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Kingdom urged to cut subsidies, raise revenue

Nov 13. 2013
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By The Nation

Thailand's financial authorities should consider revenue-enhancing measures like higher property and consumption taxes, as well as a cut in personal income-tax credits, to maintain its commitment to fiscal discipline, the International Monetary Fund said
In a report on its Article IV Consultation with Thailand, the IMF also urged the Kingdom to further reduce generalised energy subsidies and replace the rice-pledging scheme with budgetary transfers targeted at low-income rural households. 
The diesel excise tax was first waived by the Democrat-led government. At Bt5 per litre, based on daily consumption of 50 million litres, the subsidies translate to Bt250 million a day or nearly Bt90 billion in a year. The Yingluck government’s rice-pledging scheme also drew heavy criticism for its huge losses of over Bt100 billion a year. The condition of government finances could deteriorate, particularly when the government plans to borrow Bt2 trillion to finance infrastructure projects.
The IMF’s staff showed concerns over the public sector’s finances.
They estimated that the central government’s fiscal deficit will rise to 3.4 per cent of gross domestic product in the 2013 fiscal year against 1.7 per cent in 2012, mainly due to the lower corporate tax rate and tax-relief measures (including for car and home-buyers, and fuel taxes). 
Moreover, the deficit of the overall public sector, which includes off-budget investment projects, is projected to rise from 1.5 per cent of GDP in the 2011 fiscal year to 4.2 per cent by 2014. Meanwhile, the public debt ratio is projected to exceed 53 per cent of GDP in the 2018 fiscal year.
According to the IMF report, which summarised the issues covered in the bilateral talks, the authorities told the IMF that they are confident they will achieve their medium-term fiscal goals, including a balanced central government budget by 2017 and keeping public debt below 50 per cent of GDP. They pinned hopes on three pillars: containing recurrent spending; adjusting excises, including on sumptuary goods and fuel; and expanding the tax base through strengthened tax administration. They noted that a number of measures have already been taken or proposed to Parliament for next year’s budget, including an increase in diesel excises and ongoing efforts to improve the efficiency of tax collection. Other measures, particularly additional spending cuts, would be introduced gradually over the coming budget cycles, at a rate that would reflect economic conditions. The authorities noted that Fund staff projections did not include the future spending cuts and therefore showed a somewhat higher path for the central government deficit and public debt ratio. 

The economy should expand by 5.2 per cent next year as public investment projects are expected to become a key engine of growth, the International Monetary Fund said yesterday.

Growth in gross domestic product this year is projected to slow to 3.1 per cent. With growth driven by domestic demand, the current account is expected to run a small deficit of 0.2 per cent of GDP next year.

Hundreds of billions of baht were expected to be invested this year under the Bt2-trillion infrastructure and Bt350-billion water-management projects.

The Bank of Thailand forecasts 2013-2014 growth at 3.7 per cent and 4.8 per cent, respectively.

"Risks to the outlook are tilted to the downside, dominated by external factors," the IMF said in the conclusion of the annual review, the Article IV consultation with Thailand, dated September 20.

Authorities were urged to persevere in their efforts to rebuild fiscal buffers, strengthen financial stability and promote more inclusive growth.

"Directors considered that a gradual return to fiscal consolidation will broaden the room for policy manoeuvring over the medium term and create space for priority spending." The IMF directors supported expanding investment in infrastructure and education, and replacing generalised subsidies with targeted income support for vulnerable groups.

The Thai government in the 2013 fiscal year reported a budget deficit of 3.4 per cent of GDP, against 2.6 per cent in 2012. The IMF projects Thailand’s public debt to reach 47.2 per cent of GDP by the end of this year, from 45.4 per cent in 2012. The ratio of external debt to GDP will also rise from 36.4 per cent to 41.4 per cent.

In its report for October released yesterday, the Bank of Thailand’s Monetary Policy Committee assessed that next year, the economy would gradually gain momentum, thanks to the export sector taking on a greater role consistent with the pick-up in trading partners’ economic outlook.

Moreover, the slowdown in private consumption, which had put a drag on the economy, is likely to improve, the report said. In addition, private investment is expected to increase with the continuation of previously planned investments and those related to the government’s large-scale investment projects.

"Nonetheless, Thai economic growth in 2014 was projected to be lower than the previous projection (5 per cent), due to adverse knock-on effects from delayed export recovery on private consumption and investment which would continue into 2014," the MPC said.

According to the IMF, the expiration of the first-car-buyer scheme appears to have had a larger-than-expected impact on private consumption, while exports were adversely affected by a slowdown in external demand.

External factors

The external environment remains challenging and domestic tailwinds are weakening. Credit growth remains strong, but has decelerated in recent months. The stock-market rally has fizzled since May, even as housing price growth continues. Business sentiment remains robust while consumer confidence has weakened.

External risks deriving from an escalation of the euro-area crisis or fiscal-policy shocks in the United States have diminished, but are still skewed to the downside. Slower-than-expected growth in major emerging economies, particularly China, would also have a considerable impact because of trade linkages.

The unwinding of monetary-policy stimulus in the United States may trigger further capital flow reversal from emerging markets. Domestically, the impact of the unwinding of various government policies on private consumption may be larger than anticipated. Finally, political stability has strengthened, but remains a downside risk.

The IMF executive directors noted that skilful macroeconomic management, as well as the strong fundamentals of the Thai economy – including low inflation, healthy balance sheets of commercial banks and corporations, high international reserves and a moderate level of public debt – had blunted the impact of recent severe shocks and was underpinning a recovery.

The IMF directors said the currently accommodative monetary-policy stance is appropriate but authorities should stand ready to normalise the policy stance if inflationary pressures re-emerge.

Thailand’s strong international-reserve position, together with exchange-rate flexibility and macro-prudential and capital flow measures as appropriate, will help address such volatility. As of November 1, Thailand’s reserves stood at US$171.5 billion (Bt5.42 trillion). Gross reserves including forward positions are expected to end the year at $211.7 billion.

The IMF directors welcomed the progress in developing the non-bank financial industry as well as the authorities’ aim to promote more inclusive growth. Highlighting the need to enhance labour productivity, they endorsed plans to boost workers’ skills to address skill mismatches and labour shortages.

They also supported plans to expand infrastructure to lower transport costs, promote commerce and boost long-term growth.

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