To proponents of central bank independence, the ongoing friction between Prime Minister and Finance Minister Srettha Thavisin and Bank of Thailand Governor Sethaput Suthiwartnarueput appears straightforward. The prime minister is putting unwarranted and unfair pressure on the central bank governor to spur the economy by loosening monetary policy and cutting interest rates. Yet, on closer scrutiny, the entrenched politicisation of central banking in Thailand may suggest otherwise. There is more than meets the eye in the politics of interest rate cuts.
When it was popularised in the late 1980s, central bank independence seemed like a panacea. It was thought that ravaging inflation in myriad economies worldwide could be contained and controlled by an independent central bank not beholden or influenced by the government of the day. Central bank independence was thus legally codified, and central bank governors entered into contractual agreements whose sole purpose was to ensure the stability of consumer prices along with wages and exchange rates.
With the conduct of monetary policy confined entirely to them, central bank governors had substantial and unfettered latitude to oversee the broader macro-economy and price stability. Central bank independence, or CBI, became an appealing model adopted by a wide range of developed economies, initially led by the Reserve Bank of New Zealand and the Bank of England. In recent years, after the 2008-09 global financial crisis, CBI lost its allure, and central bankers have been seen as more of the problem than the solution because they were unable to address persistent global deflationary malaise.
In Thailand, central banking has never been legally independent. Instead, the BoT, since its creation in 1942, has had to rely on moral authority and technocratic competence to have a kind of monetary policy autonomy. This autonomy was premised on each and every BoT governor's expertise, integrity, and moral authority. Dr Puey Ungphakorn, who served as central bank governor from 1959-71, best exemplified these qualities.
Contrary to global CBI trends, the BoT governorship became politicised and captured by commercial banks' and elected politicians' vested interests in the early 1990s, leading to the mismanagement of the financial sector and the exchange rate. The infamous culmination was the economic crisis in 1997-98. Over the past two decades of Thailand's colour-coded politics that included two coups and volatile street protests, central bank governors have been perceived to have a pro-establishment orientation against "populist" platforms of the winning political parties associated with Thaksin Shinawatra.
This brings up the case of Mr Srettha and Mr Sethaput. It is a fact that the Thai economy has faced deflationary signs since the fourth quarter of last year. There is no crisis in view of macroeconomic data. Reserves are high, inflation low, external accounts in surplus, and the financial sector in such good health that commercial banks made obscene profits last year on net interest margins.
But to ordinary people, the Thai economy is in a kind of crisis best defined by prolonged and protracted doldrums without a good future to look forward to. Over the past decade, Thailand's trend growth has halved to an average of just 1.5% per year. For 2024, the National Economic and Social Development Council has lowered its growth projection to just 1.9%. With low growth in the face of household debt at over 90% of GDP alongside structural constraints associated with a slumping middle-income country, countless Thais don't see or feel economic dynamism in this country. This is what Thailand's economic crisis is about.
The BoT is now bringing about the two primary drawbacks of central bank independence, with the lack of coordination between monetary and fiscal policies and the lack of democratic accountability. Online records will show that the search committee for the BoT governorship in June 2020 extended the deadline, with Mr Sethaput somehow applying in the extra period and getting the job. It took place under Gen Prayut Chan-o-cha's military-backed government.
Unsurprisingly, the BoT never really questioned the advisability and viability of the Prayut government's policies. When public debt was ramped up by nearly 2 trillion baht to 17.8 trillion by the end of fiscal year 2022, the central bank conspicuously accommodated with some of the lowest-ever benchmark interest rates at the time. True, both fiscal and monetary policies expanded because of pandemic exigencies. But public debt had been expanding from 13.5 trillion baht after Gen Prayut staged a coup in 2014, and yet the gatekeepers and guardians of fiscal discipline hardly raised a voice.
The BoT's current recalcitrance has more to do with politics than policy discipline. Had the establishment side come out on top at the poll last May and formed a government, it is very plausible that the central bank would be accommodating rather than obstructing. Had the Move Forward Party, as the largest vote winner, been allowed to form a government, its economic policies, from wage rises to growth plans from tackling monopolies to structural reforms, would most likely be stymied by the current BoT leadership as well. The truth is that Thailand's central bank is still politicised and captured by establishment forces who yearn for a kind of virtuous rule that is no longer there.
For the BoT to regain its moral authority, its governors must be blind to the politics of the day. The only main leverage the governor holds is the willingness to be terminated on merits. Mr Sethaput's macroeconomic expertise is not in doubt, but his politics is. The BoT should listen to the markets that now expect rate cuts at least twice this year to stimulate the economy, and the sooner, the better.
The public and market participants need to pay close attention when the next BoT governor is chosen to make sure that the government of the day has little or no role in the search process. Thailand has plenty of talents and experts to head the central bank. They just need to be more like Dr Puey again.