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Dear Mr. Camdessus:
1. At the time of the last Letter of Intent, with financial conditions and output stabilized, we adopted a policy framework aimed at strengthening the momentum of recovery. In the interim, we have implemented a number of additional measures to revive domestic consumption and investment. These include last month's initiatives to reduce taxes and input costs, set up institutions to channel resources to restructured firms, and resume credit flows to small and medium enterprises and to the real estate sector. We are pleased to inform you that our policies are starting to bear fruit, with a range of indicators showing that the economy is turning upwards. Given these results, and in light of the improved external position, we do not expect to make further drawings from the official financing package at this point, though we would retain the option of doing so.
2. With recovery beginning to take hold, the macroeconomic framework has been revised (Table 1). Based on recent indicators, we are projecting growth in 1999 to be in the 3-4 percent range, well above the 1 percent forecast at the time of the last review. On the policy side, our priorities are to:
3. The initiatives set out in the attached Memorandum of Economic Policies, in conjunction with the progress made over the past two years, should set the basis for an enduring economic recovery in Thailand. The government stands ready, in consultation with the Fund, to take whatever additional measures that may be necessary to ensure the continued success of the program.
Mr. Michel Camdessus
1. Given the strong outturn for GDP in early 1999, and more recent evidence of recovery in manufacturing, consumption, and exports, we now project that growth in 1999 would be 3-4 percent. The revised macroeconomic framework is summarized in Table 1, and associated targets through end-March 2000 are set out in Annexes A-C. In support of this framework, we intend to implement the policies outlined below.Fiscal Policy
2. To maintain the program's fiscal stimulus, the government implemented a number of additional measures in early August, including the deferral of corporate income taxes. Nevertheless, it is now anticipated that the 1998/99 public sector deficit will be around 5.5 percent of GDP, about ½ percent of GDP lower than projected at the last review. (This excludes the interest cost of financial sector restructuring, estimated at about 1.7 percent of GDP.) This outturn is partly due to better revenue performance, but also reflects delays in some categories of spending, given efforts to ensure the quality of expenditure.
3. For 1999/00, we are targeting a public sector deficit of 5 percent of GDP to ensure that there is sufficient stimulus to underpin continuing recovery. In the event that expenditure is on track, but revenues rise in the wake of a stronger than anticipated recovery, these would be set aside to reduce the deficit, thus bringing forward the fiscal consolidation planned for the medium term. We remain committed to transparency in public sector operations, including continued fiscalization of the costs of financial sector restructuring as these are realized, and are currently working to formalize arrangements for this purpose.Monetary and Exchange Rate Policy
4. Monetary policy has been eased to the point that money market rates are at their lowest levels in over a decade. The broader structure of interest rates has also declined, and market forces will continue to determine trends in lending and deposit rates. This would ensure that the benefits of an accommodative monetary stance are fully transmitted to the economy. Looking ahead, monetary policy will continue to support recovery, subject to the maintenance of broad exchange rate stability.Structural Reform
5. Great strides have been made in raising the capital base of financial institutions, preparing the ground for reprivatizing intervened banks, and strengthening the regulatory framework. Even so, progress in reducing nonperforming loans has been difficult, hindering the resumption of normal credit flows. To address this problem, we plan the following:
6. To improve medium-term efficiency, tariffs were cut on a broad range of items in August 1999. We are also pleased to report that virtually all of the tariff increases implemented at the start of the program have been reversed ahead of schedule, and the remaining items will be liberalized by the end of the year. We will continue to rationalize the tariff structure, with the next phase of reform, including major cuts in tariff rates in line with our ASEAN Free Trade Area commitments. It remains our intention to bring the tariff structure in line with the region over the medium term.
7. There are two other structural areas where progress is expected:
8. The balance of payments situation is expected to remain strong in the near term. The current account surplus will decline in 1999 as the recovery gathers momentum, but an improved capital account and higher than anticipated foreign direct investment imply that gross official reserves will be well within the $32-34 billion range envisaged in the program. In light of the improved outlook, it is not envisaged that further drawings will be made from the official financing package, unless the external environment were to deteriorate.