Looking into the IMF mirror: Thailand's experience

Looking into the IMF mirror: Thailand's experience

BANGKOK: Today is the fourth anniversary of the day that Thailand joined the International Monetary Fund program following the economic and financial crisis of July 2, 1997, when the baht was untied from the US dollar. Some may remember that it was a popular move because confidence in the government of the day to handle the sinking economy was very low. But many may also remember that the credit line extended to Thailand from the IMF to weather the economic storm came not only with bitter medicine but some wrong doses as well. When the last government decided to graduate from the IMF program last year, it was a fairly popular move.

In truth, nobody likes creditors who are always going to make sure that the money they have lent will be properly spent and that customers have the ability to make repayment. And to be outside rather than under the IMF umbrella is something a country should strive for. The ultimate message is: "Take good care of your macroeconomic management, and you will be free from external control."

Thailand today remains a member of the IMF and is repaying its loan to the Washington-based institution. The IMF still makes regular comments on the state of the Thai economy and public policies. And the agency does make some direct comments when the situation calls for it, regardless of what the government of the day thinks.

We should look at such comments as a mirror on the economic policies that the government is subjecting the country to. There shouldn't be any hard feelings or overblown reactions. After all, economics is also an art and not just a science. Furthermore, not many experts in the country want to speak out against the government at this time. So there is an even greater need for alternative views from the outside.

Moreover, if we have learned anything from the 1997 crisis, it is not to be arrogant and close our ears. Not that the IMF did not make key mistakes in handling the Thai crisis. The most serious one was to pursue the traditional policy of jacking up interest rates, which led to a further plunge in the economy. But many may also remember that the IMF had repeatedly told the Thai authorities -- both ministers and central-bankers -- to detach the baht from the fixed exchange system. The advice was ignored and resulted in a bigger crisis than anyone could have imagined.

Last Friday, the IMF came up with a review of the Thai economy. It seems to have given broad approval, though not without reservations, to the economic policies of Prime Minister Thaksin Shinawatra. Thaksin earlier had been angry at the IMF's counter-argument to the government's move to raise interest rates. The IMF is now careful in its choice of words.

"Most directors expressed concern at last June's increase in interest rates, which was undertaken for objectives outside the scope of the inflation-targeting framework, and in the absence of inflationary pressures cautioned against further increases which could undermine policy credibility, threaten the recovery and jeopardize the financial position of banks and corporations," the IMF said.

IMF directors also welcomed the Thai authorities' stated intention not to increase interest rates for the rest of the year, but the notice added: "In view of the weakening recovery, some directors thought that lowering interest rates shouldn't be ruled out."

Speaking in response to the IMF statement, Thaksin told reporters on Friday that there was no need for a reduction in interest rates at this time, because rates were still very low.

Another difference in degree, if not in principle, appeared over the issue of central-bank independence. The IMF urged the Thai government to press ahead with legislation to enhance the agency's independence.

In response to the IMF statement, Finance Minister Somkid Jatusripitak said: "The government hasn't intervened in the central bank's work. However, the central bank's independence must be under the framework of the government's overall policy."

We should regard these exchanges as healthy. But ultimately, one side should not stay stubborn if the other side is right.

-- The Nation/Asia News Network