies in the region.” As long as the Bretton Woods agreement held up and most of Thailand’s trade was with the United States the dollar-baht link was a wise policy, preserving domestic price and foreign trade stability. But since 1973 the trade weighted effective exchange rate of the baht has declined between 15 and 20 per cent annually as the dollar has fallen on foreign exchange markets and Thailand’s trade patterns have shifted decisively towards Japan and Europe. This means imported inflation, more costly debt management for non-dollar loans and a proportionately higher trade and payments deficit. Nor could policy makers ever totally dispel the fear that the O.P.E.C. countries would one day sell their dollar holdings and that the baht would tumble in sympathy. By quoting the baht’s value from an as yet undisclosed “bundle of currencies” from among Thailand’s major trading partners, the Bank of Thailand has given itself a powerful instrument of economic policy. For three months it will intervene to keep the baht at the present dollar parity of 20.30 baht, establishing in the meanwhile what the market pressures are. It will then hold the baht at a rate to be announced in terms of a basket of currencies. Some bankers in Bangkok believe that as a result the dollar rate will go to around 18 baht.

Although this means imports will be cheaper, officials hope the tariff walls against some consumption items will prevent revaluation aggravating the trade deficit. If consumers buy imports in spite of the higher price, the Government will gain more revenue deficit, and reduce inflationary credit expansion caused by borrowing from the central bank. Moreover, the lower costs of imported capital goods and raw materials should encourage investment and partially offset the Bank of Thailand’s present tight credit policy pushing current prime rates from the commercial banks to near II per cent. Thailand’s traditional markets for rice, sugar and maize are not expected to be discouraged by higher prices following revaluation. But the depressed textile industry will definitely need Government help to remain competitive abroad.

The local press is already attacking the new moves for threatening to aggravate the current 8.5 per cent annual inflation rate, and indeed profiteering is uncontrollable. But when General Kriangsak came to power four months ago he said he was going to take this year as Thailand’s consensus dictator to force long needed reforms—however unpopular — before national elections scheduled early next year.

Observers think the measures will be in line with Thailand’s traditional economic priorities—a stable cur-

rency, high international reserves, and a good credit rating abroad. The move is also a sign that the Cabinet's socially-minded technocrats have the ear of the country’s premier-cum-supreme commander. But it is the comprehensive energy and incomes

policy now being thought out that will prove the real test of whether General Kriangsak’s overwhelming power will ultimately be justified in terms of the social progress he himself promised when seizing power four months ago.