PIA BUNGARTEN The Crisis of Thailand and the International Monetary Fund N ot so long ago, I heard a provincial governor in Thailand say that»the current crisis is twice as bad as the burning of Ayudhaya«. The sacking of the old capital city Ayudhaya by the Burmese army in 1767 , which marked the end of the so-called Ayudhaya period in Thai history( 1350–1767 ) has traditionally been regarded as the country’s worst national disaster. But to many Thais, the current economic crisis rivals and even surpasses this trau­matic event. Few people blame outsiders for the outbreak of the crisis; most see it as homegrown. But many are united in regarding the IMF policies as having made a bad situation worse, and having caused a serious financial crisis, triggered by a cur­rency devaluation, to deteriorate into an economic and social disaster. The IMF’s Success in Thailand The original approach of the IMF and the Thai government to the crisis in Thailand placed top priority on regaining stability in order to regain the confidence of investors, as recovery was thought to be unthinkable without continued foreign investment. For this purpose, a stablized exchange rate was considered essential which in turn required high interest rates. These policies were expected to halt and reverse capital flight. To promote stability, a strict financial and monetary policy was seen as essential, i.e. reducing govern­ment spending, maintaining a budget surplus, and increasing taxes. In a way, the policy has been successful: it has achieved its original objectives. The exchange rate has stablized which eventually helped reduce the high interest rates to pre-crisis levels(below 10 %) without undermining the stability of the baht or raising inflation. 1 Foreign reserves steadily im­proved. By April 1999 , the net international reser­ves were estimated to be$ 22.3 billion, thus almost equal to the amount of short term debt. 2 Thailand has pressed ahead with major reforms, particularly in the financial sector. Sixty-eight financial insti­tutions were closed. New regulations were intro­duced on capital adequacy ratios and loans. The parliament passed key legal reforms, including legislation on bankruptcy and foreclosure, which is expected to speed up corporate restructuring. In September 1998 , the cabinet approved a Master Plan for State Enterprises that outlined a strategy and timetable for privatization in infrastructure and other key areas, including water and energy. Parliament has approved the Corporatization Law, which prepares enterprises for privatization by converting them into corporations. Final adop­tion, however, has been held up by an appeal. There are some first indications that the crisis might have bottomed out:( 1 ) the manufacturing sector is expanding for the first time since July 1997 (by 0.2 % in January 1999 and 3 % in February 1999 );( 2 ) most indicators of investment(such as imports of capital goods) seem to have stabilized, albeit at a low level, and( 3 ) the situation in the region as a whole looks less threatening than in 1998 . Foreign direct investment( FDI ) has con­tinued to grow. Preliminary data(final figures on 1998 are not yet available) suggests that FDI rose to a record high of US $ 7.0 billion, continuing a trend visible since the devaluation of July 1997 . 3 Overall, international investors’ confidence in the region seems to have improved. The SET 1 . The exchange rate fell from 25 Bt / US $ in July 1997 to 56 Bt / US $ in January 1998 . It then stablized first at a rate of 40–41 Bt / US $, gradually gaining in strength through­out 1998 to reach an average of 34–35 Bt / US $ at the end of 1998 . Inflation was 2.6 % for the first quarter of 1999 and is expected to be 2.5 % for the whole year. 2 . The World Bank Thailand Economic Monitor, April 1999 , p. 9 ; http: // www.worldbank.or.th / monitor. 3 . The World Bank Thailand Economic Monitor, April 1999 , p. 8. IPG 3/99 Bungarten, Crisis of Thailand 253