The Independence Of The Central Bank Is Crucial; Thai Opinion

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EDITORIAL

The independence of the central bank is crucial

By The Nation

The govt must not be permitted to waste valuable reserves to satisfy its short-term political goals

Prime Minister Yingluck Shinawatra's government could do great harm to the country if it intervenes in the Bank of Thailand's operations. The government, by using international reserves for high-risk, wrong investments, could compromise the central bank's sacrosanct duty to guard the country's monetary stability.

The government's reported intention is obviously meant to serve its short-term political purposes. However, any compromise of the central bank's integrity and the use of these reserves for dubious purposes could have a severe impact on the economy in the long term.

The government should allow the central bank to perform its duties free from political intervention. History has proved that central banks can best serve the public interest by remaining independent from government fiscal policy and thus not influenced by any political interests.

Newly-appointed Finance Minister Thirachai Phuvanatnaranubala suggested on Monday that the inflation target could be changed. But such a change may not be the right decision now.

First of all, the inflation target is the mission of the central bank - to ensure monetary stability, especially now that Thailand and the region are facing threats from price instability due to worldwide economic turbulence.

The central bank should adhere to its monetary stability policies to counter the weight of political pressure in which politicians tend to resort to growth-oriented policies to score short-term political points. The central bank should be permitted to use its judgement to create immunity against such external shocks.

The upward trend of local inflation has served as a warning for the central bankers to continue raising the policy rate to hold inflation at bay. In fact, the pace of the rate rise in Thailand is modest compared to other countries in the region, which also feel the need to curb inflation amid the ongoing global financial instability.

The Pheu Thai Party has to fulfil its election promises to voters but the government should find better alternatives to stimulate growth in a sustainable manner. Inflating growth through an unusually low interest rate will only destabilise the economy in the medium to longer term.

The current global financial woes are not an excuse for the Bank of Thailand to divert from its monetary discipline. In fact, the financial crisis in Europe and the US has provided even more of a sound reason for the central bank to strictly adhere to its role as guardian of monetary stability.

The Yingluck government must also carefully consider its plan to use the country's international reserves to finance investment in strategic oil reserves. The government should refrain from squandering these reserves, which are meant to lend credibility to the currency. The reserve total determines the credit rating of a nation. The central bank can use its international reserves to defend the baht from speculative attacks.

The reasons for not messing with these reserves should be relevant to Thailand. First of all, in 1997 Thailand experienced a severe financial crisis from bleeding reserves. The current financial woes in other countries, especially Greece, are a reminder to Thais that the lack of fiscal and monetary discipline can result in severe economic trouble. Moreover, the choice of assets to invest in must be safer and more stable than the oil fund, which can be highly volatile.

With US$180 billion in international reserves, the finance minister will naturally find it tempting to explore the possibility of using this high figure for tempting investments, but the government is also facing fiscal limits in financing its populist policies.

The question here is whether the Finance Ministry has an effective and credible international reserves management policy to ensure that the government does not misuse money to the detriment of the country's fiscal and monetary stance.

The Yingluck government should therefore allow the Bank of Thailand to decide these questions free from political influence, to enable the agency to best serve its purpose. In fact, the finance minister should instead focus on how to uphold fiscal stability, even as the government plans to introduce a number of massive spending projects.

Any drastic change in the monetary policy is a serious issue and should only come after careful consideration based on fiscal stability both for the short term and long term. These policies must not serve political purposes because eventually voters will be left suffering long after the current crop of politicians are out of office.

-- The Nation 2011-08-17

[Junglejumbo]

Problem is that the BOT may not be independent in all respects. Granted that it should operate independently of the government but in actual fact it can not, and not by an fault of the government either.

Note that the BOT spokesperson blamed pending policy spending as a reason to raise rates last month. This has everything to do with the government. They hadn't even issued their policy statement but nobody from the BOT sought to speak with the government for a better insight such as the time-frame of spending.

I personally strongly suspect that the BOT is also biased in supporting the Democrats. Many BOT officials openly came out to protest as yellow shirts in 2008. The BOT governor is also somewhat of a buddy of Korn the ex-finance minster who picked him. He used to be on the baord of Kasikorn Bank which is owned by the Lamson family, who are cousins of Korn. Most of the major banks in Bangkok are Democrat supporters and one of the big ones supposedly helped finance the the PAD. Gen Prem also served on the board of Bangkok Bank for many years.

So, the BOT is very likely bisased against the Phua Thai government and is likely to run policies that counteract their policies leading to harming the Thai economy. However, unfortunately, it will be difficult for most people to understand this and a lot of money may go to waste. As it is higher interest rates counteract spending policies. It's like putting both a heater and cooling air-conditioner on in a room at the same time.