After deferring a decision twice on appointing the new chairperson of the Bank of Thailand (BOT)’s board of directors, the selection committee meets today to choose one of three candidates: former finance minister Kittiratt Na-Ranong, former permanent secretary of the Energy Ministry Kulit Sombatsiri, and president of the Thammasat University Council Prof Surapol Nitikraipot.
There has been speculation that Kittiratt will likely be chosen because he is the government’s nominee. Academics, economists and former central bank governors have come out strongly to oppose Kittiratt’s candidature.
As a former finance minister and deputy prime minister in the Yingluck Shinawatra government, Kittiratt is known as a Pheu Thai Party loyalist, and a staunch critic of the current BOT Governor, Sethaput Suthiwartnarueput.
More than 800 academics, economists, four former central bank governors and ex-BOT officials jointly issued a statement opposing the appointment of Kittiratt.
“We are deeply concerned about the implications of political intervention on monetary policy, as the government’s focus on the short term could seriously harm stability and economic growth in the longer term,” the statement said.
Asked about the reasons for the strong opposition to Kittiratt, Praipol Koomsup, former dean of the Faculty of Economics at Thammasat University, explained that Kittiratt should not be a candidate because he is a politician. “So it is not appropriate to choose him,” said Praipol.
A threat to the BOT's independence?
Economists are concerned about a potential government intervention in the operations of the central bank, compromising its independence in running monetary policy.
The independence of the central bank is considered crucial for economic stability in the long run. Multiple studies have found that the central bank’s independence is associated with price stability and lower inflation.
But central banks under the thumb of the government often fail to control price rise and currency devaluation.
The issue of the central bank’s independence is not a problem unique to Thailand. After former president Donald Trump’s victory in the US presidential election, there are worries that he may try to influence the US Federal Reserve.
During his election campaign, Trump said he would bring down inflation and interest rates.
Responding to questions from reporters, Fed chief Jerome Powell said that he would not resign if Trump ordered him to do so, and added that the law did not give the president the power to fire him, setting the stage for a possible collision.
The market is also worried that Trump’s tax policy may ignite inflation, forcing the Fed to maintain the high interest rate or delay a new round of rate cuts in order to fight inflation.
“It is a classic issue that governments and central banks often clash on monetary policy; governments want to boost the economy in the short run while the central banks want to set the foundation for the economy in the long run, so they have conflicting goals,” said Praipol.
The evolution of the BOT
Dr Puey Ungphakorn is considered the founding father of the modern Thai economy, serving as the central bank governor from 1959 to 1971.
He was a highly respected governor, who left behind a legacy of competence. His leadership contributed to relative price stability for a long period of time, helping to transform an agrarian economy into the industrial and service economy Thailand has become.
But the path towards an independent and stable central bank has not been smooth.
“Until the 1997 financial crisis, the central bank and the government made many serious mistakes in running the economy, resulting in the baht crashing and the economic crisis. The government then was also blamed for interfering with the working of the central bank,” Praipol said.
The cost of the 1997 financial crisis was huge, as a large number of corporates went bankrupt and many workers were laid off.
With an emergency fund and advice from the International Monetary Fund, the government implemented sweeping reforms including at the BOT, in the financial sector and state enterprises.
To insulate the central bank from political pressure, the new law has been designed to make it harder for the government to sack the BOT governor.
The finance minister no longer has the power to fire the BOT chief unless it can be proved that the incumbent had caused serious damage to the central bank and the economy, and it must be approved by the Cabinet.
The central bank chairperson’s role
The chairperson of the BOT does not have a direct role in influencing the interest rate policy, which falls under the governor.
However, he has the authority to appoint four members to the seven-member Monetary Policy Committee (MPC). He would also be involved in selecting the next BOT governor when Sethaput’s term ends in September next year.
So, in effect, he could indirectly influence monetary policy via the appointment of members to the MPC and participating in selecting a governor. The appointment of the new chairman must be approved by the finance minister and the Cabinet.
The root cause of the conflict
The conflict between the government and the BOT revolves around the interest rate policy. The BOT recently cut the key interest rate by 25 basis points to 2.25%, but the government wants a further rate cut, arguing that they want to boost consumption and help people who have high household debts.
Supavud Saicheua, adviser to Prime Minister Paetongtarn Shinawatra said that the current inflation rate was too low. In a veiled slight, Sethaput said in an interview to international media that BOT would not rush to cut the rate.
He has also harped often that there were limits to what could be achieved by adjusting the policy rate. He said it could not be used to rectify the declining competitiveness of local industry, which is the main factor behind the current slower economic growth.
The government, faced with rising public debt and higher budget deficit, wants the central bank to do more to boost the economy by further relaxing monetary policy.
Another important issue is the government's supposed interest in trying to make use of the huge official reserves of the BOT of around US$238.6 billion as of October.
There has long been a debate about the launch of a sovereign wealth fund by using a part of the international reserves. The fund would invest in international asset classes that potentially offer high investment returns. There are, however, also associated risks.
In some countries, like in Malaysia, it became a source of corruption. There are also many countries running successful sovereign wealth funds, such as Singapore and Norway, which owns the world’s largest sovereign wealth fund.
