## Press Release: IMF Approves Stand-by Credit for Thailand

_IMF News, August 20, 1997_

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## Bibliographic details
- Published: August 20, 1997

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### 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*

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