The International Monetary Fund (IMF) estimates Thailand's real GDP grew by 0.5% last year and will improve to 3.5% this year but warns that economic risks lie ahead.
"A modest recovery is expected to continue in 2015, with growth projected at 3.5% on account of some recovery in consumption, including from lower fuel prices, and in private investment as backlogs of project approvals have been largely cleared by various government agencies," the IMF said.
An IMF team visited Bangkok and Khon Kaen from Jan 15-29 to conduct the 2015 Article IV Consultation discussions.
The team exchanged views with officials from the government, Bank of Thailand and other public agencies and enterprises on recent economic developments.
It also met with the private sector, civil society and academia.
An accommodative monetary policy will support Thailand's economic recovery, but private investment is being hampered by low capacity use, weak external demand and concerns over political uncertainty, the IMF said.
It said private consumption was weakened by high household debt and tighter credit conditions, while global demand for Thailand's exports was weak.
The expansion of public investment had proven more difficult than expected including implementation of the stimulus package approved last October.
Real GDP is the value of economic output adjusted for price changes.
Headline inflation fell dramatically in the second half of 2014, but core inflation remained stable.
Inflation is projected to remain subdued this year and recover somewhat towards the end of the year.
The current account has strengthened mainly on account of lower international oil prices in recent months, and the surplus is expected to rise further in 2015.
A gradual recovery in imports is expected, while exports are projected to grow only modestly, leading to a lower current account surplus during the medium term.
"Risks to the outlook are tilted to the downside. Domestic risks to the economy come from policy slippages, weaker-than-expected private demand and political uncertainty," the IMF said.
"External risks include a surge in global financial volatility and protracted slow growth in advanced and emerging economies. On the upside, domestic consumption and exports may experience a stronger boost from sharply lower oil prices.
"The mission supports the authorities' plans to expand fiscal stimulus to boost the economy and encourages the authorities to frame it within a medium-term fiscal plan to strengthen revenue, increase investment and bolster fiscal institutions. Priority should be given to completing the fuel subsidy reform including the full reinstatement of diesel taxes."
As part of the medium-term fiscal strategy, authorities should consider gradually increasing the value-added tax rate to 10% from 7%, starting only when the economic recovery is well entrenched, while introducing programmes aimed at mitigating the effect on vulnerable groups.
A stronger revenue base would lead to a critical strengthening of the fiscal position and allow for higher infrastructure spending and provide for the needs of an ageing population in the coming years.
"Reforms to state enterprises, the rice scheme, infrastructure projects and tax administration and expenditures would further strengthen transparency, confidence and fiscal sustainability," the IMF said.
"Staff welcome the move to target headline inflation instead of core inflation because, as the more relevant measure, it is likely to be more easily communicated to the public.
"While the current monetary stance is accommodative, there is scope to consider a further easing of the policy stance if the economic recovery is weaker than anticipated."
The IMF supports authorities' efforts to strengthen financial surveillance by enhancing the monitoring of financial vulnerabilities arising from credit growth, household debt and specialised financial institutions (SFIs).
It encouraged authorities to continue strengthening the financial framework and welcomed plans to extend the Bank of Thailand's supervisory and regulatory mandate to SFIs and invite savings and credit cooperatives to be included in the National Credit Bureau.