Thailand's Currency Crisis: Solutions
From Dickinson College Wiki
Beyond academic speculation from countries worldwide, the countries affected by the East Asian crisis have learned some hard lessons. These lessons forced the countries into action to remedy the multiple economic problems created by the currency 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
- 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: 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
- external payments (foreign loans to Thailand requiring interest payments): 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
- IMF: emergency rescue monies IF the country adopts certain policies that limit vulnerability
- also implemented market-opening measures to facilitate foreign investment
These accomplished:
- strengthened financial systems
- enhanced transparency of policies and economic data
- restored economic competitiveness
- modernized legal and regulatory environment for more stringent regulatory oversight and consistent application of accounting standards
Aftermath
- 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.
