Govt must spend this B500bn wisely

Govt must spend this B500bn wisely

Parliament will be in session starting today mainly to consider the 2022 fiscal budget. An emergency decree authorising new borrowing for relief packages will be submitted for approval. (Photo: Apichart Jinakul)
Parliament will be in session starting today mainly to consider the 2022 fiscal budget. An emergency decree authorising new borrowing for relief packages will be submitted for approval. (Photo: Apichart Jinakul)

It is now official. An emergency decree authorising the Ministry of Finance to borrow money to solve the economic and social problems arising from the Covid-19 outbreak was published in the Royal Gazette on Tuesday. However, the authorised amount is 500 billion baht, not 700 billion baht as we had heard from various sources. The spending is divided into three categories: 30 billion baht for healthcare management; 300 billion baht for economic relief programmes, and 170 billion baht for economic recovery projects.

The budget from the new decree is half the previous 1 trillion baht emergency decree passed in April last year. The composition of the previous economic relief decree is similar to the new one, yet with a larger budget allocations -- 45 billion baht for healthcare management, 550 billion baht for economic relief programmes and 400 billion baht for economic relief projects. In practice, most of the 1 trillion baht budget was spent on economic relief programmes such as "Rao Mai Ting Kan" (Leaving No One Behind), "Rao Chana" (We Win), "Kon La Kreung" (Let's Go Halves). The allocation of spending limit by category is not binding.

For the next step, the decree will be submitted to parliament for approval. Coincidentally, parliament will be in session starting today mainly to consider 2022's fiscal budget. It has been tentatively proposed that the 500 billion baht decree will be put forward for parliamentary consideration and approval tomorrow. The dates for the 2022 budget consideration are set from May 31-June 2. If the decree fails to get approval from both houses, the decree will cease to exist.

Legally, there is a slight problem with this 500 billion baht decree. The authorised borrowing amount from the decree and the proposed 2022 budget deficit combined will call for 1.2 trillion baht in government borrowing. The amount will put the public debt to GDP ratio at 61.2 % -- exceeding the maximum threshold of 60% set by the Financial Responsibility Act. The act might need to be amended.

Let the government deal with tricky legal issues. I will deal with the economic issues. The first issue is the financing of the new economic relief packages. The second issue is the expected economic impact of the packages. Due to limited space, I can analyse only the first issue in this article. The second issue will have to be analysed in my next article.

I have been saying repeatedly that economic conditions this year are not like last year when the country enjoyed a large balance of payments surplus and massive capital inflow which were estimated to have brought in US$33.8 billion (1 trillion baht) of fresh money into the system.

This 1 trillion baht of cash comfortably financed last year's fiscal budget deficit and April 2020's economic relief packages. (By the way, only 500 billion baht of the relief packages was spent in 2020). In contrast, from Jan 1 to May 14 of 2021, about 200 billion baht of cash has been drained from the monetary system owing to the balance of payments deficit and capital outflow.

At the time of writing this article, excess liquidity in the monetary system was probably less than 300 billion baht -- apparently not enough to finance the government's current operations which needs 200 billion baht to cover its 2021's fiscal year deficit and another 220 billion baht to pay for economic stimulus schemes such as the Rao Chana programme. Adding an additional 500 billion baht of borrowing from the new decree will be impossible.

When I try to explain the importance of inadequate liquidity, most people dismiss the issue as they believe that somehow the government will find money out of thin air. Would it be easier for people to understand the concept of money if I changed it from "money" to "chickens"? What will happen when the government wants to borrow more chickens? First, mother hens have to lay the eggs. Eggs need to be hatched into little chicks. They need time to grow up to become adults. Only then can they be lent to the government. Get the picture? Money, too, needs time and processes to be properly nourished, just like raising chickens.

The argument that Thailand has a low public debt to GDP ratio and, therefore, the government can borrow more is irrelevant. This is similar to saying the government has not borrowed many chickens. Therefore, the government can borrow more. Sure. But the main question remains. Where are the chickens? There are two options for the government to borrow more than present domestic liquidity can support. First, do it like the big boys -- US, EU, UK, and Japan -- asking central banks to buy government bonds, the equivalent of printing money. Unfortunately, only the big boys, who have currencies that are world reference currencies, can get away with doing this. The reason is that everybody trusts in the economies and the currencies of those big boys.

No matter how much in US dollars, euros, pounds, and yen are printed, the world faithfully accepts them. When the Bank of Venezuela did exactly the same, the bolivar depreciated by thousands of per cent per year because no one trusts the Bolivian currency. In short, this is not an option for the government and Bank of Thailand (BoT). Don't believe me, ask the International Monetary Fund (IMF).

The second option is to borrow from abroad. I am sure that this will prove to be unpopular as ghosts of the 1997 foreign exchange crisis still haunt us to this day. But this is a realistic option; even the IMF has prepared a 1 trillion US dollar loan facility for this purpose. Of course, given the strength of our international reserves, Thailand is not qualified to obtain an IMF loan. But we can easily borrow in the international capital market. Thailand's external debt per GDP is still at a low level. The ratio is merely 36.7% (as of December 2020) compared to 75% to GDP prior to the 1997 crisis. The government could borrow $20-30 billion to cover the cost of economic relief packages and finance future fiscal deficits.

If the government does not want to issue a large amount of sovereign bonds in the international market within a short period of time, they can discuss with the BoT purchasing or warehousing part or all of these sovereign bonds in their international reserve funds. Now the government has money. The next step, which is more important, is how to spend it wisely. The previous 1 trillion baht spending already proved to be a failure.

Chartchai Parasuk

Freelance economist

Chartchai Parasuk, PhD, is a freelance economist.

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