The purpose of this article is to educate the public about the real issue of the digital wallet scheme. The issue is not "HOW to get the 500 billion baht?" but "Is there 500 billion baht AVAILABLE to be borrowed?"
The legality of financing sources is the government's problem, not the public's. They just have to make sure that obtaining the 500 billion baht is done in a way that will not land them in jail. It seems like the government has found the legally correct means now.
The answer to the availability issue is that, without the Bank of Thailand's (BoT) liquidity support, it is almost impossible to find money unless the government decides to pull some nasty tricks -- as there is no dormant 500 billion baht in the monetary system to borrow in 2024.
With no liquidity injection by the BoT, one can be 90% sure there will be no cash-handout in the fourth quarter of this year. I leave the possibility of 10% for a surprise massive inflow of capital, or the government pulling nasty tricks.
The financing plan of the 500 billion baht digital wallet (DW) scheme was announced last week. Instead of issuing an Emergency Borrowing Act, funding will come from three sources: (1) 2024 fiscal budget to the amount of 175 billion baht, (2) 2025 fiscal budget to the amount of 152.7 billion baht, and (3) an advance by the Bank of Agricultural and Agricultural Cooperatives (BAAC) to the amount of 172.3 billion baht.
The complicated financing plan of splitting the funding into three sources was drawn up to avoid breaching the Public Debt Management Act of 2005.
Section 21 says the "government shall not borrow more than 20% of the expense budget to finance deficit in each fiscal year". Previously, the government attempted to bypass this legal borrowing limitation by issuing a separate Emergency Borrowing Act/Decree. The Office of National Anti-Corruption Commission (NACC) advised against such a move as the economic situation now does not qualify as an "emergency". Therefore, the government abandoned Plan A that was the Emergency Borrowing Act and went to Plan B -- splitting funding sources.
I still have some legal doubts about the new funding plan, such as managing the 2024 fiscal budget to save cash for the DW scheme to be launched in the 2025 fiscal year, and the authority of the BAAC to make an advance. However, those legal risks are not my concern. My concern is "where is the money?"
It really does not matter how the financing of the DW scheme would legally come about, as long as there is money in the system to borrow. The money could be borrowed under the Emergency Borrowing Decree/Act, under this year's fiscal budget, under next year's fiscal budget, from state bank(s), from commercial banks, or even from donations from rich Thais. The bottom line is that the government has the necessary money ready for distribution.
Let me give an example: if rich Thais decide to head to commercial banks to withdraw 500 billion baht to "donate" to this DW scheme, commercial banks will say HOLD ON, as the entire Thai banking system currently holds cash in the amount of 223.3 billion baht. There are three possible ways for banks to raise the remaining 276.7 billion baht of cash: (1) borrow from abroad in dollars and convert into baht at the BoT; (2) recall loans, which is not possible as borrowers have no way to find cash; and (3) borrow from the central bank. It is clear that without the liquidity support of the central bank, financing the extra 500 billion baht will not be possible.
The prime directive of the BoT is to make sure that inflation rates are at acceptable levels through proper management of the money supply (broad money). The attached table in this article proves the BoT is good at its job, except for in 2022, probably because the economy needed to recover from the Covid economic crisis and the central bank obviously released too much liquidity. The result was a 6.08% inflation rate.
To keep inflation below 2% in 2024, according to my own estimation, the BoT will likely need to keep broad money supply growth at 2.4%, implying 499.9 billion baht of the money supply will increase. This amount of new money supply is to be shared by the public and private sectors for funding requirements. The government needs 693 billion baht to cover its 2024 budget deficit. Therefore, there would already be a liquidity fight between the public and private sectors, even without the additional 500 billion baht funding for the DW scheme.
So, is the DW scheme hopeless? Not exactly. The BoT is powerful enough to release a large amount of extra liquidity/money supply. The BoT did just that in 2020 and 2021. To finance Emergency Borrowing Decrees of 1 trillion baht and 0.5 trillion baht, the central bank injected 1.26 trillion baht of liquidity in 2020 and injected another 852.9 billion baht in 2021 respectively.
I should explain the BoT was able to do the liquidity injection because conditions were conducive to do so. The BoT is bound by law under the Currency Act of 1958 and cannot create liquidity at will. The liquidity injection of 2020 was possible because of the US$27.4 billion of net foreign capital inflow and the liquidity injection of 2021 was possible through the "asset revaluation" technique.
Before crying that the BoT is being unfair to the current government because it supported the previous government's financing needs and (are likely to) reject this government's financing needs, please note the inflation rates of 2020 and 2021. I am certain that if 2024/25's inflation rates can be managed to be below 2%, the BoT could be agreeable to a liquidity injection for DW programme.
When the government talks about the DW scheme, it only claims how much gross domestic product (GDP) growth will be boosted, but never mentions the effects on inflation. I really do not understand how the government can be proud of the DW programme as, according to the government own's statement, the GDP boost would be 1.2% to 1.8% while the cost of the scheme to taxpayers is 2.8% of GDP.
The new financing plan is a good effort but it will not work unless the BoT cooperates. It should be noted that if the BoT ignores the government's request to inject liquidity to lower the policy interest rate due to concerns over inflation, I see no logical reason why the central bank would yield to the liquidity requirement of the DW scheme.
Some wicked thought just flashed into my head. What if, worse comes to worse, the final DW token recipients cannot redeem their tokens for cash, but get tax credits or even government bonds in exchange? Interesting?