The 10,000-baht cash handout scheme has been under heavy criticism. More than 100 economists, led by two ex-Bank of Thailand governors, oppose the scheme that would bring more harm than good.
Major arguments include: (1) the Thai economy is recovering, particularly in the area of consumption, and there is no need for a big push; (2) the 560 billion baht needed can be spent on more worthy projects; (3) the scheme is not worth it as the fiscal multiplier is less than 1, and (4) fiscal discipline should be strictly observed.
The government has defended its cash handout scheme, saying the economy is in a difficult stage, thus warranting massive economic pump-priming. One justification is that people can use the handouts to start a business. Prime Minister Srettha Thavisin has even asked the public to back the scheme.
Using handouts to start a business is a lame justification. There could be a tiny percentage of cash recipients that do just that. The amount is way too small, and people lack the necessary entrepreneurial skills. Almost all of the money will be spent on consumption.
However, I do agree with the government that the economy is in a difficult stage. I estimate that Q3/2023 GDP growth could be as low as 1.5% (or even lower) because of inadequate domestic liquidity. Broad Money (BM) growth was only 1.6% in July and 1.4% in August.
September's BM growth rate is likely less than 1.4% as there is a $4.5 billion capital outflow, equivalent to 162 billion baht, in that month. Having said that, the cash handout scheme would not help the liquidity situation. On the contrary, 560 billion baht of new borrowing, whether directly by the government or indirectly by state enterprises and state banks, could create upheaval in the already tight domestic liquidity market.
I have a feeling that the government knows that the scheme is associated with high risk, particularly in finding money for it, but there is no way out. It will be political suicide for Pheu Thai to back away from its key election campaign promise. The financing plan of 360 billion baht from higher tax revenue and 200 baht from budget cuts is no longer feasible.
For a start, the 130 billion baht of new revenue expected from abolishing the 5 baht per litre diesel price subsidy is not valid as the government is now supporting the diesel price even more -- at 7.50 baht per litre. The planned cancellation of the government welfare card programme of 91 billion is out of the question as coalition parties disagree with the move.
The only option is to have state entities borrow in lieu of the government. But could that be done under this extremely tight liquidity environment? The negative excess liquidity situation is estimated to increase to 1.2 trillion baht in September.
Knowing well that the cash handout scheme has flaws, but with no option of backing out, the government has challenged those opposing the scheme to develop better ideas. So far, no alternative schemes have been suggested.
So, I accept the government's challenge and would like to propose two alternative economic pump-priming schemes.
Let me start with the standard GDP equation: Y = C + I + G + (X-M). The 10,000-baht digital wallet scheme targets C (consumption) by adding 560 billion baht to finance C. Higher C, logically, means higher Y (GDP). My suggested alternative scheme is to target I (investment) and X (exports) instead of C. Such a tactic was employed successfully by Prime Minister Thaksin Shinawatra. In 2003, investment grew 15.9%, and exports expanded 14.6%, pushing Thai GDP growth to 7.2%.
The investment-led growth strategy goes like this. Instead of distributing 10,000 baht of free money to 56 million consumers, the government provides a loan guarantee to 3.2 million SMEs at 180,000 baht for each SME. The estimated guarantee credit line is 576 billion baht, and the credit line has to be drawn down within six months or lose the remaining credit guarantee.
The guaranteed credit bears zero interest rate and would not have to be repaid for the first three years. The credits would relieve SMEs' debt burden, increase working capital, lower production costs, and improve business efficiency. SMEs who can repay the guaranteed loan would be awarded "gold" status and be entitled to favourable credit facilities after the scheme ends.
The superiorities of this investment-led scheme over the consumption-led scheme are as follows. First, the impact on GDP would be the same. Adding 560 billion baht into "C" or putting 576 billion baht into "I" would induce similar GDP growth. Second, it is not government debt but a government loan guarantee. If half of SMEs fail to return the guaranteed amount, the government can still recover half of the money of 288 billion baht.
Therefore, the cost to the government (and the Thai public) is halved compared to the cash handout scheme. Third, there is no need for immediate public borrowing. Commercial and state banks would advance the loans and become creditors to SMEs. Commercial banks with inadequate cash can borrow from state banks.
The government would have three years to prepare fiscal budgets for loan loss reimbursement. Fourth, through efficiency improvements, investment has a long-lasting positive effect on the economy.
Sound nice? Not really. Both consumption-led and investment-led schemes share the fatal theoretical flaw of no new money. An economy can only be stimulated if new money, such as from a quantitative easing programme, or excess liquidity, ie, money left dormant in the form of bank deposits and cash holding, is used. Without such necessary conditions, the scheme would crowd out other regular economic activities such as private sector borrowing for capacity expansion, repairing and replacing broken down machines, or buying houses and automobiles.
Let me note that, at the beginning of the Thaksin era in 2001, there was about 208 billion baht of excess liquidity to fund his investment-led growth strategy. And at the beginning of Yingluck's era in 2011, there was 823 billion baht of excess liquidity to fund her consumption-led growth schemes.
The liquidity problem leads to the best alternative scheme -- targeting X. Specifically, targeting more tourist income by luring more tourists and more days of stay. Cash back could be given as an incentive to foreign tourists. I will give a hypothetical example of how the scheme could be done. Tourists staying five consecutive days get 5,000 baht cash back, and tourists staying eight consecutive days get 10,000 baht cash back. The cashback incentive could be higher during the low season and lower during the high season.
If 40 million tourists visit Thailand in 2024 and all stay more than eight days, the cost to the government incentive programme would be 400 billion baht. With 40 million tourists staying over eight days, the country could earn 3 trillion baht (17% of GDP) of income. Voila!
The desperate liquidity situation is solved, and 5% GDP growth can be attained. The government might have the right idea but surely has a wrong strategy. It is time to look for better alternatives.