EDITORIAL: Keep the central bank politics-free

A clash of ideas between the government and the central bank which inevitably leads to a blame game often paints a picture of the critical economic situation. This time is no different.

During a recent policy address for state agencies and state-owned enterprises, Deputy Prime Minister Somkid Jatusripitak, who oversees several economic ministries including the Finance Ministry, called on a synchronisation between fiscal and monetary policies in the light of economic volatility in the country and outside.

He said Japanese investors have complained about “too much appreciation” of the baht which has led to hesitancy about investing in Thailand. Moreover, a strong baht substantially lessens the country’s export competitiveness.

Mr Somkid said he is setting up a monetary and fiscal committee to ensure fiscal and monetary policies would move in the same direction and address the impact of the global economic slowdown.

The new committee includes representatives from the Bank of Thailand, Finance Ministry, the Stock Exchange of Thailand, the Securities and Exchange Commission and other agencies.

The idea of having a new committee should be fine until Mr Somkid mentioned any agency must not adhere too much to independence. In his opinion, it’s time fiscal and monetary policies go the same way.

He was apparently referring to the central bank. His statement prompted concerns over political interference in monetary policies.

It is known that the central bank, by principle, is supposed to be independent in devising monetary policy.

Mr Somkid is right that the Finance Ministry, which controls fiscal policies, and the Bank of Thailand, which manages monetary policies, must work closely particularly during this time of economic hardship due to the Sino-US trade war and an unfavourable global economic outlook. The DPM also mentioned political instability as a key attributing factor.

But he may be sending a wrong signal to the market when talking about the independence of the central bank even though he might not be intending to interfere with the central bank.

The central bank’s image and credibility are at stake. While a government comes from politics, a central bank has to maintain unassailable independence, integrity and credibility, to ensure public confidence and trust. A government can fall but the central bank cannot.

Once a central bank fails to maintain its independence and bows to political interference, its monetary policies, including the interest rate and foreign exchange management, would come into question. Members of the public and investors would wonder whom such policies aim to serve — political or national interests.

The economy is at risk as the government looks set to implement pledges for more handouts which at a certain point may adversely affect monetary policy if the state mechanism is used for political purposes.

A government will have to carry out the policies it promised to voters during the election campaign, mainly populist projects that the government claims could contribute to economic growth. But at the same time, the central bank will have to engage with all economic factors to ensure financial stability. As a result, fiscal policy and monetary policy should not necessarily point the same way.

Still, as a state organisation, the Bank of Thailand cannot have absolute independence. Its annual monetary policy target has to be endorsed by the government. Meanwhile, the appointment of bank governor required cabinet approval.

While the central bank has to maintain its independence in such a complicated and volatile economic situation these days, it is important that the Bank of Thailand and the Finance Ministry work closely together. They have to pay heed to the voice of private sectors and the general public in dealing with the expected doldrums.

The central bankers must have the capability to maintain their independence.

However, they should have to convince the government to endorse its bank monetary policies.

Mr Somkid said the planned committee will be established as a cooperation mechanism between the Finance Ministry and the Bank of Thailand to tackle ongoing economic uncertainty and that it would not interfere with operations at the central bank. He has to prove it.