IMF lets Bangkok pump $1b into ailing economy

Business Asia, April 5, 1999

Thailand, reeling from its worst recession in a generation, will pump an extra 53 billion baht (US$1.4 billion) into the economy through increased government spending and possibly double that amount with tax cuts.

In its latest agreement with the International Monetary Fund (IMF), approved last month by the Cabinet, Thailand said it would boost its 1999 budget deficit by a fifth to 6 per cent of gross domestic product and slash consumer-oriented taxes.

The increased deficit, about 53 billion baht, will be funded by aid from Japan and the World Bank. The Government had yet to make a decision on tax cuts, but The Nation newspaper reported they would be worth about 77 billion baht.

The revisions are another signal that Asian aid recipients are setting their own policies amid widespread criticism that the IMF's original remedies of higher interest rates and government surpluses exacerbated recessions in the region.

Still, with an economic contraction last year of 8 per cent and exports that are falling short of government targets, the pump priming may not be enough, analysts said.

"The effect of government spending will be compressed by weak demand from consumers and investors and excess production capacity," said Mr Desmond Supple, an economist at Barclays Capital.

Another obstacle was the unwillingness of banks to lend because of mounting loan defaults, he said.

The Nation newspaper reported that Thailand's value-added tax would be slashed to 7 per cent from 10 per cent, and all income tax rates would be cut by 2 percentage points. The new graduated personal income tax rate would range from 3 per cent to 35 per cent for top earners, the report said.

"This package is aimed at strengthening the social safety net for those most affected, especially the rural poor, and boosting domestic demand through labour-intensive investment projects," Finance Minister Mr Tarrin Nimmanahaeminda said.

"Whether the IMF had a dignified retreat or it was shooed out" because of its past policy failures, "sovereign governments in the Far East now had a great deal more latitude and freedom to pursue more liberal fiscal and monetary policies," said Mr Paul Schulte, head of Asian research for ING Baring Securities.

In August 1997, the IMF arranged an emergency credit line for Thailand, which a month earlier devalued its currency after spending more than 90 per cent of its foreign reserves in a failed defence of the baht.

The moves triggered a series of banking and currency crises in many emerging market countries. Indonesia, the Philippines and South Korea, among others, also received IMF-led credits. Each of these countries has recently announced plans to boost government spending.

Thailand has tapped about two-thirds of that IMF-led credit. The extra spending and tax cuts will be augmented by private aid programs from Japan and the World Bank.

Thailand: Facts & Figures

Capital:                   Bangkok

Population:   60.03 million (1998)

GDP real growth:      -0.4% (1998)

GDP per capita:     US$6940 (1998)

People per telephone:         13.5

Sources: Bloomberg, CIA