Conflict deemed to be unhelpful for solutions
Local economists have voiced disappointment over the most recent public debate on baht appreciation and the use of monetary policy to address it.
The jibes by the Finance Ministry and the Bank of Thailand over the matter, culminating in the ministry filing a letter to the central bank’s board demanding it take responsibility for operating losses arising from a static interest rate, have not been helpful for creating better management of foreign capital inflows, the economists told a forum held by the Thailand Development Research Institute (TDRI).
The discussion flared up after the baht surged ahead of regional peers in the first few weeks of January after heavy inflows, particularly in the bond market.
However, the Thai currency has eased since mid-January and is now up by 2.5% against the US dollar for the year.
Assoc Prof Somprawin Manprasert, deputy dean of Chulalongkorn University’s economics faculty, said the baht level under the flexible exchange system should not be a point of concern as long as it moves in line with economic fundamentals.
“Thais may be familiar with having a weak currency to help exports,” he said. “We should perceive that the better the goods we make and sell in the market in the long term, the stronger the baht will be. It’s not completely correct to hope for a weak baht to increase competitiveness.”
Pipat Luengnaruemitchai, assistant managing director of Phatra Securities, said the public debate should focus on each option and its associated cost – letting the baht strengthen freely, the central bank’s purchase of foreign currencies, interest rate reduction and capital inflow management measures.
“The interest rate level clearly affects inflation and expectations,” he said.
“But it also has an unintended effect in increasing incentives for foreign capital inflows. This is where the debate should focus.”
Somchai Jitsuchon, a senior economist at the TDRI, said the Finance Ministry should concern itself with the country’s business cycle and the limitations of monetary policy rather than jumping into a debate about the interest rate’s relationship with inflows.
Assoc Prof Vimut Vanitchareanthum of the University of the Thai Chamber of Commerce said conflicts can be mitigated if fiscal policy is made with an awareness of economic stability rather than leaving it to the central bank to raise rates to cool down the economy.
“It’s difficult to avoid conflict between the government and the central bank as long as the former keeps borrowing to stimulate the economy, with the central bank needing to be aware of touching the brakes,” he said.
Assoc Prof Vimut said the central bank should be assured of independence in pursuing its agenda of price stability.
“The country’s foreign currency earnings from exports should be used to improve the capability of adopting technology through economic development and human resources,” he said. “This is a bigger issue than all the talk about the baht.”
First published in the Bangkok Post, 2 March 2013