Debt suspension, a policy that is not recommended by the International Monetary Fund

Chtisak Nanthapanich

Last week, at the end of January 2024, the IMF published the summary results of the Thai Economic Situation Monitoring and Assessment Meeting with the Bank of Thailand. The conclusion covers views on the economy, including the current economic situation. Policy support corner, warnings and suggestions on what Thailand should and should not do.

Overall, the IMF notes that the Thai economy is still recovering but is losing recovery momentum. They pointed out that the economy slowed from 2.6% in 2022 to 1.9% during the first to third quarter of 2023 due to shrinking exports. And investment in weak countries, despite strong private consumption and more active tourism. Before we conclude that the economy last year will grow by 2.5%.

But… IMF finds that the recovery of the Thai economy has not been entirely smooth. There are still external and internal economic waves to overcome, whether external or internal risks. External risks such as a sudden slowdown in the economy (economy) around the world including China, rising oil prices as well as global financial conditions becoming tighter than expected. This was followed by deepening economic polarization.

As for internal risks, such as a lack of financial discipline that may destroy macroeconomic stability. Rising private debt threatens financial stability and over-reliance on tourism will increase the risks that come from external influences.

In addition to the risks mentioned above, the IMF also points out that the problem with the Thai economy at the moment is that it has recovered more slowly than other countries in ASEAN. Moreover, they face uncertainty. Due to limited financial space and long-term structural problems

With the mentioned problems, the IMF recommends that Thailand undergo intensive structural reforms to increase productivity. Potential growth and creating preparedness to deal with climate change problems. To solve the above problem

In addition to the IMF's views that the (Thai) fiscal strategy in the medium term (about 3-5 years) should aim to reduce public debt while also maintaining fiscal space to invest in human capital and physical capital, and reduce Risks arising from state institutions and extra-budgetary funds Increase revenue collection management by gradually increasing the VAT rate. Along with improving the efficiency of budget spending. Eliminate subsidies on expensive energy prices. These are all things that need to be done in the first place.

The IMF report summarizing the findings also mentioned the issue of debt suspension, saying that the IMF Board supports the government. Implement a reduction in private debt and high household debt through restructuring support, encourage responsible borrowing and strengthen the framework to reduce systemic risks, rather than debt suspension measures that may cause moral hazard or moral hazard problems. In this case, this means that debt moratorium measures may create an incentive for debtors to stop repaying debts.

Previously, the Bank of Thailand protested the policy of suspending debts of farmers and SMEs for 3 years and 1 year, with agricultural clients. The Bank of Agriculture and Agricultural Cooperatives (BAAC) joins the project to suspend 2.698 million debts, representing a total debt of 283,327 1.99 million baht (September 2023), with the government to compensate BAAC with interest at a rate of 4.5% annually, equivalent to a total of 11.096 million baht annually.

Bank of Thailand Governor Dr Sitaput Suthiwat Naroput believes the above-mentioned debt moratorium will not be able to close debts because about half of BAAC's debtors are chronically over-indebted. Willing to suggest that the government should not rely on the debt suspension measure as the main instrument. But the focus must be on resolving chronic debt clusters. It has debtor welfare measures to incentivize debtors not to join the debt suspension as well. With reference to previous experiences, debts have been suspended 13 times during the past nine years, but the debt situation has never improved.

Even with IMF recommendations based on academic principles and on Thailand's actual economic situation. This is not new. Most of them are issues that have been talked about in different circles before. Whatever the structural problems, financial constraints including household debt problems, tax increases, etc., all need to be resolved.

If the National Bank's expression is used, it is very likely that when this round of debt suspension measures ends in 2026, the next elections will be held. Every political party must have a debt suspension as part of their campaign policy because it is considered a must and the future government will continue the same do-or-die economic policy as before.