When elected governments make noises about economic growth in countries where macroeconomic management is sound and prudent, central bankers tend to quietly bristle and brush off such interference and infringement of monetary space at their own risk. In so doing, central bankers tend to enjoy the support of domestic and international market participants who value central bank independence more than politicians' vested interests, even if it sometimes undercuts their bottom lines. Accordingly, when central bankers go along with the preferences of elected politicians, the conduct of monetary policy comes into question.
In Thailand's case, this question is attributable to Deputy Prime Minister Somkid Jatusripitak's suggestion to form a joint monetary and fiscal coordinating committee last week and Bank of Thailand (BoT) Governor Veerathai Santiprabhob's concurrence this week. This fiscal-monetary committee is rationalised on Thailand's economic well-being and growth prospects in view of adverse and worsening global economic risks and challenges.
Thailand has long been a showcase of autonomous central banking. The BoT has a proven reputation for making up its own mind. Because it is ultimately answerable to the finance minister and government of the day, the BoT has never been legally independent. Its perceived independence is more functional, a kind of monetary policy autonomy that derives from decades of shepherding financial sector stability and economic development in the country.
For much of the 1950s-80s, the BoT's autonomy was correlated with military-authoritarian rule. Back then, ruling generals provided substantial latitude to technocrats at the central bank because both sides had a vested interest in an expanding economy during this nation-building period amid the Cold War and communist expansionism. Anchored at the BoT, Thailand's technocracy at that time also featured the Budget Bureau, Fiscal Policy Office, and the National Economic and Social Development Board. This military-technocracy relationship eroded as Thai politics opened up from the late 1980s.
In more recent decades, BoT governors have had to rely on their charisma, capabilities, and credibility to ward off elected politicians who want to get a hold on monetary policy control. Their ultimate leverage is the support of the markets and the willingness to be dismissed. In 2001, for example, then-prime minister Thaksin Shinawatra effectively elbowed out then-BoT governor Chatu Mongol Sonakul for not toeing the government line. Unlike today where the baht is seen as too strong, Thaksin preferred baht strength in his campaign to make Thailand a middle power and a developed economy.
On the face of it, the Somkid-Veerathai deal to coordinate fiscal and monetary policies ostensibly makes common sense. If budgetary outlays and revenue considerations can be implemented in conjunction with interest rate movements and money supply conditions, it would seem the government can maximise its macroeconomic toolbox. If both monetary and fiscal policies can move in the same direction for national economic objectives, especially in the face of heightened global economic uncertainty, it seems obviously advisable and needed.
But in reality across countries, monetary and fiscal policy levers often move in different directions for prudential reasons. In charge of purse strings, the government of the day tends to overspend. If it is an unelected government of an authoritarian shade, overspending can end up in pockets of rulers and decision-makers. Elected governments are also incentivised to spend more than revenue generation but for a different reason. Governments that are accountable to their electorate need to maintain and gain the support of their constituencies, although corruption and graft can still be involved. The overall result for all governments over the past several decades is accumulated and growing debt.
Thailand's public debt, for example, stands at 41.28%, a manageable level compared to the likes of Japan's more than 200% and less than half of Singapore's, because the Thai economy has expanded moderately along the way. However, according to the Public Debt Management Office, the Thai government's portion of this amount has gone up dramatically.
In 2014, when the military regime led by Prime Minister Prayut Chan-o-cha began its five-year rule, the government's contribution to overall public debt was 2.8 trillion baht, equivalent to 54%. By 2018, the government was responsible for 70% of public debt to the tune of 4.6 trillion baht. The Thai military government, in other words, ran up a whopping 1.8 trillion baht of debt during its interregnum.
Even though public debt remains manageable in percentage terms, the government has been incurring debt alarmingly for future generations to repay. Payback on public debt from the national budget has climbed steadily to record levels, reaching 8.99% of the budget in 2018, most of it for interest payments. This means debt servicing could become problematic if economic conditions tighten.
This is why the BoT should stick to its long-established ground and steer away from government preferences. Fiscal and monetary policies stand apart because they are meant to check on each other. An autonomous central bank is like an institutional backstop to profligate government planners who want to spend to no end. This checks-and-balance system between fiscal and monetary authorities is more than worth the lack of policy coordination. If fiscal and monetary policies are too well coordinated, the government can have a field day with expenditures without oversight and offsetting mechanisms, resulting in more debt and burdens for future generations.
Apart from the lack of fiscal-monetary coordination, the other perennial criticism of functional central bank independence is the lack of democratic accountability. Sound, impartial and technocratic central banks have come under pressure from elected politicians for not being democratic. But in Thailand, central bankers have fought back tooth and nail to keep politicians at arm's length. Only in the 1988-91 period did senior central bankers become politicised and penetrated by politicians and their associates, eventually ending up with financial sector and exchange rate mismanagement that imploded in the 1997-98 economic crisis.
The BoT has a long and proud tradition. Its eminent line of governors since 1942, except one or two prior to the 1997-98 crisis, have been treated and regarded with utmost respect by the public and market participants at home and abroad. There is no business for the BoT to be working and coordinating with any government of any day.
Thitinan Pongsudhirak, PhD, teaches at the Faculty of Political Science and directs the Institute of Security and International Studies at Chulalongkorn University.