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IMF calls on Thai government to further ease monetary policy

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IMF calls on Thai government to further ease monetary policy

The International Monetary Fund (IMF) has urged the Thai government to spend more and suggested the Bank of Thailand should further ease its monetary policy amid an economic slowdown while the Finance Ministry is calling for the central bank to cut interest rates again.

Speaking to the press in Bangkok on Friday, IMF Asia and Pacific Department deputy director Jonathan Ostry said after two consecutive years of sustained expansion, growth is expected to moderate to 2.9 per cent this year and three per cent next year, reflecting weaker external demand.

Expansionary monetary and fiscal policies are desirable to mitigate the slowdown, he said. The IMF has cut its projection of Thai growth by 0.6 percentage points and 0.5 percentage points for this year and next year from its previous forecast.

“We think there is fiscal space in Thailand to provide support to the economy in this period of slowdown in growth. And in a more structural sense, to accelerate the build-up of infrastructure and also crowd in private investment which will help support demand going into the medium term,” he said.

“In the IMF’s recent assessment for Thailand, we came to the conclusion that there was scope on both sides of the monetary policy and fiscal policy for more vigorous and pro-active response [to cyclical slowdown]”, he said.

He said the central bank has more scope to ease monetary policy without threatening inflation or financial stability objectives.

The Thai economy and those of other developing Asia-Pacific countries have been adversely impacted by the Sino-US trade war which has also dampened confidence in the global economy. The slowdown in China and uncertainty over Brexit have also impacted the Asia-Pacific region.

Public investment will not only boost public demand in the short term but will also draw in private investment, Ostry noted.

He said accelerating public investment in infrastructures would also help to alleviate upward pressure on the baht’s value. He pointed out that Thailand has a larger current account surplus than it should from the point of view of people’s welfare.

The large surplus reflects a wide gap between savings and investment. He said Thailand should also reform its pension fund system as the social safety net is underfunded, resulting in only a small fraction of retirees having access to the pension fund, similar to other countries in the region where only 22 per cent of retirees are covered by pension fund.

The baht

The value of the baht has been driven by both current account and capital account.

Capital account is not something that can be directly linked to domestic measures. One option is to close the country completely from foreign capital flows but Thailand will not do so as it benefits greatly through integration with the global financial system, Ostry said.

The way to look at the problem is to find whether there are domestic distortions in policy setting that draws in capital flows which put upward pressure on the value of the baht, he added. Thai exporters have complained about the strengthening of the baht which has appreciated about seven per cent against the US dollar this year.

Meanwhile, Fiscal Policy Office director-general Lavaron Sangsnit said separately that the government has fully implemented fiscal expansion measures as it is running a fiscal deficit and has launched a series of economic stimulation packages. “What is needed most is an easing of monetary policy.”

Lavaron said an acceleration of infrastructure investment will occur next year as many contracts have been signed but it will take time for actual investment to kick off. Some analysts predict the central bank will again lower the rate by 25 basis points to 1.25 per cent before the end of this year, following a previous cut of 25 basis points.



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