Press Release: IMF Approves Stand-by Credit for Thailand
IMF News, August 20, 1997
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- Published: August 20, 1997
Approval and terms of the stand-by credit
- IMF approved a stand-by credit for Thailand authorizing drawings of up to SDR 2.9 billion (about US$3.9 billion) over the next 34 months to support the government’s economic program.
- Of the total, SDR 1.2 billion (about US$1.6 billion) is available immediately.
- A further SDR 600 million (about US$810 million) will be available after November 30, 1997, provided that end-September performance targets have been met and the first review of the program has been completed.
- Subsequent disbursements, on a quarterly basis, will be made available subject to the attainment of performance targets and program reviews.
- The stand-by credit is equivalent to 505 percent of Thailand’s quota of SDR 573.9 million (about US$780 million) in the IMF.
- The IMF used accelerated procedures under the Emergency Financing Mechanism (EFM), adopted in September 1995, to respond swiftly to the external financial crisis.
Background: causes and recent developments
- After a decade of strong growth, Thailand’s situation deteriorated and became increasingly vulnerable since 1993:
- Current account deficit peaked at 8 percent of GDP in 1996.
- External debt burden of 50 percent of GDP, of which some 40 percent is short-term.
- Serious weakness in the financial system, particularly in finance companies.
- From mid-1996 Thailand faced adverse developments: sharp slowdown in exports and GDP growth; growing property sector difficulties; sharp fall in the stock market; weakening fiscal position.
- Early 1997 measures to address fiscal and financial signs proved insufficient to restore market confidence; growth and investment continued to slow, and financial disintermediation increased.
- On July 2 the authorities introduced a managed float of the baht; the baht subsequently depreciated about 20 percent against the U.S. dollar during July.
- Reports of rollover difficulties on short-term debt, intensified outflows from finance companies, and accelerated injections from the Financial Institutions Development Fund (FIDF) precipitated widespread loss of confidence, prompting a comprehensive economic package.
The Medium-Term Policy Strategy (1997–2000)
- Objective: restore confidence and economic stability early and lay the foundation for sound medium-term growth.
- Targets and policy directions:
- Reduce external current account deficit to a more sustainable 3 percent of GDP in 1998.
- Recover to Thailand’s annual growth potential of 6-7 percent over the medium-term.
- Central role of the new exchange rate regime: managed float to alter incentives for short-term capital flows and protect future foreign exchange reserves.
- Fiscal policy aim: maintain the public sector in surplus to provide margin for absorbing financial restructuring costs.
- Monetary policy: strict control over monetary aggregates; end open-ended, unconditional support to insolvent institutions; develop further monetary policy instruments.
- Improve public disclosure of key economic information.
- Structural reforms highlighted:
- Strengthen the financial system while minimizing moral hazard.
- Isolate insolvent institutions, ensure viability of remaining institutions through early recapitalization, strengthened regulatory requirements, and supervision.
- Accelerate privatization of strategic sectors.
- Increase emphasis on secondary education and training and other efforts to strengthen competitiveness.
- Expect relative price effects of devaluation to boost competitiveness in low-end export markets in the short to medium-term and assist structural adjustment toward higher-technology production and exports.
The 1997-98 Program: objectives and quantitative targets
- Principal objective: achieve an orderly adjustment of the domestic economy to a sharp, forced reduction in the current account deficit to about 5 percent of GDP in 1997 and 3 percent of GDP in 1998.
- Growth and macro targets:
- Ensure positive growth of 2.5 percent in 1997 and 3.5 percent in 1998.
- Maintain gross official reserves at the equivalent of 4.2 months of imports in 1997 and 4.4 months in 1998.
- Limit the end-period rate of inflation to 9.5 percent in 1997 and 5 percent in 1998.
- Initiate a credible and up-front restructuring of the financial sector.
- Fiscal policy measures:
- Restore a small overall surplus in the public sector by 1998.
- Increase the rate of the value-added-tax (VAT) to 10 percent from 7 percent.
- Initiate expenditure cuts in a number of areas while protecting spending on health and education.
- Improve financial position of state enterprises via increased oversight on expenditures and greater emphasis on privatization.
- Near-term entails significant increases in prices of some utilities and petroleum products, while bus and rail fares remain subsidized for social reasons.
- Monetary policy designed to support the inflation and balance of payments objectives.
Structural policies for the financial sector
- Reestablish domestic and external confidence in Thailand’s financial system to maintain an open capital account within financing constraints.
- Core components:
- Up-front separation, suspension, and restructuring of unviable institutions.
- Immediate steps to instill confidence in the rest of the financial system.
- Strict conditionality on extension of FIDF resources.
- Phased implementation of broader structural reforms to restore a healthy financial sector.
- Require all remaining financial institutions to strengthen their capital base expeditiously, encouraging mergers and foreign capital injection.
Financing need and external support
- At an August 11, 1997 meeting in Tokyo, pledges received:
- Japan: US$4 billion.
- Australia, Hong Kong, Malaysia, and Singapore: US$1 billion each.
- Indonesia and Korea: US$0.5 billion each.
- Subsequent pledges and contributions:
- China pledged US$1 billion.
- World Bank announced contribution of US$1.5 billion.
- Asian Development Bank announced contribution of US$1.2 billion.
- Total financing from these sources amounts to US$12.7 billion.
- Expected that bilateral loans to Thailand will be disbursed in the same proportions as the IMF stand-by credit.
- World Bank and Asian Development Bank contributions are subject to consideration by their respective Boards.
- Proceeds from IMF and bilateral credits will be used solely to help finance the balance of payments gap and to rebuild the official reserves of the Bank of Thailand.
The challenge ahead and risks
- Decisive actions should allow growth to remain positive during adjustment, aiding program acceptability and sustainability.
- Risks:
- Sustaining fiscal adjustment and implementing necessary financial sector restructuring amid a slowing economy will require strong resolve.
- Noted outcomes:
- Impressive regional support has been mobilized.
- The EFM allowed a speedy international response, demonstrating the international community’s ability, acting through the IMF, to face challenges of globalized markets.
Thailand: Selected Economic Indicators (1994–1998)
- Real GDP growth (Percent change):
- 1994: .
- 1995: 8.9
- 1996: 8.7
- 1997*: 6.4
- 1998*: 2.5
- 1998*: 3.5
- Consumer prices (end of period) (Percent change):
- 1994: 5.3
- 1995: 7.1
- 1996: 4.8
- 1997*: 9.5
- 1998*: 5.0
- Overall public sector balance (deficit -) (Percent of GDP):
- 1994: 1.8
- 1995: 2.2
- 1996: -1.6
- 1997*: 1.0
- External current account balance (deficit -) (Percent of GDP):
- 1994: -5.6
- 1995: -8.0
- 1996: -7.9
- 1997*: -5.0
- 1998*: -3.0
- Gross official reserves (Months of imports):
- 1994: 6.8
- 1995: 6.3
- 1996: 6.6
- 1997*: 4.2
- 1998*: 4.4
- Sources: Thai authorities; and IMF staff estimates.
- * Program.
Press Release No. 97/37, August 20, 1997