IMF’s Approval of the Stand-by Arrangement for the Macroeconomic Adjustment Program Following the co-signing of the Letter of Intent by the Minister of Finance and the Governor of the Bank of Thailand, the Bank of Thailand wishes to make the following announcement on the macroeconomic and. financial adjustment program with the International Monetary Fund: 1 The Executive Board of the International Monetary Fund on 20 August 1997 approved the Stand-by arrangement to Thailand for an amount of SDR 2.9 billion, equivalent to about US$ 4 billion. Disbursement period of the Stand-by arrangement is 34 months until the year 2000. Thailand would only incur debt obligations if drawings are made (details as attached) 2. The Government of Japan and seven regional central banks, together with the World Bank, and the Asian Development Bank have also agreed to extend another US$ 12.7 billion in credit to Thailand; namely, Japan US$ 4 billion; Australia, China, Hong Kong, Malaysia, and Singapore, US$ 1 billion each; Indonesia and South Korea, US$ 0.5 billion each; the World Bank, US$1.5 billion; and the Asian Development Bank. US$ 1.2 billion. In addition, the monetary authorities. of the G-10 countries and other Asian and European countries have expressed their support for Thailand’s stabilization program and have agreed to stand ready, in case of need, to support the Bank of Thailand by providing liquidity through the Bank for International Settlements (BIS) in the form of a short-term bridging facility. 3. The credit lines will be used solely to finance the balance of payments gap and rebuild international reserves which may trend downwards due to the following reasons: 3.1 Thailand’s current account deficit is not expected to be fully financed by net capital inflows. Consequently, the balance of payments will experience some deficits and international reserves may decline.3.2 Thailand has been substantially reliant on short-term capital. A substantial part of this amount is expected to be rolled-over while another part will be repaid upon maturity, the respective portions depending on the confidence in Thailand’s economic adjustment program 3.3. The Bank of Thailand has forward obligations which have to be gradually unwound. For the purpose of transparency and public understanding on the financial position of the country, the Bank of Thailand wishes to provide information on forward obligations as follows: (1) As at 19 August, forward obligations over the next 12 months totalled US$ 23.4 billion. Of this amount, on-shore activities relating to domestic monetary operations amounted to US$ 8.6 billion, while off-shore obligations amounted to US$ 14.8 billion. (2) On-shore activities are instruments of domestic liquidity management, which have since last year become part of the normal conduct of monetary policy operations. The Bank of Thailand undertakes daily auctions of swap transactions with domestic financial institutions as a way of providing baht liquidity. This part of the operation is normally tolled-over and will not adversely affect the international reserve position: The off-shore operation resulted from intervention to defend the baht currency at the level set by the Exchange Equalization Fund during the period of intensive speculative attacks and tight liquidity in the market. These forward commitments will be settled, not immediately, but over the next 12 months. Such levels of forward commitments have been taken into account during the consultation with the International Monetary Fund, and the financing package earlier mentioned already provides for maintaining SHE TEE aT international reserves at a minimum of US$ 23 billion in 1997, and US$ 25 billion in 1998, equivalent to 4 months of imports. 5. The Bank of Thailand will in the future be publishing information on international reserves every 2 weeks on Friday, in addition to the normal monthly release Bank of Thailand 21 August 1997Summary of Important Measures in the IMF Package Outlined in the Letter of Intent On 14 August 1997, the Minister of Finance and the Governor of the Bank of Thailand co-signed the Letter of Intent committing Thailand to the economic adjustment package outlined by the International Monetary Fund Important measures in the package are as follows: 1. Credit line Under the terms of the Letter of Intent, the Intemational Monetary Fund will be providing Thailand with a stand-by arrangement amounting to SDR 2.9 billion or about US$ 4 billion ( as of 8 August 1997, 1 SDR is equivalent to about 1.35 US dollars ) equivalent to over 5 times Thailand’s quota in the Fund. The stand-by arrangement will be used to finance the balance of payments gap and to rebuild international reserves. In order to avail of the stand-by credit, Thailand is committed to adherence to the policies outlined in the economic adjustment program to ensure the achievement of the medium- term program targets. 2. Macroeconomic objectives (1) Maintain economic growth rate at 3-4 percent in 1997-98 and the achievement of potential growth rate of 6-7 percent over the medium term. (2) Reduce inflation to 4-5 percent after an initial increase to an average of 7-8 percent in 1997-98. (3) Reduce the current account deficit to 5 percent of GDP in 1997 and to a sustainable level of 3 percent over the medium term (4) Maintain gross international reserves at about US $23 billion in 1997 and USS 25 percent in 1998, equivalent to approximately 4 months of imports. 3. Policies committed and measures under the Program 3.1 Financial sector restructuring Measures Implemented (1) On 5 August 1997, the authorities undertook to isolate 42 finance companies experiencing liquidity problems from the other financial institutions in the system. This measure was aimed at restructuring the financial sector and restoring public confidence in particular, with regard to the health of the remaining financial institutions. Moreover, in anticipation of the establishment of the deposit insurance scheme, the government has announcedthe extension of temporary guarantee to the companies’ depositors and creditors, both domestic and foreign. (2) The government has announced that it will not make public funds available to aid corporate or household borrowers. (3) As the government will stand behind the remaining financial institutions’ obligations to depositors and creditors, contributions to the Financial Development Institutions Fund will be raised to 0.15 percent of protected deposits and borrowings in the second half of 1997, and to 0.2 percent in 1998, on a semi-annual basis. Measures to be implemented (1) As pre-emptive strategy against the deterioration in loan portfolios, remaining financial institutions will be required to make sufficient loan loss provision and to raise additional capital, if necessary. (2) To efficiently protect depositors, a self-financed deposit insurance scheme with limited coverage will be introduced. (3) Improvements will be made in corporate governance to allow for greater competition and play of market forces, and prudential and supervision regulations strengthened 3.2 Fiscal measures Measures Implemented To speed up economic recovery, the government is committed to improve the fiscal balance from the present deficit of 1.6 of GDP in fiscal year 1996/97, to a surplus of 1 percent of GDP in fiscal year 1997/98. (1) On revenue, the value-added tax was raised from 7 percent to 10 percent, effective 16 August 1997. (2) On expenditure, the budget has been cut further by B59 billion to B923 billion, keeping expenditures on education, health, and essential infrastructure projects intact.Measures to be implemented Short-term (1) The overall financial balance in the state-owned enterprise sector will be maintained through appropriate adjustment to reflect true costs of provision, including investment and replacement costs. (2) Wage increase in the public sector will be set in line with underlying inflation and appropriate guidance will be given to the private sector. Medium-term (1) The government will encourage private sector participation in the investment programs of selected enterprises, including transportation and energy under build-operate-transfer arrangements, and privatization programs in the energy, transportation, public utility and communication sectors. In addition, the government aims to pursue the alternative modalities of privatization and share divestiture such as direct sale to the public and joint- venture arrangements. (2) The financial position of state-owned enterprises will be improved to achieve a surplus of 1 percent of GDP in overall public sector position in fiscal year 1997/98, and to maintain such a surplus over the medium term through strict prioritization and control of capital expenditure, with the aim of maintaining essential infrastructure investment and other projects financed by the World Bank and the Asian Development Bank. The overall financial balance of the state-owned enterprise sector will be maintained through cutting back or rephasing low-priority investment, seeking private sector participation in certain investment programs, including expressway and power generation, as well as self-financing investment. (3) The government will pursue the policy of alleviating poverty and ensure that the adjustment program does not have undue adverse short-term effects on the poorest sections of society. Budget allocation to education, health, and essential infrastructure investment will be maintained. 3.3 Monetary and exchange rate policies (1) Monetary policy will need to remain tight in the near term to prevent the outflow of capital. In the short run, policies will be centered on stabilising conditions in the exchange market. Once exchange market and monetary conditions have settled and capital inflows restored, there would be scope for downward adjustment of interest rates and the lifting of capital controls. wer aS(2) The government will maintain the present ‘managed float’ exchange rate system, with limited intervention to smooth out fluctuations. 4. Program monitoring and data issues ‘The government intends to improve the publication and dissemination of key economic data to enhance transparency and allow the public to make more informed assessment of economic developments. As of 29 August 1997, the Bank of Thailand will publish fortnightly data on key elements of assets and liabilities of the Bank of Thailand, including gross international reserves. Moreover, the Bank of Thailand and the Ministry of Finance will co-ordinate closely with other regulatory agencies and with financial institutions to ensure the timely dissemination of information on the financial position, including non-performing loans, capital adequacy and ownership structure of financial institutions. In addition, in order to increase transparency and efficiency of data dissemination to the public, the government intends to expedite observance of data dissemination in line with the IMF’s Special Data Dissemination Standards (SDDS) and have accordingly requested technical assistance from the IMF. 5. Measures to cushion adverse impact on the poor The government intends to implement additional measures to alleviate adverse impact on the poor as follows: (1) Safeguard against opportunistic price adjustments. (2) Continue to set fares for standard buses and trains below costs for the time being. (3) Provide relief to the urban and rural poor through the targeted provision of social services and extension of social security system coverage, (4) Maintain vital education and health services expenditure in the central government budget. (5) Develop training program for retrenched workers affected by public enterprise reforms. (6) Expand enrollment in secondary and vocational education. Bank of Thailand 21 August 1997 °