The Finance Ministry and the Bank of Thailand yesterday agreed not to tap the country's foreign reserves to establish a sovereign wealth fund, easing market concerns about government interference in the central bank.
The proposal, initiated by the ministry, would look to invest some of the country's US$180 billion (5.6 trillion baht) in foreign reserves in higher-performing assets other than low-yielding government bonds.
The Finance Ministry also agreed to a central bank proposal to shift the target of its monetary policy system to headline inflation. Under the new system, the central bank's Monetary Policy Committee will set short-term interest rates with the aim to keep inflation, measured by the consumer inflation index, at an average of 3% per year, with an upper and lower band of 1.5 percentage points.
The central bank's inflation-targeting system now aims to keep core inflation, which excludes food and energy prices, within a range of 0.5% to 3% per quarter.
Finance Minister Thirachai Phuvanatnaranubala, himself a former central banker, asked the Bank of Thailand to consider the issues of a sovereign wealth fund and a change in inflation targets after he took office in August.
But the two agencies yesterday failed to reach an agreement on how to manage the massive liabilities built up from the bailout of ailing banks and finance companies during the 1997 crisis.
Mr Thirachai said the ministry would not push the central bank to allocate any foreign reserves for a sovereign wealth fund.
The government would establish a clear objective and investment strategy for the fund, with money drawn from other sources other than the central bank, he said. The Finance Ministry would continue studies on the idea, with a focus on ensuring transparency and safeguards in the investment process.
Mr Thirachai said he disagreed with two proposals made by the central bank on how to refinance the 1.1 trillion baht in liabilities outstanding from the Financial Institutions Development Fund.
The liabilities were transferred to the Finance Ministry following the 1997 financial crisis. Under an agreement made in 2002, the central bank must help pay off the debt using returns generated from the country's foreign reserves.
But the central bank has run losses in recent years due to exchange rate effects resulting in little reduction of the debt. Mr Thirachai suggested the central bank consider the impact on its balance sheet if the 1.1 trillion baht in debt was transferred back to the Bank of Thailand.
The central bank was also directed to consider if levies assessed on local banks could be used to pay down liabilities of the fund.
Central bank governor Prasarn Trairatvorakul expressed caution about the idea as potentially undermining monetary discipline. The liabilities were originally transferred to the government to avoid the risk of "monetisation", where the central bank could look to pay down the debt simply by printing money, jeopardising economic stability.
But the transfer has incurred a significant cost for the government, as interest paid on bonds issued to cover the liabilities must be paid through the annual government budget.
Mr Prasarn said the change in inflation targets would help improve public communications and understanding, and also help boost flexibility in monetary policy as the target has shifted to an annual average compared with a quarterly one.
Source: www.bangkokpost.com
The proposal, initiated by the ministry, would look to invest some of the country's US$180 billion (5.6 trillion baht) in foreign reserves in higher-performing assets other than low-yielding government bonds.
The Finance Ministry also agreed to a central bank proposal to shift the target of its monetary policy system to headline inflation. Under the new system, the central bank's Monetary Policy Committee will set short-term interest rates with the aim to keep inflation, measured by the consumer inflation index, at an average of 3% per year, with an upper and lower band of 1.5 percentage points.
The central bank's inflation-targeting system now aims to keep core inflation, which excludes food and energy prices, within a range of 0.5% to 3% per quarter.
Finance Minister Thirachai Phuvanatnaranubala, himself a former central banker, asked the Bank of Thailand to consider the issues of a sovereign wealth fund and a change in inflation targets after he took office in August.
But the two agencies yesterday failed to reach an agreement on how to manage the massive liabilities built up from the bailout of ailing banks and finance companies during the 1997 crisis.
Mr Thirachai said the ministry would not push the central bank to allocate any foreign reserves for a sovereign wealth fund.
The government would establish a clear objective and investment strategy for the fund, with money drawn from other sources other than the central bank, he said. The Finance Ministry would continue studies on the idea, with a focus on ensuring transparency and safeguards in the investment process.
Mr Thirachai said he disagreed with two proposals made by the central bank on how to refinance the 1.1 trillion baht in liabilities outstanding from the Financial Institutions Development Fund.
The liabilities were transferred to the Finance Ministry following the 1997 financial crisis. Under an agreement made in 2002, the central bank must help pay off the debt using returns generated from the country's foreign reserves.
But the central bank has run losses in recent years due to exchange rate effects resulting in little reduction of the debt. Mr Thirachai suggested the central bank consider the impact on its balance sheet if the 1.1 trillion baht in debt was transferred back to the Bank of Thailand.
The central bank was also directed to consider if levies assessed on local banks could be used to pay down liabilities of the fund.
Central bank governor Prasarn Trairatvorakul expressed caution about the idea as potentially undermining monetary discipline. The liabilities were originally transferred to the government to avoid the risk of "monetisation", where the central bank could look to pay down the debt simply by printing money, jeopardising economic stability.
But the transfer has incurred a significant cost for the government, as interest paid on bonds issued to cover the liabilities must be paid through the annual government budget.
Mr Prasarn said the change in inflation targets would help improve public communications and understanding, and also help boost flexibility in monetary policy as the target has shifted to an annual average compared with a quarterly one.
Source: www.bangkokpost.com
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