FIDF Debt
Wichit Chaitrong
The Nation January 11, 2012 1:00 am
The government has passed four executive decrees to address public debt and borrow huge amounts of new funds to finance post-flood reconstruction projects.
The government made some changes to the original draft decree for managing debt of the Financial Institutions Development Fund (FIDF) following sharp criticism from the central bank, opposition MPs and the public on the issue of fiscal and monetary discipline.
Finance Minister Thirachai Phuvanatnaranubala said yesterday that the Cabinet approved an executive decree requiring the Bank of Thailand (BOT) to pay both the principal and interest cost of the Bt1.14 trillion FIDF debt.
Annual debt servicing has crippled the government from spending more on investment as about Bt65 billion is paid as interest cost for this amount of debt, he said.
The government has repaid a total of Bt670 billion of the FIDF debt, Thirachai said.
The FIDF debt was incurred during the 1997 financial crisis following the rescue of financial institutions.
Under the debt decree, the central bank has three sources of funding for debt repayment: profit from its operations, profit generated from the central bank's reserve management and annual premiums collected from financial institutions, said Thirachai.
The controversial clause in the original draft decree, authorising the Cabinet to prescribe funding from other sources, was removed. Instead it is the central bank that has sole authority regarding its asset management.
"I have asked the central bank governor to report to the Finance Ministry a timetable for debt
repayment?it would not take a short period of time for debt payment as higher premiums collected from financial institutions would create a burden on them," said Thirachai.
Deputy Prime Minister and Commerce Minister Kittiratt Na-Ranong said ministers attending the meeting suggested that annual premiums collected by the Deposit Protection Agency (DPA) from banks may be reduced to 0.1 per cent, or even lower from 0.4 per cent of total deposits currently. This would make room for a large part of the premiums to be used for debt payment, he said. The decree requires banks to pay more annual premiums but not more than 1 per cent of total deposits.
Kittiratt defended the decrees, saying the government shoulders high debt servicing up to 12 per cent of annual expenditure, close to its legal limit of 15 per cent, so the government had to ask the central bank to repay the FIDF debt.
Kittiratt said following the issue of the executive decrees, the government will elaborate its investment plans for post-flood reconstruction to foreign investors during the Board of Investment Forum on Saturday.
He said of the Bt350 billion fund, Bt300 billion would be used to finance development projects of Chao Phraya River, Bt40 billion to finance development of 17 other rivers and Bt10 billion for infrastructure projects under the responsibility of the strategic formulation committee for reconstruction and future development chaired by Virabongsa Ramangkura.
Previously the Cabinet had approved priority projects worth Bt17.1 billion for flood prevention, to be implemented in this and the next fiscal years, he add.
Opposition MPs have opposed the decrees. Sansern Samalapa, Democrat MP, said it amounted to forcing the Bank of Thailand to print money. Moreover, the central bank's reserves should not be utilised by the government, he said.
The decrees might also breach the Constitution's article 184 as there is no emergency for issuing the decrees, he said.
"The opposition would consider whether to petition the Constitution Court," he said. Sansern, however, agreed with the government plan to set up an insurance pool to support the industry, which was hit by floods last year.
Former finance minister Korn Chatikavanij also strongly opposed the decrees, arguing the government's debt policy damaged fiscal and monetary discipline and investor confidence.
Bank depositors, borrowers, bankers, exporters or all of us inevitably will have to shoulder the cost of the executive decrees, some economists said.
Somchai Jitsuchon, research director at the Thailand Development Research Institute (TDRI), said that someone has to shoulder the burden of the FIDF debt. If the central bank collects more premiums from banks, then bankers would shoulder the cost. The bankers could also pass on the cost to depositors and borrowers. If the central bank allows the baht to appreciate against the US dollar to cut losses from exchange rate intervention, exporters would complain, as they would find their products more expensive than those of competitors.
"If the central bank chooses to print more money to pay off the debt it would lead to higher inflation and it would hurt everybody [due to the diminishing value of the baht]," he said.
Somchai and other economists have long suggested that the government increase tax rates, such as introduce a new tax on property and land or other taxes that target landlords or wealthy persons.
Though the government removed the controversial clause that authorised the government to intervene in the central bank to a great extent from the final decree, but as the government is still forcing the central bank to pay the debt, there is a high risk to fiscal and monetary discipline, he added.
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