Baht policy under fire in the NLA
Members slam govt for not ensuring stability
WICHIT CHANTANUSORNSIRI & MONGKOL BANGPRAPA

Members of the National Legislative Assembly yesterday sharply criticised the government's handling of the country's foreign exchange system. In a mammoth 11-hour session, 20 NLA members took to the floor to offer their views on the economic conditions and the sharp appreciation of the baht.

Most were generally critical of the government and the Bank of Thailand (BoT), arguing that insufficient attention and resources had been given to preserving exchange rate stability.

Over the past two years, the baht has gained nearly 17% against the US dollar, putting pressure on local exporters. Exchange rate volatility has also increased in recent months due to instability in the global financial markets.

Ammar Siamwalla, a prominent economist and NLA member, proposed the BoT adjust its policies from a managed float of exchange rates to a target system.

Exchange rates would not be rigidly fixed, he said, but set around a target band most appropriate for the economy.

''Since the 1997 economic crisis, the central bank has used the managed float system. But in reality, the baht has floated more than it has been managed. As a result, with capital inflows, the baht has appreciated at a faster pace than our neighbours' [currencies],'' he said.

The central bank's experience during the economic crisis, when intervention in the exchange markets nearly bankrupted the country, remained an ''open wound'' for the central bank and had led to its general tendency to allow the baht to float freely, he added.

Mr Ammar said the central bank's decision to impose capital controls last December with the 30% reserve rule on inflows was a shock to the markets.

But a similar response could have been gained if the central bank had only cut interest rates.

NLA member Praphan Khoonmee noted that 138 members of the NLA had agreed with the petition to raise the issue of baht appreciation to signal their concerns to the government.

''The baht is not moving in line with normal market forces. Yet the government has taken the view that this situation has not yet reached a crisis. The government's measures have failed to create confidence or stemmed the sale of dollars, and modest interest rate cuts have proven insufficient,'' he said.

Jada Wattanasiritham, another NLA member and a former president of Siam Commercial Bank, said the government should consider alternative measures to help curb the problems of exchange rate volatility and speculation.

One possibility was to impose a capital gains tax on exchange gains, she said.

''Even if the government does not implement these measures, it should at least communicate to the public that it does have options in hand. We should not create a surprise [such as with the 30% rule],'' Khunying Jada said.

Economist Sangsit Piriyarangsan suggested the government create a new currency management system to handle the baht appreciation.

Mr Sangsit said the country's currency issue is now far more complicated for the central bank governor alone to handle and take responsibility for.

Finance Minister Chalongphob Sussangkarn argued the appreciation of the baht stemmed from imbalances in the global markets.

But while developed markets had the tools to manage exchange rate volatility, smaller, developing countries such as Thailand lacked the market depth and breadth to adequately manage rapid changes in capital flows, he said.

''Our exchange rate policy is to allow the currency to gradually adjust, whether it be up or down. We must create a certain degree of uncertainty [in the direction of rates]. We cannot have the rate simply move in a single direction,'' Mr Chalongphob said.

He insisted that even as the government gave the central bank a free hand in managing the exchange rate, overall policy rested with the government.

Mr Chalongphob also rebutted claims the baht was unnaturally strong, noting that Thailand's current account surplus of $11.22 billion in the first half was the main factor driving baht strength.

''The baht has not appreciated abnormally, but we might have appreciated [against the dollar] faster than other countries in relative terms,'' he said.

Mr Chalongphob insisted that the baht was fairly priced based on economic fundamentals, but agreed that exchange rate policies should also consider where the baht stands relative to the country's trade competitors.

Bangkok Post