Thai Banking's Role Reversal - Bank of Thailand - Brief Article - Statistical Data Included

Business Asia, June, 2001 by David Derosa

HERE'S A STORY THAT can be filed under the "stranger than fiction" category. Prime Minister Thaksin Shinawatra of Thailand last month fired Bank of Thailand Governor Chatumongkul Sonakul for keeping interest rates too low. Talk about role reversal!

Politicians are normally the ones who are upset with central bankers for keeping interest rates too high. But Thaksin was rip roaring mad at Sonakul, saying that his low interest rate policy was hurting local depositors and the baht.

Thaksin has been Prime Minister for only three months. Here is the situation he faces. Asia is in a downturn based on lower worldwide demand. And Thailand, in particular, is still recovering from the pyrotechnic 1997/1998 Asian crisis. Higher rates, the man says?

The central bank under Sonakul was keeping interest rates low to try to weather the storm. But no, Thaksin wants the bank to raise the interest rate to please bank depositors and to spruce up the baht. Let's just say that economics is not his forte.

Neither is quantitative analysis. When asked last month where he thought the interest rate should be, he responded: "There are different levels -- very low, somewhat low and less low. We have to study the appropriate level." Sounds more like someone judging a limbo-dancing contest and hard to believe this guy is for real.

One of the cornerstones of modern international finance is the concept of central bank independence. The reason why most nations have adopted central bank independence is that they don't want monetary policy to fall into the hands of politicians pursuing their own agendas.

There is also another nasty side to this, as Thaksin has also accused Sonakul of running the Bank of Thailand to please foreign investors.

That doesn't make any sense but it smells bad -- here comes the "us against the foreigners" bit. One thing Asia doesn't need is another Mahathir.

Unless I am very mistaken, isn't the International Monetary Fund (IMF) a big supporter of independent central banking? In fact, isn't the IMF now crusading for Indonesia to allow its central bank complete independence from the national government?

And wasn't central bank independence something that the IMF routinely preached throughout Asia? Actually, being a champion of central bank independence is one of the few issues where the IMF can have a positive influence on developing nations. So what is the IMF going to do about the Bank of Thailand?

Not that Thailand doesn't owe the IMF. More precisely, Thailand is in debt to the IMF up to its eyeballs ever since the 1997 crisis when it borrowed US$14.3 billion ($28.1 billion) out of a total emergency package of US$17.2 billion. This year Thailand is due to repay US$2.5 billion; next year it must pay US$4 billion.

Well, ladies and gents at the IMF, if this is an early taste of Thaksin, I would have to wonder whether you don't have another problem-child nation on your hands.

DAVID DEROSA(*)

(*) David DeRosa is president of DeRosa Research and Trading, and is also an adjunct finance professor at Yale School of Management.