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Dear
friends,
The
current
Thai
economy
is in
the dual
state of
inflation
and
slowdown
due to
the
pressure
of the
rising
oil
prices.
The
monetary
policy
can thus
be
characterized
as ‘a
jump
from
fire to
the
frying
pan’. In
other
words,
if the
Bank of
Thailand
applies
a strict
fiscal
discipline
to rein
in
inflation,
it will
only
aggravate
economic
slowdown.
But if
it opts
for
leniency
and
expansive
fiscal
path to
stimulate
the
economy,
it will
risk
exacerbating
the
inflation.
Problems
thus
arise
when the
Bank of
Thailand
is
regarded
as
employing
an
excessively
tight
monetary
policy
by
continually
augmenting
the
interest
rate.
Such a
sustained
rise of
interest
rate is
widely
debated
as
potentially
aggravating
the
economic
slowdown,
while
the Bank
of
Thailand
maintains
that it
merely
attempts
to ‘nip
the
inflation
in the
bud’
before
it
becomes
irreversible
or
uncontrollable.
The
central
issue of
such a
policy
conflict
is
therefore
the
question
as to
which
goal
should
those
responsible
for
national
economic
management
aim for.
To
answer
this
question,
it is
necessary
that we
take
into
account
all the
current
economic
contexts
in
conjunction
with
their
future
trends.
From my
analyses
of
various
data
sources,
I came
to a
conclusion
that
economic
management
of the
second
half of
2006
should
emphasize
the goal
of
economic
expansion
rather
than
that of
inflation
control.
The
rationale
behind
that
conclusion
is the
observation
that the
inflation
in the
second
half of
this
year is
likely
to be
more
benign
than the
problem
of
economic
slump.
Although
the Thai
economy
in the
first
quarter
of 2006
has
expanded
as much
as 6%,
most
state
economic
agencies
predicted
that the
economy
in the
second
half of
this
year
will
significantly
slow
down—causing
all
‘schools’
of
economic
forecast
to
adjust
the 2006
economic
growth
projection
downward.
Since
the
inflation
rate is
predicted
to
decrease
in the
second
half of
this
year,
the
average
annual
inflation
rate
therefore
ends up
lower
than
that of
the
first
half of
the
year.
The Thai
economy
in the
second
half of
this
year
will be
impacted
by two
main
factors—the
delayed
allocation
of the
2007
budget
and the
global
oil
price.
According
to the
impact
analysis
involving
these
two
factors
using
computable
general
equilibrium,
I found
that
economic
expansion
will
suffer a
downward
turn due
to the
negative
impacts
of these
two
factors.
However,
both
factors
will
have a
contrary
effect
on
inflation,
thereby
offsetting
the
downward
trend in
economic
expansion
and
resulting
in only
minor
increase
in
inflation
rate (see
Table
1).
The
delayed
general
election
has
caused
the
budget
allocation
to be
postponed
for at
least
three
months,
which
means
that
there
might
not be
any
budgetary
disbursement
in the
last
quarter
of 2006—the
equivalent
of
approximately
of 70
billion
baht
that
could
have
been
injected
into the
economy.
With the
budget
allocation
postponed,
the real
GDP
growth
will
decrease
by 0.41%
from the
initial
forecast,
while
the oil
price
that
rises by
15% to
US$ 65 a
barrel
will
further
cut the
GDP
growth
by
0.51%.
The two
factors
combined,
therefore,
will
slash
the 2006
economy
by as
much as
0.92%.
As for
the
impact
on
inflation
rate,
the
absence
of
budget
allocation
in the
last
quarter
of 2006
will
lift
some
pressure
off the
inflation,
causing
it to
climb
downward
by 0.41%
from the
initial
forecast.
However,
the 15%
rise in
oil
price
will
increase
the
inflation
rate by
0.58%.
As a
result,
the two
variables
combined
will
cause
the 2006
inflation
to edge
up by
only
0.17%
from the
original
estimate.
Table 1
Analysis
of the
Impacts
Caused
by
Delayed
Budgetary
Allocation
and Oil
Prices
|
Variables |
Impact from Delayed Budget Allocation |
Impact From the 15% Rise in Oil Price |
Impact From the Two Variables Combined
|
|
Real GDP Growth (%) |
-0.41 |
-0.51 |
-0.92 |
|
Consumer Price Index (%) |
-0.41 |
0.58 |
0.17 |
Source:
Kriengsak
Charoenwongsak
(2006)
The use
of
excessively
strict
monetary
policy
may not
yield
positive
effects,
either,
because
Thailand’s
current
inflation
problem
is cost-push
inflation
caused
by the
rising
oil
price—an
uncontrollable
external
variable.
As such,
increasing
interest
rate
will not
help
lessen
the
pressure
on
inflation.
In
addition,
the lack
of
confidence
in the
future
economic
situation
on the
part of
the
public
and
entrepreneurs
due to
political
uncertainty
and
impacts
from the
rising
oil
price
has
already
resulted
in
decreasing
consumption
and
investment.
As such,
state
intervention
through
the use
of tight
money
policy
to
lessen
the
pressure
on
demand-side
inflation
is
therefore
unnecessary.
In the
present
economic
situation,
the Thai
baht has
strengthened
due to
the
inflow
of short-term
investment,
resulting
in a
significant
increase
in
international
reserves.
Given
this
scenario,
it is
not
necessary
for
Thailand
to raise
the
interest
rate to
maintain
the
level of
short-term
overseas
investment.
On the
contrary,
Thailand
should
allow
the
inflow
of these
short-term
investments
to
decelerate
in order
to
prevent
the Baht
from
becoming
too
strong
and to
help
stimulate
export
in the
second
half of
the
year.
In
addition,
an
overly
strict
monetary
policy
will
severely
affect
the
public
given
the
situation
whereby
the
government’s
populist
policy
has
increased
the
level of
household
debts.
This is
because
a high
interest
rate
will
directly
and
adversely
affect
the
people’s
debt-servicing
abilities,
which
might in
turn
lead to
the
problem
of bad
debts.
Due to
these
factors,
I am in
agreement
with the
Bank of
Thailand
Governor
when he
stated
that
this
would be
the last
time
that the
government
would
raise
the
interest
rate.
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