Thailand's Currency Crisis: Solutions
ABOUT THE REACTIONS/RESPONSES TO THAILAND'S CRISIS
Reactions
- Lesson: Monetary authorities stuck too long with the fixed exchange rate, managing the exchange rate is no longer possible or desirable and they now should focus instead on inflation.
- Bank of Thailand now needs badly to restore its reputation. To do so, the Bank has decided to go for inflation targeting, setting itself an ambitious inflation target.
Responses
Regardless of the cause of the crisis and its consequent spillover to other countries, all analysts agree that the fallout in Asia and other emerging markets have been severe. Although initially only financial in nature, the crisis has led to significant real economic losses in these formerly fast-growing economies. Just like the previous developing-country crises, lenders, borrowers, and international financial institutions worked together to overcome the crisis. The external payments situation were stabilized through IMF-led aid programs, the rescheduling of short-term foreign debts, and reductions in foreign borrowing through painful reversals of current account deficits. Financial packages are now being geared to encourage the adoption of policies that could prevent crises in selected developing countries. Backed by a recent IMF quota increase of $90 billion, the IMF would make a continent short-term line of credit available before a crisis breaks out, but only if a country adopts certain policies that would limits its vulnerability. This line of credit is expected to be of short-term and charge interest rates above market rates to discourage misuse (Moreno, 1999).
East-Asian countries closed many ailing banks, cleaned up non-performing loans, encouraged surviving banks to merge with other banks, and compelled these banks to meet the capital adequacy ratio set by the Bank for International Settlements. Corporate sector reforms included capital structure improvement through debt reduction, business restructuring to remove excess capacity, the reorientation of conglomerates on core specialists, and the upgrading of corporate governance standards. These countries also implemented market-opening measures to facilitate foreign investment.
These and other policy responses strengthened financial systems, enhanced transparency of policies and economic data, restored economic competitiveness, and modernized legal and regulatory environment for more stringent regulatory oversight and consistent application of accounting standards. The Asian crisis, like the Latin American debt crisis and the Mexican crisis, have had a profound impact not only on the economies of the affected countries, but also on the developing countries. Our analysis in this paper sheds light on the Asian countries' reversal of economic fortune and suggests action that may help countries to face and weather out the financial storms in the future.
- The fears of significant backtracking in Thailand's existing commitments have not materialized. The Thai government has announced it's intention of adhering to all existing commitments with regard to trade policy reform.
- Crisis has made it more difficult for gov't to contemplate tariff reductions and/or relaxation of the non-tariff barriers in industries badly affected by the crisis.
- Inevitably the crisis led the Thai government to reconsider policies of liberalization (which characterized the first half of the 90's). Debate over which type of liberalization had contributed to the crisis (trade policy liberalization or capital account liberalization) resulted in the decision that capital account liberalisation was responsible. Therefore major changes to exchange rate policy were implemented but the commitment to trade liberalization remained essentially intact.
