Repaying IMF: Another marketing ploy

Thanong Khanthong, The Nation, Asia News Network, Bangkok

Prime Minister Thaksin Shinawatra would like to show off Thailand's financial strength by announcing that the Kingdom will be pre-paying all the outstanding loans of US$4.8 billion owed to the International Monetary Fund by July this year. There is indeed an underlying political agenda behind his decision to remove Thailand from the yoke of the IMF and restore its financial integrity.

Thaksin's Thai Rak Thai Party conducted a vigorous anti-IMF campaign during the run-up to the last general election on Jan. 6, 2001. It blamed the IMF for aggravating the Thai economic crisis and for advocating that foreigners buy up Thai assets on the cheap.

By painting the Democrats and the IMF as the culprits in the 1997-1998 crisis, Thai Rak Thai rode on a crest of nationalism to win their landslide election.

Thaksin would like to claim that it is his government that succeeded in liberating Thailand from the IMF's obligations. Repaying all the debt to the IMF would add more weight to Thaksin's Asia bonds, which will be launched this year at the second meeting of the Asia Cooperation Dialog (ACD).

At the ACD meeting, member countries will be asked to contribute a small portion of their international reserves to set up a regional fund, which will be used to subscribe to the Asia bonds. Then Thaksin will host the Asia-Pacific Economic Cooperation forum with the status accorded to his regional role.

Yet our memories should not fail us. Thailand sought a $17.2- billion rescue program from the IMF in August 1997 during the Chavalit government.

At that time, when Thaksin served as a deputy prime minister, the country's foreign-exchange reserves were depleted in the Bank of Thailand's futile defense of the fixed exchange rate system. Without the reserves, the baht could have gone anywhere from Bt50 to Bt160 or Bt200 to the U.S. dollar.

The IMF was brought in to restore confidence in Thailand's financial solvency. The IMF, international organizations and other governments extended a $17.2-billion credit line to Thailand, which would only be able to draw on this credit line on a quarterly basis to shore up its reserves once it met the tough IMF reform conditions.

The Democrat government implemented most of the painful and very unpopular reforms, with mistakes here and there, yet overall Thailand emerged from the depths of the crisis and has been headed toward the path of recovery since 1999. By that year Thailand had already graduated from the IMF program because it no longer needed the IMF's credit line.

In total, the IMF program was designed to cover a period of six years. In the first three years Thailand could draw on the credit line and undertake financial and structural reforms. In the last three years, Thailand would repay the loans.

From a macroeconomic standpoint, Thailand is in a position to pre-pay all the outstanding loans of $4.8 billion. Of the $17.2 billion IMF package, Thailand actually withdrew only $12 billion to prop up the baht.

And Thailand has made progress in its financial and structural reforms, so that it has so far repaid $7 billion to the IMF. There remains $4.8 billion in outstanding loans. The last payment to the IMF is due by May 2005.

Given the high level of Thailand's international reserves of $38.6 billion, a prepayment of $4.8 billion by the middle of next year should not have any significant impact on confidence.

But there are a number of factors that should be taken into account. First, Thailand's total external debt of $60 billion remains high, albeit manageable. The private sector will continue to repay its foreign loans, which would periodically put pressure on the baht.

Second, Pridiyathorn Devakula, the Bank of Thailand governor, has repeatedly warned of his fears about the looming war between the U.S. and Iraq. If that happens, it is likely that investors would go for safe havens by holding hard currencies such as the U.S. dollar.

The governor has rebuilt international reserves from around $31.6 billion in the middle of last year when he took office to $38.4 billion. This amount should represent Thailand's last stronghold to stabilize the baht in the event of war.

Third, if there is a war in the Middle East, it would significantly affect Thailand's external account. The surplus from either the current account or the balance of payments might be reversed if our exports go into a tailspin or capital takes flight from the country again. Although most analysts try to discount this factor, it could happen.

Fourth, the foreign-exchange market is likely to face volatility next year. As pointed out by Pisit Lee-ahtam, the president of TT&T Plc, Japan will be resorting yet again to a weak yen to boost its exports after it exhausted all of its stimulus measures to bring its economy back on track.

A weak yen will create further foreign-exchange fluctuations among the regional currencies, which move in alignment with the yen.

Overall, the issue of prepaying the loans to the IMF looks more political than a routine practice. And Thaksin knows how to take advantage of the timing. He will never easily exhaust his marketing gimmicks.