Thailand's Reform Program for the Challenges Ahead

Keynote Address by

His Excellency
Tarrin Nimmanahaeminda
Minister of Finance, Government of Thailand

Washington DC, 14 April 2000

The worst of the economic crisis in Thailand is clearly over, and the recovery is well under way. After contracting by over 10% in 1998, real GDP grew by over 4% in 1999 and is expected to grow between 4 to 5% in 2000. Private consumption increased by nearly 3.5% in 1999. Exports have recovered and grew by nearly 9% in 1999, contributing to a current account surplus of over 13% of GDP. Gross international reserves have increased to over 250% of total short-term external debt. In the financial sector, bank recapitalization has made strong progress, and non-performing loans have declined. These positive factors underlie our recent announcement that we will no longer need an IMF program.

However, if Thailand is to achieve balanced and sustainable growth in the long run, it is crucial that the reform process must be further strengthened. The reform agenda that we began over two years ago was designed to address not only the immediate crisis, but also more fundamental, structural issues. On this front, we still face significant challenges, including strengthening the financial sector; enhancing our competitiveness; improving social equity; and increasing the effectiveness of the public sector. In what follows, I would like to discuss the financial, economic, social, administrative, and political reforms that we are undertaking to address these remaining challenges.

I. Financial Sector Reforms
On financial sector reforms, the objective is to improve the soundness and efficiency of our financial institutions to the extent that they interface effectively with the new global financial architecture. To this end, we have undertaken a variety of measures.

First, financial sector restructuring. We have allowed increased foreign participation to promote greater competition and efficiency in the sector. We have intervened in weak financial institutions and significantly consolidated the number of financial institutions. Under the state support facility, we stand ready to assist private financial institutions with their recapitalization needs.

Second, financial sector governance. We have revamped our entire prudential framework. Loan classification, provisioning, and interest accrual and capital adequacy rules were tightened and brought up to international standards.

At this moment, we are in the final stages of drafting two key pieces of legislation which will bolster financial sector governance. The new Financial Institutions Act will modernize our regulatory framework. With financial liberalization, the scope of operations of different types of financial institutions has increasingly overlapped. The new Act will standardize the regulatory framework for banks, finance companies, and credit fonciers. It will provide a legal basis for the consolidated supervision of financial conglomerates. The Act also tightens regulations significantly in a variety of areas, including interconnected lending; disclosure standards; and penalties and prevention against fraud.

The new Bank of Thailand Act will strengthen the Bank of Thailand's independence and accountability. Objectives of the Bank of Thailand will be limited to maintaining price stability and safeguarding the stability of the financial system. With a view to ensuring transparency, the Bank of Thailand will be required to pre-announce its monetary policy direction and past performance in conducting monetary policy; report its operations to the cabinet and parliament; and disclose its financial accounts on a weekly basis. Rules governing conflicts of interest of Bank of Thailand staff will also be tightened to strengthen financial sector supervision.

Third, an effective debtor-creditor regime to address problem loans. Legal reforms underpin our improved debtor-creditor regime. Amendments to the Bankruptcy Act provide legal protection for new financing for distressed debtors and allow voting on reorganization plans by classes of creditors. To facilitate bankruptcy proceedings, we have established new bankruptcy courts with specialized judges. We have also introduced legal measures to strengthen foreclosure procedures.

The objective of these legal reforms is to provide a clear and predictable court process to act as a reference point for encouraging out-of-court settlements. For this reason, we have complemented these legal reforms with an institutional framework for monitoring and facilitating debt restructuring by establishing the Corporate Debt Restructuring Advisory Committee, or CDRAC. Chaired by the Bank of Thailand, CDRAC consists of the heads of associations from the financial and corporate sectors. It has developed two key civil contracts -- the Intercreditor Agreement and the Debtor-Creditor Agreement -- which provide an enforceable, time-bound framework for speeding up restructuring proceedings.

II. Economic Reform
With regard to our economic reform agenda, a key challenge is to improve our competitiveness. Prior to the crisis, Thailand's growth was driven largely by rapid capital accumulation, high level of borrowing, and to some extent depletion of natural resources. Such a strategy, however, is now neither tenable nor desirable. Looking forward, Thailand's growth should be based more on increasing our productivity and improving the efficiency with which our resources are used. To this end, we are pursuing a wide range of reforms.

First, we are strengthening corporate governance by improving financial disclosure, board oversight, and shareholder rights. Stronger governance increases accountability and enhances corporate performance and competitiveness. We have adopted accounting standards consistent with international best practice. We are working towards establishing the Thailand Financial Accounting Standards Board as an independent organization with the authority to set accounting standards, and making the Institute of Certified Accountants and Auditors of Thailand (ICAAT) a self-regulatory, professional body. All listed companies and state owned enterprises are now also required to have an audit committee of the Board of Directors.

We are also in the process of amending the Public Company Act and the Securities Exchange Act. There amendments will improve the process for appointing directors; reduce thresholds for the exercise of minority shareholder rights; increase the accountability and liability of directors by making an explicit reference to their fiduciary duties and imposing sanctions in case they are breached; introduce explicit reference to accountants' legal liabilities in case of negligence and fraud; and introduce shareholder approval requirements for major or connected transaction.

Second, we are improving our trade and competition policy. Under the ASEAN Free Trade Agreement (AFTA), Thailand will reduce tariffs on 85% of its tariff line items to between 0 and 5% for trade within AFTA. We will also eliminate tariffs on 153 technology items in accordance with the Information Technology Agreement (ITA). Furthermore, a working group is currently preparing an across-the-board rationalization of our tariff structure, with a view towards reducing tariff rates and dispersion.

In addition to tariff reductions, we are further facilitating trade by streamlining customs administration. An Electronic Data Interchange (EDI) system is being implemented and customs brokers are being registered and regulated to expedite customs procedures.

We are also putting in place the institutional capacity to oversee and enforce our recently enacted Business Competition Act. The Act provides a legal basis for three key areas of competition policy: (i) prohibited practices; (ii) abuse of dominant position, price fixing and collusion; and (iii) mergers and acquisitions, joint ventures, and strategic alliances. An independent, twelve-member Committee on Business Competition to oversee implementation of the Act has been established.

Third, we have allowed greater foreign participation in the economy to encourage the introduction of new technology and knowledge. The recently enacted Alien Business Bill allows greater liberalization in the job categories allowed for foreigners. Amendments to the Land Code and Condominium Act allow for greater foreign ownership of land and condominiums, respectively.

We have also completed a comprehensive review of the investment incentive system offered by our Board of Investment with a view towards linking incentives more closely to export performance, skills, and technology development.

Fourth, we are assisting with industrial restructuring. We are implementing an industrial restructuring plan coordinated by the Ministry of Industry. The first phase of the program consists of 24 projects developed by the private sector and public agencies to address different aspects of industrial competitiveness, especially skills development and industrial worker training.

We are paying particular attention to small and medium enterprises (SMEs) which represent an important source of employment generation. The SME Promotion Act which we passed in January of this year provides the basis for coordinating, financing, and implementing SME support activities and calls for the establishment of an Office of SME Promotion. An Institute for SME Development has also been established to provide business management, technology services, and training to SMEs.

We have improved the financing available to SMEs by restructuring the Small Industry Finance Corporation and the Small Industry Credit Guarantee Corporation. We have also set up two equity funds to invest in SMEs: the SME Investment and Restructuring Fund and the Mutual Fund for Venture Investment. In addition to facilitating SME financing, we have also set up 25 advisory centers nationwide to provide technical assistance to SMEs on a variety of issues, including debt restructuring.

Fifth, we are restructuring our agricultural sector. We are implementing a US$ 600 million agricultural sector restructuring plan, with particular emphasis on water resource management and agricultural research and development.

Sixth, we are developing a comprehensive information technology strategy. Our first priority has been to develop the legal framework for e-commerce transactions, including the Electronics Transactions Act and the Digital Signature Act. Further legislation, including the Universal Access Law; Data Protection Law; Computer Crime Law, and the Electronic Funds Transfer Law are in the process of being drafted. At the same time, our National Electronics and Computer Technology Center (NECTEC) has also been conducting intensive education and training programs in the e-commerce area.

Last, but not least, we are reforming our entire education system. Educational reform is also a critical part of our social reform agenda, an area I would like to discuss next.

III. Social Reform
The key challenge on our social reform agenda is to improve equity. The economic crisis has interrupted our progress in reducing poverty. Our poverty headcount -- the percentage of people below the poverty line -- declined from over 32% in 1988 to less than 12% in 1996. However, as a result of the crisis, it increased again to nearly 13% in 1998. While income inequality has been improving, Thailand's income distribution is one of the most unequal in East Asia. As of 1998, the poorest quintile of the population had less than 5% of national income, while the richest quintile had 54%. Furthermore, many indicators of social welfare are still below pre-crisis levels, indicating the need for improved social protection mechanisms in preparation for future, possible downturns.

One difficulty in addressing our social reform agenda is the need to strike a careful balance between formal government assistance programs and informal, traditional social safety nets. We do not want government programs to supplant traditional forms of support or to undermine our traditional Thai values of self-reliance and self-help. They have a critical role to play in improving social equity, and have helped Thailand to avoid civil conflicts such as those experienced in other crisis countries.

Indeed, a study of the social impact of the economic crisis by the World Bank, UNICEF, and two leading Thai universities found that the traditional, informal social safety net was used extensively and expanded during the crisis. At the household level, Thai families cut back on "Luxury" expenditures such as alcohol and tabacco and continued to protect expenditures on health needs and children's education. Notably, Thai families continued to help each other with cash gifts and remittances during the crisis. Communities drew together and created new institutions to help themselves, as indicated by a surge in the formation of savings and other local groups.

I believe that such community capacity building -- together with good educational opportunities -- represent the keys to successfully improving social equity on a lasting basis.

On local capacity building, the Government has been supporting community organizations such as savings groups, vocational groups, and community markets through the Community Development Department. The Government has plans to establish a Community Organization Development Institute, and a draft bill to improve the enabling environment and support for civil society organizations is awaiting Parliamentary approval. Such local capacity building is all the more important because the 1997 Constitution emphasizes increased citizen participation, community-based development, and greater decentralization.

On educational opportunities, we are undertaking a comprehensive reform of our educational system with the objectives of improving the quality of learning and expanding enrollment in secondary and higher education. Secondary education enrollment expanded slowly in Thailand and only reached 60% in 1998. The Constitution of 1997 now provides all citizens with the right to 12 years of publicly financed education.

The legal basis for the ongoing reform effort is the Education Act which was passed in Parliament in August 1999. The Act gives three years to reduce the power of the central ministry; decentralize to new school districts; establish quality control mechanisms; reform teacher employment; move to block grant financing; and increase school autonomy and accountability. The teaching process is to be overhauled and curricula revised with a view towards improving analytical and problem solving skills rather than rote learning.

Universities will also become more autonomous, giving them greater flexibility to develop graduates with the skills demanded by the labor market. Public subsidies for private education would be increased, and regulations restricting their expansion relaxed. A separate vocational educational and training act is also being developed.

IV. Administrative Reform
The challenge that we face on administrative reform is to increase the efficiency and effectiveness of the public sector. The urgency of this task has increased for several reasons. First, the crisis clearly demonstrated the huge costs associated with poor economic management. Second, implementing difficult reforms requires a talented and motivated public sector.

Third, the increasing demands on the budget require us to do more with less. We increased our fiscal deficit substantially to stimulate the economy and resolve the crisis. However, we now need to reduce our government deficit steadily to return our long term fiscal position to balance and reduce our public debt. Higher debt service payments, coupled with the need to increase our investment budget in critical areas, require us to carefully control our recurrent expenditures. Given the ever-increasing demand for high quality public goods and services, we have little choice but to substantially improve public sector efficiency.

As part of this effort, in May 1999 the Cabinet issued its Public Sector Management Reform Plan which provided the Government's vision for institutional change. The reform program which the Government has embarked on has three key objectives: strengthening performance-based resource management by focussing on outcomes; improving service delivery by outsourcing, restructuring, or decentralizing government activities; and strengthening accountability.

The reform program draws upon international best-practice experience and will encompass five key areas: expenditure management; human resource management; revenue management; decentralization; and government accountability and transparency.

We are also proceeding with our privatization agenda in accordance with our privatization master plan. The Corporatization Act, which was passed by Parliament last year, facilitates corporatization and private participation in state enterprises. Detailed restructuring plans for the telecommunications and energy sectors are ready. Upcoming transactions include the strategic sale or public offering of a stake in Thai Airways International; the Airports Authority of Thailand (Regional Airports); the Petroleum Authority of Thailand; the Ratchaburi Power Plant; the Communications Authority of Thailand; and the Telephone Organization of Thailand.

While we remain fully committed to privatizing state owned enterprises to improve their efficiency and improve the quality of services offered to the public, we have no desire to privatize these enterprises without having a strong regulatory framework in place or at bargain basement prices.

V. Political Reform
Lastly, political reform. The Constitution of 1997 provides for greater citizen participation, decentralization, accountability, and transparency.

Citizens were recently able to elect directly members to the Senate for the first time. Voter turnout was impressively high, indicating a substantial interest among the population to exercise their newly acquired rights. Also noteworthy was the fact that the Election Commission declined to announce the names of several candidates who had won enough votes for election to the Senate due to voting irregularities, and called for new elections in many areas.

At present, Thailand has a highly centralized government. The new Constitution strongly supports decentralization. Citizens have been able to elect representatives to local government. Objectives under the new Constitution include increasing the share of local government expenditures; assigning more revenue sources to local government; revising the system of intergovernmental transfers to provide grants in a more predictable and transparent manner; and promoting mechanisms for local accountability. The present goal for the devolution of revenue is to increase the share of local relative to total government revenue to 20% by 2001 and to 35% by 2006.

Along with greater citizen participation and decentralization, the Constitution of 1997 provides for improved transparency and accountability. New accountability institutions introduced by the Constitution include the Office of the National Counter Corruption Commission, the Ombudsman, and a system of administrative courts.

The Official Information Act has increased the transparency of government operations by allowing citizens access to information which is deemed not to be sensitive. This improved transparency also extends to individuals under public service. Under the Organic Law on Counter Corruption, politicians and high level civil service, state-owned enterprise, and military officials must declare their assets.

Properly managed, this combination of increased citizen participation, decentralization, and transparency and accountability should result in better government for Thailand. The challenge, however, lies in properly managing this entire, difficult process. Decentralization, for example, can be an important way to improve governance. But without first strengthening local government capacity and local mechanisms for accountability, it could lead to fiscal instability.

As you can see, even though the worst of the crisis has passed and the recovery is well on its way, much work remains to be done, especially with regard to addressing longer-term, structural issues. But I hope that I have managed to convey the importance that the Government attaches to these issues, as well as provide an overview of the numerous ongoing reform measures that the Government continues to undertake in addressing these remaining challenges. With a lot of hard work and what I hope will continue to be a healthy world economy, I am confident that Thailand will be able to overcome these remaining challenges, just as we have done with this last crisis. Thank you very much.