A chance to think and then make the right decision

"In communicating with the government,” said Puey Ungphakorn, the celebrated former governor of the Bank of Thailand, “it is necessary for the central bank to establish credibility to convince the government, or people in the government, that we do not place personal interest above the national interest. The central bank’s governor and high-level officials must have the courage to speak out if they see anything inappropriate. If they don’t have such courage, better not take this job.”

This is the theme of an article by the current governor of the Bank of Thailand, Prasarn Trairatvorakul, that appeared in the bank’s journal in May. Prasarn explained why he had to act against the government’s plan to transfer the Financial Institutions Development Fund (FIDF) debt obligation of Bt1.14 trillion, incurred from the 1997 financial crisis, to the central bank.

Much of what he wrote has been reported in the press, for it marks a clash of titans. Prasarn, symbol of monetary stability, is on one side, and the Yingluck government and Deputy Prime Minister Kittiratt Na Ranong and Virabongse Ramangura (recently named chairman of the BOT) on the other. The controversy over the FIDF debt transfer was no small issue, since it led to the dismissal of Thirachai Phuvanatnaranubala from the Finance Ministry. Thirachai earlier made it known that he did not wholeheartedly agree with the project.

The government, at any rate, managed to pass executive decrees to allow the debt transfer. But this does not mean the rest is history, for Prasarn maintains his stance that inappropriate implementation of the project will negatively affect the country. 

Prasarn disagreed with the rationale from the start. “The excessive spending plan of the government, especially the populist projects promised to voters during the election campaign,” he wrote, “has caused a budget deficit and tended to lead to strange demands upon the Bank of Thailand. An example: the transfer of the FIDF obligation.”

Prasarn said the project, if not carried out properly, could have negative effects on monetary policy and undermine fiscal discipline. This could affect stability and economic growth in the long term, and erode the credibility of the government and the country’s credit rating. Declining credibility could prompt creditors to charge higher interest to offset diminishing confidence in Thailand, wrote the governor.

The essay, “A Letter from the Governor to Ajarn Puey”, reveals Prasarn’s views on the entire FIDF obligation-transfer episode. Prasarn might come from a different school of thought than those in the government, who naturally aim for short-term political results rather than long-term stability, but differences of opinion are part of the beauty of a democratic system.

Prasarn realises the risk of expressing an opposing view to the government. “It takes [rhetorical] art and courage to counter the government’s opinions because the government has higher authority over the central bank,” he wrote.

The government submitted the transfer plan to the Cabinet on December 27 as a confidential agenda item. Prasarn was not informed of the proposal beforehand, but three days later was nonetheless called into a meeting with four other top economists to sound out opinions.

Prasarn said he made his point at his December 30 meeting with Kittiratt, Akom Termpittayapaisit, Thirachai (then finance minister), Finance Ministry permanent secretary Areepong Bhoocha-oom and Achaporn Charuchinda, secretary-general of the Office of the Council of State and secretary-general of the Office of the National Economic and Social Development Board. They discussed the negative effect of the debt transfer on the country’s monetary stability.

Prasarn did not quite get what he wanted, even though he sought assurance from the government that there would be no printing of banknotes, and foreign exchange reserves would not be used to service the debt. He was informed on January 4 by the media that the Office of the Council of State had submitted the executive decrees to the Cabinet. A reporter faxed him a copy of the bill that evening. The central bank was not informed of the bill, contrary to normal protocol. And the content was not quite what was agreed to on December 30, he said.

Prasarn sent a letter to the finance minister on January 9 seekign reassurance that the debt transfer would not lead to money printing to cover government expenses and that the central bank’s money and assets would not be transferred to service the FIDF debt.

It is too early to judge who is right or wrong in this difference of economic ideas. Nonetheless, with the country’s interests at stake, it may be worth remembering Puey’s statement that, “The country’s foreign exchange reserves are not mine or any individual’s in the central bank. It is neither yours nor the government’s. It belongs to the entire nation and future generations.”  Prasarn’s reflection on Puey’s wisdom should give the government useful insight.