THAI POLITICS
THITINAN PONGSUDHIRAK
The Bank of Thailand's new 12-member Monetary Policy Committee approved last month by Prime Minister Samak Sundaravej's cabinet is conspicuously political.
Half of the new board comprises current or former bureaucrats closely aligned with the prime minister's ruling People Power party.
Moreover, the recent cabinet reshuffle has brought in two new faces, the chief economic adviser and deputy finance minister, who have openly called for looser and "growth-targeting" monetary policy.
With inflation running at more than twice the current benchmark rate of 3.5%, the BoT is biased towards inflation-targeting in the face of the government's preference for lower interest rates.
The long-running conflict between the BoT on one hand and the government and finance ministry on the other, is likely to intensify for the rest of this year and beyond.
However, the BoT's functional autonomy and its "inflation-targeting" objectives are likely to be maintained, owing to sustained pressure by the anti-government movement both inside and outside parliament.
If it had its way, the government would prefer to replace BoT Governor Tarisa Watanagase, who was appointed during the coup period. But this would be a huge gamble and would give virulent anti-government groups, revolving around the People's Alliance for Democracy (PAD), ample ammunition in their efforts to topple the Samak administration.
Instead, Finance Minister Surapong Suebwonglee has gone through the back and side doors by reshaping the MPC's composition and by appointing Deputy Finance Minister Suchart Thadathamrongvej to do the government's bidding.
As a host of critical judicial cases await court verdicts, Mr Samak and his cabinet ministers are in all kinds of legal trouble, and the PPP could end up being dissolved by the Constitution Court for vote fraud.
A looming general election appears on the near-term horizon, probably in the first half of 2009. The government thus wants to boost GDP growth to around 6% to lay the electoral groundwork and shore up its popularity.
In fact, Mr Suchart has blatantly called for the benchmark rate to climb down to 2% to prop up growth. Virabongsa Ramangkura, the prime minister's new chief economic adviser, echoes a similar line.
Taking pressure off from Finance Minister Surapong, who is being investigated for legalising the underground lottery from the time he served under former prime minister Thaksin Shinawatra's tenure, Mr Suchart and Mr Virabongsa have argued that inflationary pressure will be well over the average in any event, and thus becomes secondary to addressing the people's hardship by lowering rates and bolstering economic growth by boosting investor and consumer confidence.
Their posturing has not affected the BoT's integrity and position. What will be crucial, however, is the MPC board. Half are ex-officio members from the BoT, economic planning agency and budget bureau. But the other half are holdovers and associates from the Thaksin era and from within the PPP's inner circle, including a former Thaksin adviser as MPC chairman and the current national police chief as a board member.
These six PPP-associated appointees are expected to exert pressure to bring down the benchmark rate.
But the anti-government groups, led by the PAD in the streets and the Democrat party in parliament, are on to the new MPC's vested interests.
Already the Democrats have asked the Administrative Court to annul the new MPC board. The PAD and certain segments of the press have attacked the government for endorsing the new MPC.
The government is too weak in credibility and popularity to reply forcefully, and is expected to rely on its quiet penetration and meddling with the BoT through its MPC appointees.
As a result, the face-off and stalemate in Thai politics has entered the BoT, with the MPC as yet another battleground.
The anti-government groups have become the unwitting guardian of central bank autonomy, indirectly shielding Mrs Tarisa and the BoT's monetary policy autonomy by their sheer animosity towards Mr Samak, Mr Thaksin and their allies. This stalemate at the national level can be expected to be at work at the BoT's MPC in a proxy fashion when it meets to discuss macroeconomic conditions next week.
As long as BoT officials can make their case convincingly for fighting inflation rather than pumping growth, the MPC will be divided and under pressure to go with sound macroeconomic analysis.
As the global economic downturn deepens and oil prices ease at least in the short term, price instability may not be as an immediate a concern as previously. The merits and imperatives of macroeconomic stability, not the electoral cycle, should underpin monetary policy.
Time and again, it has been shown that the BoT lacks the mandate to effectively carry its inflation-targeting policy regime. Explicit legal independence from the cut and thrust of Thai politics, rather than unreliable functional autonomy, is needed at the central bank, despite the twin shortfalls of democratic accountability and coordination with fiscal policy.
Until then, public pressure in the streets and elsewhere is needed to prevent the Samak government from ramming its "growth-targeting" goals through monetary policy.
The writer is Director of the Institute of Security and International Studies, Faculty of Political Science, Chulalongkorn University.
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