Experts ask: Who would pay off principal of FIDF's debt?

Nitinai Sirismatthakarn, an independent economist, told a recent roundtable on “Proper Ways Out for FIDF Debts” held by Krungthep Thurakij newspaper that the planned executive decree mentioned only servicing the FIDF debt but the first question was who will take responsibility for repaying the principal under this planned decree.

The second question was who would take responsibility for financial institutions if there is a crisis. 

“Is this to find a way out for the FIDF or worsen its problem? There is money to pay for servants [interest] but no one is responsible for financing the house [the principal],” he added.

The planned decree alters an agreement made in 2002 for the Finance Ministry to pay the interest while the central bank pays down the principal in any year it earns a profit. 

The Bank of Thailand has reported net income only once since 2004 and in 2010 posted a net loss of Bt117 billion due mainly to foreign-exchange losses.

 

Allocations to reduce principal

Under the 2002 agreement, 90 per cent of the central bank’s net income, as well as returns on foreign-reserve management operations, will be allocated to reduce the principal.

The central bank will probably earn a profit twice in the next 10 years and if there is some money left over from interest payments, it could be used for the principal, said Chakkrit Parapuntakul, director-general of the Finance Ministry’s Public Debt Management Office.

Pairoj Vongvipanond, a former economics professor at Chulalongkorn University, and Nitinai suggested that the Finance Ministry may take responsibility for the principal repayment, for example Bt30 billion each year, to give more fiscal room for public investment, and the central bank may take care of the interest burden. 

Since the FIDF’s obligations are part of the country’s public debt, which may need to be fiscalised, the law should give a lot of leeway, besides profits from the central bank, to repay the debt.

“They should look at other sources of revenue, which may come from taxes or sales of various assets that the government has,” he said.

“Don’t undermine the central bank’s major roles, which involve its ability to maintain low inflation, economic stability and financial stability,” he warned.

In this case, the FIDF debt could still be called public debt as only the debt servicing comes from bank depositors, Nitinai said.

“But once the principal is repaid by funds from depositors, the debt probably cannot be called public debt. Public debt needs to be financed by the public,” he said. 

 

Deposit protection

Earlier, the financial authorities agreed to let the Deposit Protection Agency (DPA) shoulder part of the interest burden of the FIDF and pondered a possible increase in commercial banks’ contributions including a 0.35-per-cent fee on the sale of bills of exchange.

The competitiveness of local financial institutions, particularly commercial banks, needs to be taken into serious consideration by the financial authorities, said Smith Banomyong, an executive vice president at Siam Commercial Bank.

If the contribution to the DPA increases, the already high competition in the banking industry could be more distorted. 

Commercial banks currently contribute 0.4 per cent of their deposit base to the DPA while state-owned specialised financial institutions (SFIs) are not required to make the contribution, he said.

Chakkrit argued that the SFIs are being used as state mechanisms to provide financial access to people and some SMEs that commercial banks cannot reach. 

The SFIs include the Government Savings Bank, Government Housing Bank and Bank for Agriculture and Agricultural Cooperatives.

The major issue is how long the contributions will last, Pairoj said. 

A clear timeframe is required to ensure the collection is temporary, as this increases the costs of intermediation and could erode the financial system’s long-term efficiency, which is needed to compete with foreign banks when the Asean Economic Community materialises in 2015, he added.

 

New income needed

Chakkrit said the planned decree would give another source of income for the central bank to repay the FIDF debt, besides its profits and returns on foreign-reserve management operations.

There has been some limitation on the government budget, investment in particular, as debt servicing is close to the ceiling, he said. Debt servicing now account for up to 12 per cent of the nation’s expenditures, close to the 15-per-cent ceiling.

“This will give more fiscal space for the government to proceed with its investment projects including logistics and water resources management,” he said.