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1 Public Disclosure Authorized Public Disclosure Authorized RETURN TO REPORTS DESK WITHIN ONE WEEK RESTRICTED Roport No. EAP-15a This report was prepared for use within the Bank and its affiliated organizations. They clo not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL IIANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized CURRENT ECONOMIC POSITION AND PROSPECTS OF THAILAND (in three volumes) VOLUME I Public Disclosure Authorized THE MAIN REPORT August 20, 1970 East Asia and Pacific Department

2 CURRENCY EQUIVALENTS Currency Unit - Baht U.S. $ 1.00 = > a 1.00 = U.S. $ 0.o48 a 1.00 million - U.S. $ 48,077

3 This report was prepared by missions tha.t visited Thailand in January/February and in June The missions comprised of Messrs. Wouter Tims (Chief of Mission), Peter Streng (Chief Economist), Christian G.A. Merat, Mrs. Helen Hughes, Miss Lucy H. Keough, and Messrs. Thomas Geer and Eljas K. Sukselainen.

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5 TABLE OF CONTENTS Page No. Basic Data Summa.ry and Conclusions i iii I. Recent Performance and Short-term Outlook 1 II. The Fiscal and Monetary Situation 17 II.. The Longer-term Outlook 38 Annex I Export Projections, Annex II Production of Paddy and Rice in Thailand Map

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7 B A S I C D A T A Area. 51h,000 square km Population Total (mid-1970 estimate) 37.7 million Rate of Growth 3.3 % per annum Density (persons per square km) 73 Gross Domestic Product Tota.l (1969) 1/ $130.6 billion Rate of Growth, Constant Prices ( ) 9.1 % per annum Per Capita., Current F'rices (1969) $166 2/ Per Ca.pita, Constant Prices (1969) $150 2/ Annual Growth Share in Industria.l Origin of Gross Domestic Product (%) 1969 Agriculture % Manufacturing, Construction, Mining % Trade % All Other Sectors % Expenditure on Gross Domestic Product Consumption % Private ( 8.0) (68.2 %) Public (10.9) (10.7 %) Fixed Capital FIormation l % Private (15.0) (16.1,) Public (13.9) ( 7.4 %) Change in St nc ks % Net Imports of Goods and Non-factor Services hl.9-4.h % Expendi.ure on GDP % Gross Nat:ional Saving % Marginal Saving Rate ( ) 2h.2 % Resource Gap a.s % of Investment (1969) 17.1 Annual Growth End Internal Financial Situation (%) ($ billion).'otal. Money Supply T:.me and ;Saving Deposits Hank Credit to the Public Sector (net) Bank Credit to the Private Sector Consumer Price Index (1962 = 100)

8 Annual Growth FY FY 1969 Public Sector Operations 3/ (%) (M billion) Current Revenue Current Expenditure Surplus Capital Expenditure L, Net External Assistance Annual Growth Balance of Payments (%) ($ million) Merchandise Exports, f.o.b. 3.h Merchandise Imports, c.i.f. 4/ ,224.0 Net Services Net Goods and Services L.L Net Private Capita.l 5/ Net Public Capital Foreign Exchange Reserves / External Debt 7/ 1969 ($ million) Amount Outstanding a.nd Disbursed Private Sector (302.1) Public Sector (299.4) Debt Service Payments 1l0.7 Private Sector ( 92.4) Public Sector ( L.3) Debt Service Ratio 8/ 12.5 Private Sector ( 8.2) Public Sector (.3) 1/ National accounts da.ta. for 1969 are preliminary. 2/ Converted from baht at The Thai fiscal year runs from October 1 to September 30. b/ Tncluding non-monetary gold, excluding military imports. 5/ Including transfer payments. b/ Equivalent to 7.5 months' imports of goods and services. 7/ Debt with an original or extended maturity of over one year, excluding non-guaranteed debt of state enterprises. 8/ Debt service a.s % of exports of goods and services.

9 - iii - SUMMARY OF CONCLUSIONS i. During the 1960's Thailand experienced rapid growth. ;Q_tEut, went up 1_bu8 percent pand er capita income by close to percet year- This growth was act1eved wit l e nlaionary pressure. Savings increased rapidly, providing most of the resources for the expansion of investment. Foreign exchange earnings together with capital inflows from abroad (including transfers) exceeded imports and enabled Thailand to build up its exchange reserves substantially. Since late 1965, reserves benefited particularly from U.S. miiitary spending in Thailand. ii. In the last three years, the econonr has run into some difficulties. Merchandise exports nearly stagnated due to a bad harvest in 1967/68 and deteriorating orld market conditions for rice and kenaf. At th_e samtijmme,eceipts fronm the U.S. military biytteev ol.t * On the other hand, the strong growtuh of imports continued. Thulos res of $8 million, the first after ten years of steai eserve accumulation. Government revenue increased cons-i-derablyfaster than GDP, but despite restraint in capital and, to a lesser-extent, in current spending, expenditure rose still more rapidly, with defense and salaries leading the list. As a result, large and expanding deficits occurred since FY 1968 ^eaching over 20 _ UFbl^e-to raise sufficent funds i-rom non-expansionary sources, the Government borrowed from the Central Bank on a large scale to finance these deficits. iii. In the face of these developments, the Government has increased imnport dutiesland sal e inly on onsumer..goods an--'pas) in -u1yt770tj'\ These measures are aimed at containing h u deficit and slowirlg do;tm--the rate of import growth. To boqst,exporzts, the Government reduced the_export tax on rice _the rice premium) in December 1969 and has established an interministerial working group on expoit promotion. iv. The :lowdown of fixed investment and public consumption and the disappointing export performance in 1969 were not reflected in the growth rate of (GIP largely becaulse of an exceptionally good harvest. In fact, GDP groith picked up considerably compared to 1968 reaching about 11 percen-t accordiisg to prel:ij.minary official estimates. v. The outlook for 1970 is characterized bthe probable continuation of sloti eyport growha7furher slowdown of investmen activity and, as a, result, a lower Pb_fgrowth of national output than in 19 9/ Imports are expected to expand 3-,5ha-t less rapitye-5 tueof tax and duty increases, but this is unlikely to prevent a further loss of reserves of roughly the same magnituda as in The estimated decrease of net private capital inflows will be outweighed by larger inflows on public account. vti. The budget deficit is expected to reach a record level in FY Arn a. result of the increased import duties and sales taxes, holwever, revenue growth in e,timated to exceed that of expenditure in FY 1971; nevertheless, the deficit and the amount of expansionary financing are likely to remain at their 1970 levels.

10 - iv - vii. Conservative fiscal and monetary policies had been instrumental in the past in maintaining remarkable monetary and price stability. Since 1968, however, credit expansion to the public sector hlas exerted a de-stabilizing influence. Together with the poor export performance it has been a factor in bringirng about the reserve loss experienced in On the other hand, price stability has been maintained. The tax measures of July 1970 are expected to pu-t a check on these trends at the cost of some price increases, but not to reverse them altogether. Further fiscal measures and capital market improvements will be needed. viii. It is not nossible at present to evaluate in any detail the longer term prospects of Thailand; preparations for the Third Five-Year Development Plan (FY ) have started, but most of the work was still at an early stage at the time of the mission's visits. A tentative projection of the major variables has been attempted by the mission on the basis of presently available information. ix. Export growth, a major dynamic factor in the past decade, may be only about 4.5 percent a year through 1976 or less than half the rate experienced in the past. Merchandise exports are expected to maintain or even exceed past growth in volume, but the favorable price development of earlier years is likely to be reversed. Serzice receipts are estimated to decline substantially during *the next three years mainly because of the projected drop in U.S. military expenditures, but in later years they should regain about the 1969 level. Export growth will depend not only on foreign demand but also to a large extent on export promotion policies where improvements appear to be possible. The Government is recognizing these problems and is in the process of examining proposals for export promotion in the widest sense. x. Government expenditures have stimulated economic growth in the past; consumption and investment expenditure together increased by almost 14 percent a year in the last decade. The mission projects further growth by about percent annually. This will require continuous critical review of expenditure priorities in order not to exceed this rate. The revenue effort necessary to finance such expenditures without inflationary consequences will be large and difficult to achieve, but not out of reach. xi. Private investment must maintain a rate of growth of about 10 percent over the next six years in order to generate GDP growth of 7 percent a year in real terms. This is still considerably below past achievements and underlines the importance of Government policies to promote and direct private investment. The projected investment requirements do not necessitate major additional savings efforts for the nation, but they do so for the public sector. Depending on the availability of external finance, a marginal savings rate of about 20 percent would be adequate compared to 24 percent in the last five years. However, the expected slowdown in economic growth and its probable effect on the propensity to save will require careful consideration of the possible impact of new tax measures on savings. xii. Imports are projected to grow by around 4 percent a year if the same demand forces apply as in the past and if strict measures are taken to

11 -v - curb the demand for imported goods and services. The size of the current account deficit under these assumptions will nevertheless expand and lead to substantial further losses of foreign exchange reserves even with rather optimistic projections of netk capital inflows. Under reasonably optimistic assumptions regarding political developments in the area as well as Government investment policy, a large part of these inflows may be expected from private sources leaving a residual requirement of net public capital inflow of around $400 million for This would be equivalent to disbursements of about $610 million, the difference representing projected repayment obligations. In the six years , disbursements will amount to about $330 million; the projection thus implies an increase of 85 percent. xiii. At the end of FY 1969, Thailand had a pipeline of foreign financing commitments of about $190 million. Projected new commitments in 1970 and disbursements during the year would leave an undisbursed amount of around $175 million. In order to obtain a disbursement total of $610 million in new commitments after 1970 of about $680 million would be needed. Part of this sum could be committed against projects included in the current Five-Year Development Plan (FY ) for which no commitments are expected before the end of 1970; the remainder will require the preparation of new projects and the initiation of pre-investment studies to build up a sufficiently large portfolio. The magnitude of this task is large but should be within the capacity of the Government and its agencies. xiv. Successfil implementation of a program of the size projected will entail rising external indebtedness and debt service obligations. In 1969 the debt service ratio l/already amounted to nearly 0.13 (including public non-guaranteed obligations). A further increase to about 0.19 in 1976 is proiected. This is a substantial burden on the balance of payments and the estimated decline of foreign exchange reserves from $874 million (end-1969) to about $500 million in the coming years brings the growth of this burden into even sharper focus. However, Thailand has in the past established an i.mpeccable record as a debtor and its amp'le exchange reserves will be of great help in maintaining confidence. Thus, incurring external debt of the size projected would be justified if the Government designs policies to assure that the inflroxirig capital is put to its most productive use. Since the largest part of debt ser.--ice payments is expected to be on account of private suppliers' credit, it seems worth considering measures to improve the terms, and limit the amounts on unsatisfactory terms, which could be accepted by Thai private borrowers, a regulation to be enforced by the Bank of Thailand. A first step would require full compliance with registration procedures for such credits; at present there is still a considerable inflow for which terms are not known. xi. The projections for the next six,years given in this report assume substantial efforts by the Government in the fields of fiscal and monetary, foreign trade and investment policies; they also assume a sizable drawdown of exchange reserves. Increased capital and technical assistance will be necessary to complement the Government's efforts. Still, on the basis of present krnowledge, the sum of these efforts by the Government and the donor l/ Public and private debt service as a. ratio to exports of goods and services.

12 - vi - countries will not suffice to repeat the growth record of the past and economic stability will be less easily preserved. Lesser efforts on either side and on any of the crucial issues could reduce growth further and extend the transition to a new growth path over a longer period of time.

13 I. RECENT PERFORMANCE AND SHORT-TERM OUTLOOK Introduction 1. During the past decade, the econorm,y of Thailand has grown at a rapid pace, averaging some 8 percent a year in real terms. In , the ave.gewas even h gi,...exceeding 9 per. Ths growth has been achieved with little inflationary pressure and was accompanied by considerable increases of foreign exchange reserves. The fast growth of' income and saving provided the resources for a substantial expansion of investment in the private sector, and the mounting inflow of external private capi-tal lent further strength to this growth. Government revenue increased more rapidly than GDP, but expenditure began to surpass its growth since 1967, generating widening budget deficits. 2. The strong performance of the economy during the 's was facilitated by a large increase in exports and rising U.S. military expenditures in Thailand. Merchandise exports increased at an average rate of 8.6 percent a year through 1966, and between 1964 and 1968 receipts from services more than quadrupled. In the last three years, however, merchandise exports practically stagnated. At the same time, service rece pjl_ben o7loff. As a result, exports of goods and services went up by only 5.5 percent a year, compared with 13.3 pe-rcent SinFI961-I966; average growth in the 's was more -than 10 percent a year. 3. Agriculturmore santotal GD? but remained the dominant setor. Its?are ropped from almost -o peceno GPinl6oabout 32 percent in In fact, these figures understate the importance of the sector,-because Ve Government's taxation policy has kept domestic rice prices / below international levels. Agriculture produced nearly three quarters of mer chandise exports in 1969, and almost 80 percent of the labor force is agricultural. b. While agricultural rotin the 1960's averaged - with substantial annual variations - so-m-e-percent a year, the other sectors or o my, taken together, expanded at about twice that rate. Manufacturing and public utilities were leading among the non-agricultural sectors. These, with construction, reflected the rise of investment. 5. The large U.S. military expenditures in Thailand since 1965 have had a noticeable impact on the composition of growth. Construction growth reached 20 percent in some years and averaged nearly 13 percent in Some of the service sectors also expanded faster than if demand had come entirely from domestic sources. Besides, earnings from the U.S. military have significantly contributed to free the economy from any foreign exchange constraint. Thus, they have permitted a level and a composition of national expenditure which would most likely have been quite different had the external position been less comfortable. They have made possible a rate of import growth which, in combination with economic expansion and some use of reserves in 1969, has counteracted the inflation which might otherwise have been expected from the large budget deficits since 1967.

14 Inves-tment, rising from about 15 percent of GDP in the early 1960's to around 25 percent in 1969, had a major influence on imports. Although the import component of investment remained fairly stable, investment growth led to equally rapid growth of investment-related imports which accounted for almost two-fifths of total imports of goods and services in The fast expansion of the non-agricultural sectors of the economy resulted in a shift toward more import-intensive production. On average, imports of goods and services went up by over 12 percent a year during the 's. 7. In the five years , the deficit on goods and services was about $55 million per year, but in the following five years the higher growth of impolts compared to that of exports, particularly in 1967 and 1968, resulted in substantially larger deficits averaging about $130 million. Transfer payments (net), mainly in the form of U.S. grants, kept the current account deficit during at an average of less than $20 million, but could not prevent it from increasing to about $75 million per year in the period Capital inflows in excess of the current account deficits in all years except 1969 led to a build-up of foreign exchange reserves from $313 million at the beginning of 1960 to $874 million at the end of Both in the first and in the second half of the decade, the annual reserve increases were in the order of $55-60 million. In 1969, for *the first time since 1958, Thailand suffered a loss of reserves of $48 million, about 5 percent of total reserves at the end of Public capital inflows (gross) rose rapidly in the early 's to reach $65 million in 1962, but then declined again to less than half this level in In the last two years, they averaged around $50 million. Increasing repayments gradually reduced the net inflow over the years. The favorable balance of payments position and the groziing foreign exchange reserves diminished the need for external public borrowing except for budgetary reasons. 10. The steady increase of private capital inflows from a net amount of less than $10 million in 1960 to $120 million in 1969, has been the most important factor in the capital account. In 1969, gross private capital inflows were almost $250 million, of which -the largest part consisted of medium- and longterm loans (70 percent) and direct investment (20 percent). This development had a major impact on Thailand's external debt service liabilities; from payments obligations of 2 percent of exports in the early 'sixties, private sector debt service rose to more than 8 percent of exports in On the other hand, public sector service payments remained at the relatively low level of 3-4 percent of exports. Total debt service payments in 1969 reached $141 million, equivalent to 12.5 percent of exports of goods and services in that year. 11. Thailand's economic growth over the past decade has largely resulted from the activities of a dynamic private sector, assisted by external capital and operating in an environment of stable economic policies. These policies have been implemented principally by indirect means, in monetary and fiscal affairs as well as regarding the promotion of investment and saving. The activities of the public sector have, with few exceptions, been aimed to preserve stability and security and to improve the country's infrastructure.

15 12. Government investment expenditures are only about 30 percent of total investment and are almost entirely concentrated in the social and economic infrastracture fields. Conservative budgetary policies were pursued until 1967, characterized by budget deficits covered fully by nonexpansionary means. During these years, the public sector financed its investment program entirely from increasing current account surpluses and modest borrowing from the economny. 13. Current revenues were growing at a slightly faster rate than national output and income until 1968; the share of revenues in GDP rose from 12.5 percent in 1960 to 14.4 percent in However, since 1968 revenue grow.rth appears to be lagging behind that of national product. Current expenditures which, through 1967, were growing at about the same rate as revenues, began to rise faster thereafter and capital expenditures increased further. As a result, the Central Government generated substantial deficits in 1968 and 1969, exceeding 20 percent of total expenditures on a cash basis. At the same time, the Government has been unable to expand nonexpansionary financing of the deficit; thus very sizable recourse to Central Bank financing has taken place. 14. The rapitd e mintain security have resulted in grow ngattentiorito existing disparities of income within the count; relatively slow growthof riculture and the concentration of new economic activities in Bangkok have widened the gap between urban and rural incomes which was already substantial at the outset. Insurgencies in the North-East, North and South have led to increased security spending in these areas, but have also brought to the fore the need for regional planning aimed at the improvem-ent of living conditions and economic opportunities in the provinces. 15. In total, the past decade has been one of substantial progress in Thailand. Economic policies have favored private initiative and Government activities have largely been concentrated on the preservation of a stable environment and the provision of infrastructure facilities. Exceptional circumstances, in particular the rapid increase of export prices and the substantial LT.2. military expenditures in Thailand, have had additional beneficial economic effects. However, in the last few years the economry has run irnto some difficulties. Both the balance of payments and the Government bu-get began to develop unfavorably. The adjustments needed to cope with these problems will require a much more active Government policy than in past years. In addition, some of the structural problems which have existed for some time will have to be dealt with more effectively. Tlhe policy measures to be ttken and the external assistance Thailand may require in order to implement those policies are the subject of this report. Recent Performance 1.S. The provisional national accounts of Thailand fox 1969 show an exceptionally high rate of economic growth. In nominal terms, gross national product increased by percent and, as prices remained almost stable, real grotuth was of the same order.

16 -4 - Production and Income 17. Overall growth was particularly high because of the large increase in agriculture, amounting to nearly 10 percent in real terms. In 1968, agricultural production had just recovered from a bad crop year, with real output at about the 1966 level; the performance in 1969 bring;3 average grow th for to around 5 percent - the rate prevailing in ear]ier years. /18. Within th+ agrtcujtural sector, growth of livestock and-forestry remained low, but fisheries 4 creasedby about 30 percent, as in Hlowever, as these three sectors_a4e relatively small, accounting for about 30 percent of agricultural value added, their impact on the growth of the sector was modest. The growth of crops by over 9 percent was the dominant factor. As crop reporting in Thailand is imperfect, this estimate must be treated with some care; in recent years, the reporting of major crops has shifted between agencies and, as a consequence, there is some doubt about the accuracy of recent crop statistics. 19. Price developments during the latter part of 1969 and the first months of 1970 indicate that the rice crop in 1969 must have been substantial. Rice stocks seem to be well above normal levels and prices have decreased despite the fact thatlrice exports in early 1970 were above the previous year' level The offhical p-roducti6honestimate of 13.h million tons of paddy is about 8 percent above the 1968 level. The effect of the price decline for rice was, however, more than offset by price increases for some other crops which is reflected by the even larger increase of value added in crops at current prices (about 14 percent); thus average prices to farmers rose by around 4 percent. The same development can be noted with regard to export prices, where substantial price gains for rubber, maize and kenaf contrasted with a price decline for rice of a much larger order than occurred in the domestic market. The decrease in the export premium rates 1/ allowed domestic rice prices to stay closer to the previous year's level than would otherwise have been the case. 20. Real growth in the non-agricultural sectors is estimated at close to 12 percent for 1969; in nominal terms it is about 11 percent as a consequence of a slight price decline. This is about equal to the growth of these sectors over the past decade. The commodity producing sectors clearly led the group; the mining sector expanded by more than a third reflecting a substantial gain in tin production, but even more rapid growth in other mining activities. However, the current value of mineral output increased by a comparatively low 17 percent only as prices fell by 13 percent since Manufacturing production rose by 12 percent, but here also price declines reduced the growth rate of output at current prices to 8.5 percent. Public utilities increased their deliveries by 20 percent. The slower pace of investment activity is reflected by the modest 5 percent growth of the construction sector. The service sectors recorded an 11 percent increase, which stems from the increase 1/ The export premium is in effect an export duty on rice, which is adjusted administratively from time to time in accordance with world and domestic market developments.

17 of agricultural production passing through the trade and transport sectors and from the growth of public sector activity. 21. In current prices the increase of national product per capita amounted to almost 8 percent in 1969, bringing the per capita output level to around $170 as compared to about $100 in This impressive achievement does, however, hide considerable differences in both levels and growth of regional per capita incomes. The favorable performance of the agricultural sector, because of output increases and of an improvement in the terms of trade of this sector with the rest of the economy, probably means that urbanrural differences and perhaps also regional differences, may not have deepened as much as in previous years. Investment and Saving 22. The past years were characterized by rapid growth of fixed investment, rising to 23.7 percent of gross domestic product in This percentage has been maintained in 1969, as fixed investment expenditures rose at about the same rate as GDP. Investment grew more slowly in 1969 than in previous years because of the modest growth, of less than 3 percent, of public investment; the private sector showed an increase from 11 to over 14 percent. As public investment consists in large part of construction work, its low groith rate was mainly responsible for the rather slow growth of construction activity during Private residential construction was also less buoyant than in past years. 23. Growth of fixed investmen-t expenditure was thus concentrated in private non-residential construction and purchases of machinery and equipment. As the latter are largely imported, this affected the balance of payments. Investment-related imports went up by 13 percent. On the other hand, gross private capltal inflows in 1969 increased by over 25 percent, mainly because of fast expanding use of suppliers' credits The nationa:l accounts for 1969 show a further increase in stocks to twrize che previous year's level. Statistics on stocks are very limited and some nuestiions may be raised about the methodology used to calculate stock changes. The direction of change seems plausible, however, since there were increases in rice production both in 1968 and 1969 with no corresponding change in exports. 25. In the last three years, the resource gap increased from 10 percent of gross investment in 1967 to 16.4 percent in 1968 and 17.1 percent in This compares to an average of 8.8 percent for / which includes annual figures ranging between 16.6 percent (1'963) and 1.Z percent (1966). vjhen net capital inf:lows as shown in the balance of payments 2/are compared to investment, a finarncing ratio of around 20 percent is found for , 1/ Excliiding 1961 which showed a resource surplus of 1.7 percent of investment. 7/ Including transfers and errors and omissions.

18 - 6 - the difference between the two averages being attributable to the steady reserve accumulation in these years. For , this difference practically disappears. 26. National savings increased by over 20 percent a year between 1960 and 1966 financing around 90 percent of gross investment. The savings ratio reached 22.5 percent of GDP in 1966 (1960: 13.8 percent). In 1967 the ratio dropped to 20. percent but went up again to 21.h percent in Correspondingly, a somewhat smaller portion of total investment was financed by national savings in the last three years (86 percent). The rise of the savings ratio in 1969 was to some extent the result of the involuntary growth in stocks, mainly rice, but even if allowance is made for this the savings performance remains impressive. Exports of Goods and Services 27. For the second year in succession, export performance in 1969 has been far below the trend of most of the 's. In 1968 a small decline (of 0.6 percent) of earnings from goods and non-factor services took place. A 3 percent rise in 1969 brought earnings slightly above the 1967 level. About half of this growth resulted from a price increase. Thus, export volume in 1969 was only about 1.5 percent higher than in 1968 and less than 0.5 percent above the 1967 figure. 28. This stagnation of exports applies to both goods and services. A growth of 0.6 percent a year of merchandise exports in the last three years compares with an average growth of 13 percent in the preceding three years ( ) and of about 6 percent for the 1960's as a whole. The contrast is even more striking in the case of service receipts which increased by 12.3 percent annually in the last three years compared to an average of over 50 percent for 196h-1966 and to about 27 percent a year for the decade. The low growth rate during is almost entirely due to the decline (-6.6 percent) in Thailand's merchandise exports show a high degree of concentration. The main export commodity, (rice,, accounted forabout20cpereent of exports in 1969, closely followed by rubber--(18- percent), maize (11 percent) and tin metal (11 percent). Together with five other major exports - tapioca products, kenaf, shrimps, tobacco leaves and teak - these four export items accounted for three quarters of all merchandise exports. The slow growth of this group of major commodities over the last few years resulted in a decline of their share in total merchandise exports and a slightly more diversified export pattern. 30. Exports of rice declined in volume since 1965, but did not decline further in 1969 when export prices dropped by about 19 percent. This decline was compensated by major price increases for rubber, tin and kenaf and by small price increases for maize and tapioca products. The unit value index for merchandise exports gained 2.4 percent in 1969, which, together with the volume growth of about 5 percent, raised merchandise export value 8 percent above the 1968 level.

19 The decline of service receipts in 1969 was caused by the decrease of $22 million (-8.5 percent) in U.S. military expenditures in Thailand. Higher receipts from tourism and miscellaneous sources were not sufficient to offset this loss. As services contribute around one-third of total foreign exchange earnings 1/, their decline had a significant impact on this total. Public Sector Ependiture 32. The slowdown of public investment was discussed earlier in this chapter. In the following chapter a more detailed account will be given of the fiscal position of the Government. The slower growth of revenue in 1969 was not matched by equal restraint in spending and an increasing part of Government expenditures had to be met by deficit financing. Although current expenditures have grown more slowly than in previous years and public investment almost stagnated, this was not enough to keep the budget deficit from rising. National Resource Balance 33. The principal sources of demand on the national product are summarized in Table 1 below. With the exclusion of private consumption, they can, to a degree, be considered as autonomously determined and in turn influencing the growth of national product and imports. Table 1: Expenditure on Gross Domestic Product, (at 1962 prices) Percentage Rate of Growth (Average) Expozts of Goods and Services Govcrnment Consumption Govcrrunent Fixed :[nvestment Private Fixed Investment Sub-total Private Consumption Total Source: Vol. II, Table / Excluding factor income.

20 The factors identified above as autonomous have, as shown in Table 1, not only become much less dynamic in the last few years, but their composition has changed substantially at the same time. Exports and investment were clearly leading in the process of economic growth in , and continued to do so in In the two most recent years, exports have entirely lost their momentum and the growth of investment also declined significantly. On the other hand, Government consumption expenditures have become more important but their accelerating growth was, of course, not sufficient to maintain the earlier growth of autonomous demand, which dropped to about half its former rate. 35. The export development of the last two years has already contributed to a first drawdown of foreign exchange reserves, a continuation of which can only be sustained for a limited time. Also Government consumption expenditures are a poor substitute for exports and investment as a growth factor because they lead to additional foreign exchange expenditures, but do not create additional productive capacity. Their rate of expansion is strictly limited - certainly in the longer term - by the capacity of the Government to mobilize non-inflationary sources of finance, preferably additional tax revenues. As the latter are directly related to economic growth and the rise of incomes, it is difficult to see how Government consumption could play more than a shortterm role in fostering economic growth. 36. The developments in 1969 indicate the vulnerability of the economy because of the intensity of import demand under new circumstances. Economic growth continued at a high rate which was to a large extent the result of an extremely favorable agricultural year; the rise of income had an impact on imports which in turn required the drawdown of foreign exchange reserves. At the same time, the lack of foreign and domestic demand for the commodities produced resulted in a stock increase twice the size of that in Table 2: Resources and Expenditure Balance, (Billions of baht; current prices) (Average) Increases in: Total Demand (Table 1) Gross Domestic Product Surplus (+) or Deficit (-) Covered by: Imports of Goods and Services Stock Change and Statistical Discrepancy (Increase -) Source: Vol. II, Table 2.3.

21 In all years covered by Table 2, except 1969, growth of GDP was less than growth of demand, the difference being made up by imports. In 1967, when a bad crop led to low GDP growth while imports rose more than usual there was a large decrease of inventories. In contrast, GDP in 1969 was more than sufficient to meet additional demand, but as part of this demand went into imported goods and services - as in other years - the stock increase of domestic products was made even larger. 38. The growth of stocks and the slower growth of autonomous demand cannot fail to result in lower output growth initially accompanied by and later indlced by lower prices. Although this will reduce import growth, it does not necessarily lead to an improvement in the balance of payments. To the extent that exports remain sluggish and autonomous factors further reduce foreign exchange earnings, there may even be a deterioration. Balance of P.yments 39. The current account deficit 1/, which had varied between $15 million and $60 million and had once even turned into a surplus of nearly $30 million during , increased to $142 million in 1968 and to $204 million in To a Large extent, this growth of the deficit was met by increased net capital inflows, but 1969 brought a drawdown of foreign exchange reserves interrupting the steady build-up since Table 3: Balance of Payments, (Millions of ) / Exports of Goods and Services 1, , ,129.3 Imports of Goods and Services 1, , ,393.7 Net Transfer Payments h 60.1 Curront AcCount Balance Private Capital, Net Public Capital, Net Errors and Omissions Change in Reserves (Increase -) _ Financing of Current Account Deficit / Preliminary. Source: Vol. II, Table / Net goods and services plus net transfers.

22 The slow growth of exports 1/ for reasons discussed earlier in this chapter is primarily responsible for the deteri oration of the balance of payments in Imports increased by less than 7 percent which is considerably below the average rate of preceding years. The decline of IJ.S. military expenditures by about $20 million, vwhich contributed to the modest performance of foreign exchange earnings, was also responsible to some extent for the relatively low rate of import growth. U.S. expenditures have a direct import component, and through the generation of additional income - the multiplier effect - they create further import demand. It is not possible to estimate accurately the direct and indirect import effects of UJ.S. military spending, or the relevant multiplier, but a reasonable assumption is that these induced imports amount to about percent of receipts from the U.S. military. 41. As shown in Table 4, a notional correction for the effect of U.S. expenditures leaves other imports of goods and services at a lower level but growing at a somewhat faster rate in 1969 which is nevertheless still modest in comparison with previous years. Investment-related imports constitute about 40 percent of this group. These imports, consisting of machinery, equipment and materials for investment goods industries and construction, rose by 13 percent. Other imports, related mainly to consumption expenditure, increased by only 5 percent. Table 4: Imports of Goods and Services, (Millions of $) X Growth Total Imports of Goods and Services 1,182 1,305 1, Of which: U.S. Expenditure Induced Other Imports Investment-related Imports 1/ 420 't ' Other Goods and Services / According to NEDB's import classification Gross capital inflows (public and private sector) increased from $248 million in 1068 to $306 million in This rise of $58 million would have been sufficient to maintain the level of foreign exchange reserves, but net inflows went up by less than $12 million as a result of a sharp increase of debt service payments and purchases of IBRD participation certificates by the Bank of Thailand. Total outflow in 1969 amounted to $183 million. 1/ The difference in growth rates computed on the basis of national accounts and balance of payments data results from the fact that national accounts figures exclude factor (investment) income and re-exports.

23 Normal public sector capital flows did not change appreciably in Disbursements were around $50 million and repayments somewhat more than $30 million as in However, participations in IBRD loans by the Bank of Thailand ($17 million against $2 million in 1968) registered as repayments on public account reduced the net inflow from $20 million to less than $3 million. Thus, it could be argued that the real loss of exchange reserves in 1969 was only about $31 million instead of $48 million as shown in Table 3. 4AI. The more than 25 percent increase in gross private capital inflows in 1969 was tlo a large extent offset by debt service payments. Nearly 70 percent of gross inflows consisted of drawings on medium- and long-term loans and suppliers' credits (1968: 58 percent); the rapid increase of service payments on this account demonstrates the fact that lending terms are hard. In contrast to an increase in private sector disbursements of $54 million the net gain in 1969 was just over $20 million. 45. Total debt service increased from less than 8 percent of exports 1/ to 12.5 percent between 1967 and This is entirely attributable to developments in the private sector as public debt service remained around 4 percent of exports throughout these years. The total debt service ratio is high but does not give reason to doubt Thailand's creditworthiness. In this connection, it could be argued that debt service liabilities should be compared to the sum ol export earnings and foreign exchange reserves as the latter, at least for short run liquidity requirements, constitute as much a source for the payment; of service obligations as do exports. A further refinement is possible by including only net foreign exchange receipts from the U.S. military. Assessed in either way, the conclusion is that the external debt Thailand has incurred to date is a considerable burden on the balance of payments but a manageable one, with room for substantial additional foreign borrowing. V6. Developments in 1969 have further brought to light the problems which already became vrisible in Autonomous growth factors remained weak.,.ower growth of the financial resource base of the public sector, which is not reflected on the expenditure side, required increasing recourse to expassionary deficit financing. Rapid growth of output in contrast to reduced demand growth resulted in stock accummulation and some downward pressure on prices. The balance of payments deficit widened further and for the first time since the late 'fifties caused a drawdown of reserves. For the cur-rent year, it is expected that some of these developments will continue. Prospects for 1970 and policy measures taken or considered by the Government wl.11 be discussed in the following paragraphs. Ihe Outlook for 1970 Wi. Several projections have been made by the National Economic Development Board and the Bank of Thailand during the first half of Data revised in June 1970 are used in what follows. Although some differences still 1/ Goods and services.

24 existed at that time between mission forecasts and official projections, they were generally of minor importance. On the main issues there was agreement. L8. The outlook for 1970 is characterized by the probable continuation of slow export growth, a further slowdown of investment activity and, as a consequence, a lower rate of growth of national product and income. Moreover, another substantial budget deficit appears unavoidable despite a lower rate of increase of Government expenditure. Further although less rapid growth of imports is expected which will probably lead to a somewrhat larger dr;iwdown of foreign exchtange reserves than in h9. Official estimates of real GDP growth are in the order of 9 percent. However, this figure was based on preliminary data for 1969, which were subsequently revised. In addition, the estimates of exports and Government expendi-ture used in this forecast were later found to be too optimistic. The mission has attempted to put together a set of consistent national accounts and balance of payments estimates based on the most recent information available from the Government of Thailand. From this exercise follows that growth of GDP at market prices in 1970 will probably not exceed 7 percent in real terms. This estimate implies a rather favorable development of agricultural production. 50. On the basis of current construction permits andl issues of new promotion certificates for private investment, fixed investment expenditure in the private sector is estimated to increase by about 10 percent in current prices; some price increases may occur as in the past, which would mean a real growth rate of less than 10 percent. Tnis could still be considered a favorable development as in 1969 some industries experienced increasing excess capacity and the same probably holds true for some of the service sectors. During the early months of 1970, there was also uncertainty about Government policies regarding foreign-owned companies and measures to restrict imports. These factors may have had some adverse effect on investment decisions, but recent official statements and policy measures have brought more clarity about Government intentions in these areas. 51. The financing of private investment may also become somewhat more difficult than in the past, because of the financial implications of overcapacity in some sectors and of the apparent increase of inventories combined with larger needs of the public sector to borrow for the financing of its deficits. Net inflow of external private capital is at best expected to be the same as in 1969 as the exceptionally high level of loan disbursements may not be maintained and debt service payments will probably increase further. 52. In FY 1970 capital expenditures of the Central Government are now estimated to increase by only 058 midlion. But, transfers to local governments and state enterprises, which are in large part used to finance investment outlays, are expected to increase by Y539 million. The delay in obtaining parliamentary approval for the budget in part explains the small increase in capital expenditure of the Central Government. Taking investment expenditures of local governments and state enterprises into account, the mission

25 estimates that public fixed investment will exceed its 1969 level by about 11 percent in current prices. Official estimates were higher but in the process of being revised at the time this report was written. Public consumption is forecast to grow by about 7.5 percent. This implies an increase in Central Government current expenditure of about 10 percent. 53. The volume of merchandise exports in 1970 is projected to grow by abo percent whic' uld constitute a substata l recoverfrom-e arlier years. However, the high_prices for some major expof-co6-o-dities (rubber, rice, kenaf) are expected to drop. In fact s ready been -noted in the first-imonths of Merchandise export value is therefore expected to grow by about 8 percent, which would still be considerably above the perfornance of recent years. Export growth depends to a large extent on the question whether the volume of rice exports, projected to increase from just over 1.0 million tons in 1969 to 1.3 million tons, can actually be achieved. Sales in the first few months of 1970 would indicate that it can, but international market developments in the second half of the year could still cause a shortfall in volume or force prices down even further than expected. 54. Exports of non-factor services are projected to fall by about 6 percent as a consequence of the continuing decline in U.S. military expenditures. The present situation in the area makes an accurate prediction of these earnings impossible. The mission has adopted a figure of about $200 million, or $35 million less than the 1969 level. For a number of years receipts from tourism have increased rapidly and further growth can confidently be predicted. However, earnings from this and other services, taken together, cannot; be expected to fully compensate the decline of receipts from the U.S. mili-tarr. 55. The projected increase of foreign exchange earnings on merchandise account and the decline of service receipts result in total growth of export eaznings of a3. modest 3 percent, far below the rate achieved during the 'sixties. 56. In sum, growth of demand from exports, government expenditures and pr vate fixed.investment will probably decline further in The estimated grol,th i-ate in real terms is about 7 percent, against 7.4 percent on average in 1968: and 1969, and over 15 percent in the years There is no simple and straightforward way to estimate the impact of this development on the growth of output. On the basis of overall relationships in the past it appears, however, that real growth of national product of at most 7 percent can be expected. As mentioned in paragraph 49, this growth rate depends on aj continuation of the favorable trend of the past two years in the agricultural sector, which may not be entirely realistic. The projections are summarized in Table 5, below.

26 - lbi - Table 5: Projected National Resources and 2sxpenditure, (Billions of baht) at Cur. Vol.Index at 1969 Price Ind. at Cur. Prices (1969=100) Prices (1969=100) Prices Private Consumption Public Consumption l ( Private Fixed Investment Public Fixed Investment Changes in Stocks * Exports of Goods ]4.90 Exports of Services Statistical Discrepancy Total National Expenditures Imports: U.S. Induced Investment-related Other Goods and Services Gross Domestic Product Balance of payments developments expected during 1970 are in part determined by the weak export performance, for another part by the increases in import duties and sales taxes which the Government introduced on July 1. W.ithout the latter, the balance of payments deficit would probably be still larger than now projected. The new measures to curb imports, mainly of luxury consumer goods, are estimated by the Government to reduce projected imports by around X1.00 billion a year. The mission has not been able to analyze the new measures in sufficient detail, but it seems not unreasonable to expect a reduction in that order of magnitude. As the full effect of the measures will be felt only some time after their introduction, the mission assumed that during the second half of 1970 imports may be 0400 million less than otherwise. 58. Total imports of goods and non-factor services are projected to grow by about 4 percent in This low growth rate not only reflects the impact of the recent tax measures but also a significant decline of imports induced by U.S. expenditures. In accordance with past trends, investmentrelated imports are projected to grow at the same rate as fixed investment

27 (about 8 percent). The effect of the duty increases is entirely reflected in other (mainly consumption-related) imports of goods and services which might have increased by 6.5 percent without these measures but are now forecast to grow by less than 4 percent. 59. The slower growth of imports in 1970 will not be sufficient to prevent a. further increase of the deficit on goods and services to about $290 million (1969: $264.4 million). As net transfers are expected to decline because of lower U.S. grant disbursements, the current account deficit may rise to $236 million. 60. Estimates of capital inflows by the Bank of Thailand have been adopted with only minor modifications. The projections are summarized in Table 6 below: Tab:Le 6: Balance of PaYments (Millions of $) Prelim. Projection Ex ports of Goods and. Services 1, ,164 Imports of Goods and Services -1, ,456 Net Transfer Payments Current Account Ba:Lance Pri-vate Capital Inflow, Net Public Capital Inflow, Net 2.9 1/ 36 1/ Change in Reserves (Decrease = +) 48.0 T/ 55 T/ Total Financing Errors ond Omissions / Includes Bank of Thailand participations in IBRD loans of $17.2 million in i?69 and.$9.6 million in 1970 registered as repayments on public account. fl. On private capital account, drawings on loans and suppliers' credits are expected to be abuut the same as in 1969 ($175 mil:lion) while repayments increaw. by about $15 mrillion to $131 million, leading to a corresponding drop of the net inflow. Since direct investment (net) is likely to rise only slightly to about 5;55 million while other inflows are projected to remain at around $10 million, total net private capital will decline somewhat from the very high level reached in 1969.

28 - i6-62. A substantial growth of capital inflows is eypected in the public sector, from a net of $20 million in 19'69 (exclluding Ba-nk of Thailand participations in IBRD loans) to $45 million in Detailed estimates of disbursements from foreign loans have been prepared by the National Economic Development Board and are presented in Vol. II, Table 3.7 of this report. The mi:sion has examined these forecasts and found that, if some allowance is made for slippage, they are in substantial agreement with the figure of $70 million used here. This figure is based on a pipeline of available foreign finnctrling corvnritments at the end of FY 1969 (September 30, 1969) of $190 million. Disbursements in this order of magnitude appear realistic and in line with the on-going public sector investment program. Disbursements in 1969 araounted to,,53 million financing 11.5 percent of public fixed investment; projected disbursements for 1970 would raise this share to about 13.5 percent. 63. The expected increase of net public capital flows would not only compensate for the lower net private inflows but also cover a sizable part of the increase in the current account deficit. Thus, the estimated foreign exchange loss in 1970 is roughly of the same order as in This drawdown would reduce reserves to the equivalent of less than seven months' imports of goods and services. It would be inappropriate to take comfort in the fact that the projected decrease of reserves is not much larger than in 1969, considerilng the uncertainties which surround the estimuate. A shortfall of rice exports, a lesser impact of the recent tax and duty increases on imports or slower disbursements of foreign loans to the public sector could result in a loss of twice the magnitude forecast above. Above all, even a modest reserve loss in 1970 would not mean that the deterioration of the balance of payments has been halted. Export growth, Thailand's main asset during the 1960's, has not improved and the future decline of IJ.S. military expenditures will add to the strains on the foreign exchange budget. 64. Measures to protect the balance of payments and the reserve position must clearly focus on the promotion of exports, in the widest sense. Moves to stimulate the produc-tion of exportable goods, provision of infrastructure facilities, price policies and appropriate fiscal arrangements belong in the possible range of measures, as do improved marketing arrangements abroad. As many of these measulres may take considerable tlne to be implemented and become fully effective, early initiation of studies and preparation of necessary ac-tion is essential. The Government has clearly recognized the need for export promotion and has given highest priority to the elaboration of suitable measures. 65. In the meantime, further growth of imports - in line with the expansion of domestic demand - may lead to reserve losses in excess of what the Government may find acceptable. In this case it may again, as in 1970, be necessary to curb import demand at least temporarily. The Government takes the view that in such a situation preference must be given to the use of indirect and non-quantitative instruments; quantitative measures would therefore be used only as a means of last resort. The mission fully endorses this position. Another area where action could be effective concerns imports of passenger cars and consumer durables financed by short-term foreign credits. Their registration by the Central Bank should urgently be improved and regulations could then be enacted with a view to control both terms and flow.

29 II. THE FISCAL AND MONETARY SITUATION The Fiscal Position of the Central Government 66. During the early 1960's, the Central Government followed a conservative policy of small budget deficits entirely financed by nonexpansionary means. In fact, from FY 1961 to FY 1967, 1/ the Government accumulated sizable cash balances by raising more resources to finance its deficits than were actually needed. This situation has changed more recently. Revenues have ceased to increase faster than current expenditures so that the current surplus has tended to decline. Nevertheless, higher capital expenditures have been undertaken. As a result, the Government has generated increasingly large deficits, which now exceed 20 percent of total expenditure. The recent evolution of the Central Government's accounts on a cash basis is summarized below: Table 7: Central Government Accounts (Billions of baht) FY1967 FY1968 FY1969 FY1970 Actual Actual Actual Rev.Est. Current Revenue Current Expenditure Current Surplus Capital Expenditure Transfers D;?ficit 1/ Financed by: External Loans and Grants Domest:Lc Resources (Non-expansionary) (1.82) (1.53) (1.20) (1.42) (Expan3ionary) (0.16) (1.89) (2.27) (3.38) 1/ Differences due to minor adjustments for double counting. Source: Vol. II, Table / Thai fiscal years end September 30.

30 To finance its deficits, the Government has not been successful in increasing receipts from non-expansionary sources. The reasons for this are given later in this chapter. As a result, recourse to expansionary sources - mainly to borrowings from the Central Bank - on a large scale became inevitable. In FY 1969 expansionary financing amounted to over 10 percent of money supply. Under present circumstances in the Thai economy, this has put pressure on the balance of payments rather than on prices, although export performance and other factors have probably had more importance in bringing about the loss of foreign exchange reserves experienced last year. 68. Faced with this situation, the Government started to apply restraint on expenditures in FY The growth of current expenditure has been brought down from a record 23 percent in FY 1967, when government salaries were increased across the board, to an estimated 10 percent in FY Capital expenditure and transfers to state enterprises and local governments increased by only 10 percent from FY 1968 to FY 1970, compared to 56 percent in the previous two years. A fortuitous factor helped the Government restrain expenditure in FY For the first time since 1960, approval of the budget by Parliament was required in that year. The level, as well as the allocation, of expenditure was debated at such length that it took the Government more than five months after the fiscal year started to obtain final parliamentary approval. Pending such approval, government agencies could not undertake expenditures for t"new"l obligations and they are not expected to be able to make up fully for the delay by accelerating disbursements in the remaining seven months of the fiscal year. As a result, expenditure on a cash basis in FY 1970 is expected to be 3maller than it would have been without the parliamentary delay. In turn, this short. fall will increase the carry-over of FY 1970 appropriations which may be disbursed in the first half of FY The FY 1971 budget has been proposed by the Cabinet. Parliamentary approval remains to be obtained. The Cabinet proposal provides evidence of further restraint. Total FY 1971 appropriationsare proposed to exceed those of the previous year by only 7.3 percent. However, because of the large carry-over of Ff 1970 appropriations to be disbursed in FY 1971, expenditure on a cash basis is expected to increase by about 11 percent. 70. In addition, new tax measures were enacted in July They are expected to yield about %1.2 billion of additional tax revenue in FY / Such an amount will be sufficient in the mission's opinion to hold the deficit and the recourse to expansionary means of financing down to the levels reached in FY From FY 1968 to FY 1970, the inflationary impact of deficit financing had increased by more than 01 billion each year. The estimated results of FY 1971 with expenditure restraint and the new tax measures will, therefore, represent a considerable improvement in fiscal performance. 1/ The new tax measures became effective on July 1, Additional revenue from this source in the last quarter of FY 1970 is reflected in Table 7 above, but not in Vol.II, Tables 5.1 and 5.5.

31 Current Expenditure 71. Since FY 19657, expenditure required by defense and police forces to cope with the security situation and payments of interest on domestic and external debt have increased very rapidly. Of the total estimated growth of current expenditure in FY 1970, defense and police represent 80 percent, interest payments represent 34 percent. Restraint, therefore, has been exercised in the fields of general administration, and of economic and social services. To a limited extent, however, the Government has continued to increase expenditure for education. A comparison of the growth rates of the most important categories of current expenditure in selected periods is presented below: Table 8: Growth of Central Government Current Expenditure. FY (Percent) FY63-66 FY67-70 FY1970 Average Average FY1970 Percent of total Defense and Police Interest Payments h General Administration 1h Economic Services Social Services (Education) (6.5) (10.9) (2.4) (16.2) Source: Vol. II, Table It may be Iexpected that the requirements of security, as well as education and other social_sectors which have suffered _o lze1ative neglect in the past, wil'e.onhlinue to exert very strong upward pressure on current expenditarte-in the foreseea6le future Expenditure on security now represent% 4.2 pernent of GDP (excludin g.s. military assistance). Current and capital. expenditu-re on -duc-atbon is 2. percent. Salaries and wages of-the Central Government are quite low in bd parison with those of the private sector, so that further increases may well become necessary in the future to maintain or improve the relative attractiveness of government employment. In this respect, however, selective increases and a more efficient use of existing staff will be preferable to a repetition of the large cross-the-board increase which too} plac:e in The Government also may want to substantially increase expenditures benefiting the Northeastern and Southern regions to achieve a better regional balance of expenditure than in the past (this observation also applies to capital expenditure). Finally, with large borrowings from abroad and from clomestic sources, interest payments are expected to rise sharply. Notwithstancding these expansionary factors, the mission believes that, in view of the revenue prospects and the requirements on capital account, the Government ought to curb the growth of current expenditure although it is probably only realistic to expect that further increases will not fall below

32 to 11 percent per annum. Given the needs of security forces and interest liabilities, this objective will require a detailed critical review of expenditure heads and reducing or eliminating less essential items to make room for a continued expansion of expenditure in more essential fields such as education. Capital Expenditure and Transfers 73. Capital expenditure increased by 24 percent annually from FY 1961 to FY They rose by 2 percent and 1 percent only in FY 1969 and FY 1970, respectively. In those two years, capital expenditure for education, health and other social services continued to increase at a fast rate. There were cutbacks or slow growth in other fields. Transfers to state enterprises and local governments, which include central assistance on current account, remained at %1.4 billion in FY 1968 and FY 1969, and increased to 01.9 billion in FY The mission was not in a position to analyze the consequences of the recent curtailment of capital expenditure because work on the mid-term Plan evaluation had not reached the stage where comprehensive data could be obtained. It was assured that the implementation of on-going development projects was in no way hampered by shortages of domestic financial resources. But executing agencies have probably delayed the start of new projects, the financing of which is not at present assured. In turn, this delay has probably slowed down the rate at which foreign loans are sought and contracted for new projects. In view of the need, discussed later in this report, to increase public sector investment it will be desirable for capital expenditures to resume their growth, but this will require substantial additional fiscal efforts and further foreign aid commitments to offset declining U.S. military assistance. Central Government Revenue 75. Proceeds from taxation are almost 92 percent of the Central Government's total revenue. The remainder is contributed by profits from the Bank of Thailand, other state enterprises and miscellaneous sources. As in many other developing countries, the importance of income taxes is small. Revenues by major sources are summarized below:

33 Table 9: Central Government Revenue (Billions of baht) FY1961 FY1968 FY1969 FY1970 FY1970 Actual Actual Actual Rev.Est/ Percent Income Taxes o Import Duties Export Duties Business Taxes h Excise Taxes Other Taxes Tax Revenue Non-tax Revenue Total Revenue Percent of GDP 2/ o / Excluding the effect of new tax measures for which no breakdown was available. 2/ GDP at current mar]ket prices in corresponding calendar years. Source: Vol. II, TabLe The Central Government increased its revenue effort from 12 percent of GDP in FY 1961 to 4Qperce1nt Er Simultaneously, proceeds frorn taxatiori went up from IIpercent of GDP to 13 percent. This creditable performance is expected to be interrupted in FY 1970; even after taking the effect of the new tax measures into account, the ratios of tota.l and tax revenue to GDP will. show a slight decline. The main factor is a sharp drop by 31 percent of receipts from export duties because the Government had to reduce drastically the premium rates on rice exports in December But, the growth of receipts from other taxes in FY 1970 is also expected to be below lasl; year's levels. The Government has taken several measures to counteract this tendency. 77. Firstly, tax administration is being improved on a continuing basis. Improvements are being made by the departments collecting business taxes (a form of sales taxes) and customs duties, although much reportedly remains to be done to reduce tax evasion. The system of excise duties is being reformed by combining excise and business taxes when they bear on the same commodities for the convenience of tax payers and greater simplicity

34 of collections. Secondly, as noted earlier, new tax mneasures were taken in July It is estimated that they will raise revenue growth from 4.5 percent in FY 1970 and 8.0 percent in FY 1971, at existing rates, to 6.0 and 14.0 percent, respectively. A more detailed appraisal of these measures is made later in this chapter where the tax system is analyzed. Financing of Central Budget Deficits 78. As noted earlier, the Government has not been successful in increasing receipts from non-expansionary sources to finance its deficits since FY These sources include extra-budgetary treasury receipts, foreign loans and grants, and government securities sold outside the banking system. Extra-budgetary treasury receipts (net) reflect operations of a purely administrative nature, such as imprest, advance and revolving funds. Proceeds from foreign grants reached a peak of Ol.5 billion in FY They are expected to decline in the future because their largest component (U.S. grant aid) is expected to decline. Net receipts from foreign loans have displayed a stable trend because repayments have in recent years increased much faster than loan drawings. In turn, loan drawings depend on the availability of development projects and on the availability of domestic resources for the projects which they contribute to finance. 79. A problem has arisen since FY 1968 with non-expansionary sales of government securities, which comprise direct sales to the public (a minor proportion) and sales to the Government Savings Bank (GSB) which in turn collects deposits from the public. Net receipts from these sales expanded by 19 percent per annum from FY 1961 to FY 1967 when they reached a peak of JK1.1 billion; they have remained substantially below that level since then, although the financing requirements of the Government expanded very rapidly. For one thing, the growth of private deposits with GSB has declined sharply from 25 percent in 1966 to 10 percent in This has restricted GSB's ability to purchase government securities on an expanding scale. To permit GSB to compete more effectively with other financial institutions and resume a faster expansion of deposit mobilization, the Government should probably allow GSB to pay higher deposit rates and to iss-ie more attractive financial instruments. In addition, the Government made interest on government bonds liable to corporate income taxation in January 1969 and this change adversely affected direct sales of bonds to the public. Corporations now have no incentive to hold such bonds, especially since new financial houses offer commercial paper with much more attractive terms than bonds. 80. The change in the tax status of interest on government bonds has also adversely affected sales to commercial banks (in part these sales are technically non-expansionary since commercial banks can only borrow 70 to 90 percent of the value of the bonds from the Central Bank, depending on the length to maturity). As a result, most of the bonds issued from early 1969 have remained with thecentral Bank. The Government has decided this year to improve the terms of its bonds and the Central Bank is now testing the market with new issues.

35 State Enterprises 81. It has been argued that state enterprises do not make contributions commensurate with the Government's participation in them because they are not efficiently ran and, thus, not sufficiently profitable. The mission has examined available financial data on state enterprises and foundthat they do not provide a basis to formulate an opinion on the validity of this contention. These data are in part unaudited, perhaps incomplete and sometimes out of date. They cover only sales, operating expenses, depreciation, net income, capital expenditures and financing of the enterprises in which the Government's silare capital participation is 50 percent or more. An urgent task would be to keep more detailed and reliable records of the accounts of state enterprises as these are essential for adequate financial control. For the above reasons, Vol. II, Tables 5.10 and 5.12 only include the capital accounts of state enterprises. 82. Available data, nevertheless, show that out of 39 enterprises only 4 incur losses which axe minor; they are a paper mill, two jute mills and a gunny bag factory. The Tourist Organization and the Metropolitan Water Works also incur losses which are sizable; but it seems that these enterprises would normally be organized as government and city departments, respectively. From FY 1965 to FY 1968, average net income (after depreciation) of state enterprises has risen from 12 to 18 percent of total sales. The net income to sales ratio was lowest for industrial enterprises. It was above average for public utilities in power, transport and communications. 83. As may be se!en from Vol. II, Table 5.10, state enterprises have increased their capital expenditure from 01.5 billion in FY 1964 to %3.9 billion in FY During the same period, they have also raised the proportion of capital expenditure financed from own resources from one-third to two-thirds. With the exception of industrial enterprises, the above evidence casts a rather favorable light on the performance of state enterprises and their pricing policies. 84. TheLr contribution to. the budget on the whole appears in line with government policy in this respect. It has increased from 086 million in FY 1964 to g354 million in FY Further growth may be expected on the basis of salez prospects for public utilities in power, transport, communications and oil distribution. The policy governing contributions to the budget appears fair. Enterprises which do not pay business and income taxes are required to contribute 75 percent of net profits, or more if warranted by their cash position. Enterprises in which Government participation is 50 percent or more contribute 25 percent of net profits in lieu of income tax and dividends. Enterprises in which Government participation is less than 50 percent pay income tax and only contribute dividends. 85. The Bank of Thailand is also a state enterprise. It has increased its contribution to the budget from 104 million in FY 1961 to 0250 million in FY Since FY 1966, accretions to the Bank's capital accounts have been much larger, rising from 0400 million in that year to 0720 million in FY 1969.

36 Local Government Finances 86. Detailed information on local government finances is not available. The compilation of such data is neither timely nor systematic. As in the case of state enterprises, the mission would like to urge the Government; to establish soon procedures whereby the accounts of local governments would be centralizeld and processed rapidly for analysis and budgeting purposes. On the basis of available figures (Vol. II, Table 5.11), it appears that local governments show a small overall current surplus; some probably have current deficits. Most of their capital expenditures have to be financed by transfers from the Central Government. 87. It has been argued that such transfers impose too large a burden on central finances and that this method of financing unduly restricts the freedom and incentive of local governments to improve their facilities and services. In spite of the lack of adequate information, the mission would like to offer some comments in this respect. A land tax is at present collected on urban and rural lands, but its incidence is extremely small. Later in this chapter, the need to curb land speculation is discussed and it is suggested that capital gains on real estate transactions be taxed. In addition, the mission would strongly advocate immediately raising local taxation of real estate in urban areas. Assessment regulations and minimum rates could be set by law, but municipalities would be allowed to adopt higher rates if they wish. A similar measure for the taxation of rural lands should be put under study for early enactment. These measures would represent a major step towards greater local fiscal autonomy. Consolidated Accounts of the Public Sector 88. For lack of data, a complete consolidation of the accounts of the central government, the local governments and the state enterprises cannot be prepared. Only a partial one is presented in Vol. II, Table Current accounts are clearly inadequate, but capital accounts are satisfactory, although probably incomplete to a small extent. Further, the series only extend to FY A summary for recent years is presented below: Table 10: Consolidated Public Sector Capital Accounts FY (Millions of baht) FY1967 FY1968 FY1969 Actual Actual Actual Capital Expenditure Financed by: Foreign Loans and Grants Domestic Sources (Non-expansionary) (5.37) (5.44) (6.09) (Expansionanr) (0.05) (1.91) (2-27) Source: Vol. II, Table 5.12.

37 89. Capital expenditure of the public sector increased by an average 12.8 percent a year from FY 1961 to FY It rose by 29.1 percent in FY 1968 and 11.9 percent in FY Thus, the very slow growth observed for the Central Government in FY 1969 was compensated by a continued fast growth for other entities of the public sector. It is not unlikely that this situation has continued to prevail in FY A decreasing, share of public capital expenditures is being financed by external loans and grants: 33 percent in FY 1961, 19 percent in FY 1967, and 14 percernt in FY In the past three-years, three fourths of the increase in domestic sources of financing has been expansionary. However, the overall inflationary impact of public sector financing is not greater than that of Central Government operations alone. Development Expenditures 90. The National Economic Development Board (NEDB), an agency reporting directly to the Prime Minister, prepares annual development plans within the framework of the Second National Economic and Social Development Plan, FY These plans are set against the background of an analysis of the -countrhy's economic position_and prospects. They contain discussions regarding the private sector and make recommendations on overall and sectoral economic policies and strategy. Mainly, the annual plans are programs of development expenditure in the public sector. Vol. II, Tables 5.8 and 5.9 contain info.rmation expenditure of the Central Government and of the public sector, respectively. a 91. Unfortunately, these figures cannot be used for an analysis of the development effort. In the first place, the series are not up to date. Figures for FY 1969_.and-later are only budget estimates. Secondly, the definition of development_expenditures was changed after the Second Plan documentflwas i-ssu e Eso that annual7plans cannot be compared against-sec-nd Pl.ar; objectives ) Finailly, available- data on-the-implementation o-f-arnual plans cannot bereconciled with Central Government accounts on a cash basis an13 annijal plan docume!nts have until now never contained any detailed quantitative references to past achievements. '92. These obsernations point to the fact that the implementation of development plans is rnot centrally monitored. This situation should be remedied since there are inherent dangers in drawing plans without up to date information on past performance, more particularly now when financial resources are becoming increasingly scarce and priorities have to be assessed with greater care. It appears essential that, as a first step, budgetary and planning authorities should reach a set of common and agreed definitions between the budget and the development plan. Reportedly, steps are being taken in this direction. Secondly, in the light of these definitions, procedures should be established to monitor the performance of the agencies of the Central Gove-niment, the local governments and the state enterprises which implement the various parts of the development plan.

38 Some indications on changes in the investment strategy of the public sector may be derived by analyzing the data on capital expenditures in the public sector in Vol. II, Table A comparison of growth rates of several expenditure categories is presented below: Table 11: Growth of Public Sector Capital Expenditure, FY (Percent) FY64-66 FY67-69 Distribution Average Average FY1969 Agriculture l1.o of iwhich: Irrigation (16.9) (15-1) (10.8) Industry and Mining Power Transport & Communications of which: Highways (27.0) (33.4) (24-5) Education Local Governments Other 13.h Tota Source: Vol. II, Table )4. During the three first years of the Second Plan period, the highest priorities have been given to power, highways and education, in that order. Taken together, they now represent more than 50 percent of total capital expenditure in the public sector. In the case of power, the recent fast expansion represents a sharp reversal from the previous three years, when a sizable decline had taken place. In the case of highways and education, recent expansion represents an acceleration over already rapid increases in the previous three years. These three sectors have benefited from foreign financial and technical assistance..95. Agriculture and irrigation have lost some of their momentum and the figures reflect a shift in emphasis away from irrigation although on a small scale. However, Central Government figures for FY 1970 show that this shift was only temporary. The small priority given to industry and mining reflects the predominantly private character of these occupations in Thailand. The deceleration of investment by local governments is partly explained by the fact that the Central Government sholilders most of the spending for local education, water supply and sewerage.

39 The Tax System 96. A somewhat detailed analysis of Thailand's tax system appears necessary in this report for several reasons. Some features of the system seem to interfere with the responsiveness of tax revenue to economic growth. There are inequities in the system that have become significant political issues. The measures taken recently need to be appraised within their context. Finally, projections made in the following chapter indicate that the need for more revenue action will probably arise again in the next few years. 97. The re]ative importance of income taxes in tax revenue has steadily increased from 10.2 percent in FY 1961 to 12.2 percent in FY Their responsiveness to income growth is high so that further change in this direction may be expected. Such a change is desirable to provide tax revenue with increased resilience and buoyancy. It could be accelerated if administration were improved to reduce evasion. At present, income taxation is simple and rates have been kept unchanged. Under personal income tax, some 850,000 individuals f'ile returns and rates are progressive from 10 percen-t to a maximum of 50 percent on selected levels of assessed income. Standard deductions, personal and charity allowiances, and the exemption of income derived from rice farming by the fanner himself and his family exempts the vast majority of wagge earners and small farmers from personal income tax. These appear justified on grounds of equity (rice farmers bear the effect of the premium levied on rice exports), as well as of administrative expediency. 98. Less justified is the exclusion of two increasingly important types of income from personal income tax liability. 'These exclusions concern interest on bank deposits and government bonds, and proceeds from -the sale of property "iacquired not with a view to trading or profits." (property refers to land and buildings). The second exclusion is so liberally interpreted that, in practice. real estate speculation is a tax-exempt activity for individuals. These tw,io exclusions are objectionable on several grounds. In the first place, the government is thus foregoing the possibility of collecting substantial amno)]nts of revenue. Secondly, they benefit tax payers in high income brackets most ancd thereby introduce an element of inequity into the system, further increased bjy the fact that there are no inheritance taxes in Thailand. Such tax shelte-rs for the wealthy have become a politically sensitive issue. Thirdly, they impede the development of a liquid securities market by making government bonds, bank deposits and real estate speculation more attractive than investment in private securities. For example, a tax-free return of 7 percent on 12-month bank deposits or on real estate transactions becomes at the margin equivalent to a taxable return of 14 percent on private securities (neglecting i tamp duties and brokerage fees) for individuals with incomes of o400,000 ('1,,500) and more, wh:lch are taxable at the maximum rate of 50 percent. Quite naturally, therefore, investors tend to ignore private securities, which offer no tax advantage, and to prefer time deposits, which have expanded from 1.5 billion in 1961 to K16.1 billion in 1969, and real estate speculation. The latter reportedly is now driving property values in Bangkok out of line with rental charges and up tlo levels which discourage *the establishment of new businesses there. rpeculation, however, does not seem to have reached unmanage.able proportions, but obviously it ought to be curbed before this happens. As a first step in this direction, the mission would urge the Government to propose legislation providing for the taxation of capital gains on real estate

40 and private securities (instead of income tac liability). It could be designed in such a way as to provide for differential treatment of real estate according to its economic use (undeveloped lands in urban areas would be taxed more heavily), and to encourage holding private securities. 99. The case of interest on bank deposits should be considered with caution. This exemption has helped commercial banks in their effort to mobi]ize personal savings. It has also contributed to depress the level of interest rates. In this manner, it has probably acted as a powerful incentive in channeling savings toward the financing of private industry, trade and agriculture. On the other hand, this exemption has probably had little effect on the grotuth of total savings available for productive investment. Therefore, in view of its inequitable and discriminatory nature, as well as in order to help provide a larger market for private securi-ties, the mission would on balance argue for a gradual reduction of this exemption. As a first step, the Government could reduce the exemption by, say, 20 to 25 percent. A further reduction would not be envisaged until the effects of this first reduction can be thoroughly assessed The case of interest on government bonds is also not clear cut. The fact that such interest is exempt under personal income tax, but taxable under corporate income tax is surprising. As a result, the market for government bonds has lost its unity, several categories of bonds are being issued and investors are reportedly confused. Perhaps, the Goverment should consider removing this anomaly by unifying the tax status of government bonds irrespective of their holders Net profits of corporations are subject to corporate income tax. Its rates are progressive but low; they are 15 percen-l on the first /500,000 portion of net profits, 20 percent on the second /500,000 portion and 25 percent on net profits exceeding /1.0 million. As a result, receipts from this source were only 5.0 percent of tax revenue in FY 1970, although they had been growing at 16 percent per annum since FY In 1965, 11,323 company tax returns were filed, but 176 companies accounted for about 80 percent of receipts from the tax The tax provides for depreciation on a declining balance of buildings over a period of twenty years, and of most other assets over five years. Depletion allowances can be made for wasting assets such as mineral resources. There is no system of investment credit; but five-year tax holidays may be obtained by private and public companies alike, which are granted this and other promotional privileges by the Board of Investment. Because of low tax rates, and for companies which have to incur start-up losses, the attractiveness of tax holidays is not very great. The revenue loss on this account is still small but should be expected *to increase in the future. Write-off of bad debts is allowed only after reasonable action has been taken for recovery The low level of existing rates seems to suggest that corporate taxation could be increased somewhat without any serious adverse effects on corporate activity. This is probably true, but it should be noted that income

41 taxation, as it is, is unfair to publicly-held companies. They cannot claim tax exemption for interest on bank deposits and government bonds, nor claim exemption on proceeds from sales of property. Dividends are fully subject to personal income tax, which in this case is withheld at source. Capital appreciation on corporate shares is fully liable to personal income tax. Large public companies reportedly would find fewer opportunities of tax evasion than individuals and small companies because of disclosure requirements. 1o4. Export taxes have lost their past importance. They now represent only 6.7 percent of tax revenue compared to 19 percent ten years ago. In particular, proceeds from the rice premium are estimated to decline to 0750 million in FY 1970 from a record level of 01,236 million in FY In view of the volatile nature of exports as a tax base and in view of the need to promote exports, the mission believes that export taxes should be progressively reduced, notwithstanding the consequential revenue loss. Developments in production, domestic consumption and external markets of the five taxable commodities (rice; rubber; teak and other woods; hides, skins and leather; iron or steel scraps) would determine the timing and the extent of possiblie reductions Import duties are the main source of tax revenue. Their relative importance has been maintained at around one-third of tax revenue for the past ten years, in spite of a shift in the composition of imports that has accompanied industrialization. The share of consumer goods and passenger car imports, which are subject to high tariffs, has decreased from 37 percent of total imports in 1959 to 25 percent in 1969, whereas the share of intermediate products, raw materials, capital goods, commercial vehicles and fuels, which pay :Low duties, has increased from 58 to 73 percent in the same period. Exemptions granted to promoted industries and refunds to exporters have cost the exchequer little, and since 1967 the extent of customs relief for newly approved firms has been reduced The ratio of collections to the value of imports has remained around 20 percent for the past ten years. By comparison with other developing countries, this ratio is around the median. It should be recalled in this respect that in Thailand there is no implicit under-valuation of imports on account of the exchange rate, and that a business tax is collected on the duty paid value of most imports at points of entry. Business tax collections on imports represent about 28 percent of total import duties. Further, anomalies in the tariff with adverse economic effects need to be corrected (see Vol. III on Industry). At present, rates of duty vary from zero for very few items to 80 percent on goods which are considered as luxuries or goods produced by protected domestic industries. However, the 8 0-percent rate only applies in a few cases. The majority of rates are below 30 percent ad valorem. This is confirmed in Vol. II, Table 5.2 which gives ratios of collections to value of imports by economic groups of commodities. This presentation shows that only non-durable consumer goods and passenger cars pay duties in amounts exceeding.30 percent of their value.

42 Taxes on consumption expenditures comprise a business tax, excise duties, profit remittances from the Tobacco Monopoly and the State Lottery, entertainment duties and various minor taxes. Tley have a samll incidence on consumption expenditures and offer scope for additional revenue by raising rates. The business tax is a highly differentiated sales tax that embraces both sales of goods and services. Although basically a single-stage tax at the producer/importer level, it combines some of the features of a multiple stage turnover tax with respect to some goods and services. Its rates are low except on goods and services which are considered as luxuries, such as electrical appliances (12 percent), passenger cars (20 percent), alcoholic beverages (25 percent) and night-clubs (10 percent). The sale of goods of common use is subject to a rate of 5 percent onl-y. In the case where sellers at all levels have to pay tax, the rate is reduced to 1.5 percent of gross receipts. Excise duties only apply to nine products, of which petroleum, tobacco and beverages are the most important. Their administration is good, but rates are on the low side by international standards and could be increased quite markedly, except in the case of cement. It may be noted, incidentally, that in FY 1969 petroleum contributed more than 02.0 billion to the exchquer by way of import and excise duties, and tobacco 01.2 billion in monopoly remittances and excise duty (i.e percent and 6.6 percent of total revenue, respectively) It should also be noted that 10 percent surcharges on the business tax, on excises on liquor and beverages, and on entertainment duties are collected by the Central Government for local governments. These surcharges are not reflected in the Central Government budget New tax measures were enacted in July They consist of changes in 81 rates of import duties and in o rates of business tax. Tariff adjustments have, in all cases except that of soaps, been increases sometimes combined with changes from specific to ad valorem rates. They are tentatively estimated to yield up to 0400 million of additional receipts in FY 1971, but were designed primarily to reduce import demand. With a few exceptions, rates on non-durable consumer goods, including foodstuffs, have been raised to 60 percent, rates on durable consumer goods and passenger cars to 80 percent, and rates on cosmetics, wine and liquor to 100 percent. In addition, adjustments have been made to eliminate windfall profits to some industries, in particular the assembly of passenger cars and commercial vehicles. An industryby-industry survey had been carried out beforehand; some industries are expected to receive greater protection as an incentive to promote production. Further adjustments are expected to be made in this respect as a result of constant review of tariffs affecting industrial activities by the Tariff Committee, an interministerial body receiving private complaints Increases in business tax rates aim at discouraging consumption, mainly of imported commodities. The basic rate on all goods, except petroleum products and cement, has been raised from 5 to 7 percent, the rate on passenger cars from 20 to 30 percent, on liquor from 25 to 30 percent, on household electrical appliances, watches and cameras from 12 to 15 percent, on electric fans and motorcycles from 10 to 12 percent, and on massage parlor services from 2 to 5 percent. Since the business tax applies to the duty-paid value of imports, the above increases will reinforce the effect of tariff adjustments. These measures are estimated to yield about 0800 million, to which the 10 percent surcharge for local governments should be added.

43 Taken together, the increases in rates of import duties and business tax were well designed to achieve the simultaneous purposes of raising substantial amounts of additional revenue and dampening import demand and consumption. The rate increases may be expected to bring about numerous changes in relative prices that seem to be in desirable directions; a small increase in the general price level may also be expected. Although the increase in the basic business tax rate will affect poor and rich consumers alike, the larger increases concerning passenger cars, consumer durables and luwury articles satisfy the criterion of equity, since they will only affect wealthier consumers who can afford to purchase these items. Tie strength of political resistance to tax increases in Thailand is demonstrated by the fact that parliamentary approval of the recent measures was obtained by the narrowest possible majority of 102 to 101 only after the Government agreed to remove proposed increases in excise duties and business tax on petroleum products and cement. This will be a factor if additional revenue is again required in the next few years as seems to be the case. Nevertheless, the mission would hope that the Government would not rely only on indirect taxation but would, to the extent administratively possible, also use direct taxation, particularly of real estate transactions and holdings, and by the pricing of goods and services provided by Government agencies and state enterprises. Money, Credi-t and Prices 112. Thailand has enjoyed remarkable monetary and price stability throughout the 1960's. Between 1961 and 1969, wholesale prices have only risen by 15 percent and consumer prices by 18 percent, or by 1.8 percent and 2.1 percent per innum, respectively. The costs of food, housing and medical care have risen by 33, 16 and 10 percent, respectively, during this period. Other prices have remained virtually unchanged. Conservative fiscal policies up to 1967, balance of payments surpluses up to 1968, the considerable mobilization of private savings by commercial banks and the insistence of the Central ]Bank on sound expansion of private credit have been instrumental in bringing about such stability. The rate of increase of money snmply- Jas been kept below that of GDP at current market prices, except in 1961, and It was only 4.7 percent in 1969 (i.e. lower than the real economic growth rate), mainly because foreign exchange reserves declined for the first time since Recent changes in money supply and the main factors influencing it are surmmarized below:

44 Table 12: Changes in Factors Affecting Money Supply, (Billions of baht) Changes in: Credit to Government (net) Credit to Private Sector Foreign Assets (net) o Less: Time Deposits Other Bank Liabilities (net) 0.57 o o.63 Money Supply Source: Vol. II, Table The expansionary effect of increasing recourse to the banking system by the public sector since 1968 clearly appears in the above tabulation. As noted earlier, the Central Government has been unsuccessful in expanding non-expansionary financing of its deficit since that year. This has increased the need for credit expansion to the public sector, mainly in the form of Central Bank loans to the Central Government From 1961 to 1969, private credit was allowed to expand at the high rate of 16.5 percent per annum with only small year-to-year variations. But with good export performance and balance of payments surpluses, this was more than offset by the rise in private time and savings deposits which have growm at an annual rate of 27.2 percent. Under those circumstances the Central Bank has not had to make use of the coercive powers available to it in the Commercial Banking Act of The minimum reserves ratio has been kept low (7 percent at present) although the bank has powers to raise it up to 50 percent. Commercial banks have been required to maintain capital funds equivalent to 6 percent of their risk assets, but in fact, as a group they have on their own maintained this ratio above 10 percent since The Central Bank applies some selectivity in its lending to commercial banks; loans secured by government securities are at a rate of 9 percent, whereas rediscounts of export and industrial bills is at the concessional rate of 5 percent; rediscounts of rice warrants and agricultural bills is at the rate of 7 percent. Howiever, commercial banks have made little use of these facilities to a large extent because they are not always equal to the task of handling the required formalities on behalf of their customers. This selectivity has not had much effect on the structure of bank credit. Some banks, however, do report making substantial use of rediscounting facilities. Finally, a bank may not extend credit to any one person in an amount exceeding 30 percent of its capital funds. This is a rule of sound banking

45 practice. To further strengthen the financial position of banks, the Central Bank intends to lower this ratio to 25 percent in So far, therefore, economic circumstances have permitted the Central Bank to concentrate on furthering the adoption of sound practices by commercial banks and ensuring that adequate credit flowed to the economy with minimum use of coercive powers and selective controls. A measure of the success of this policy is given by the remarkable record of growth and stability, but the deterioration of the external position may require more restrictions in the next few years Already in 1969, the bank had to increase the cash reserve requirements (from 6 to 7 percent in May), raise its loan rate (from 7 to 8 percent in January, to 11 percent in June) and raise the U.S. dollar rates at which the Exchange Equalization Fund intervenes to maintain a stable parity for the baht. These measures became necessary when, in view of rising interest rates ir the world money markets and of high liquidity enjoyed by the domestic banking system, capital outflows from Thailand had to be prevented. Their effect has been mild; about X100 million of bank deposits were neutralized and Central Bank loans and rediscounts decreased by about 0500 million. It was mostly felt by the few banks which had so far been inactive in the development of export trade or the development of agricultural and industrial credit, since concessional rediscount facilities for these types of credit were left unchanged. The loss of foreign exchange reserves exercised a contractionary effect on money supply in 1969 which was more important in moderating monetary expansion than the preventive measures of the Central Bank. The loan rate was brought back to 9 percent in March Developments in 1970 are difficult to predict because the effect of the recent tax measures cannot be ascertained with precision. Nevertheless, comparing fiscal forecasts and quarterly changes in the factors affecting money supply (Vol. II, Table 6.11), it appears that the expansion of credit (net) to the public sector will substantially exceed that which took place in Although the expansion of private credit will probably be sloi-.-ed down in the second half of 1970 by the dampening effect of tax measures on import demand and consumption, it is likely that in view of the la-ge irincrease that has taken place so far, the expansion of private credit for 1970 as a wihole will amoiunt to approximately the same figure as in As a resuilt, total domestic credit should be expected to keep import demand at a high level and there.by put pressure on foreign exchange reserves, which are no longer fed by large increases in export earnings and U.S. military spending. The Capital Market 117. UJntil the most recent past, the transformation of private savings and cash balances of surplus business concerns into term financing of fixed investment, stocks and working capital had been almost exclusively undertaken by commercial banks. Hence, their overwhelming importance in the development

46 of trade and industry. Further, they have recently become active in agriculture. Of course, there has been an active class of private money lenders from times immemorial in Thailand; but although this class has never been the subject of comprehensive investigations, it seems that its activities are of importance mainly for the financing of agricultural production and personal consumption. In view of the fast expansion of commercial banking and of the Bank for Agriculture and Agricultural Cooperatives throughout the country, the relative importance of private mone-y lending has probably diminished somewhat in the 1960's. Insurance companies and provident funds also operate in Thailand; but their activities are strictly limited by law in respect of both fund collection and investment The Bangkok Stock Exchange was founded in 1962, and functions as a market for dealing in government bonds and treasury bills, as well as in stocks, shares, debentures and other securities issued by companies incorporated in Thailand; members also deal in bills of exchange, promissory notes and other commercial paper. The volume of transactions reached a peak of 0218 million in This is very small. Only foreign members actively participate in the Exchange. Two specialized institutions operate in the fields of industrial finance and agricultural credit; but they have not yet reached full development of their potential activities Medium-and long-term financing of industry is performed by the Industrial Finance Corporation of Thailand (IFCT), although commercial banks and private lenders are also active in this field. IFCT is a private development finance company in which several major foreign banks are participating. It is now ten years old, and for the past ten years it has, as a matter of policy, confined its operations to conventional lending only with a few cases of convertible'loans, as well as to small- or medium-sized projects. As at March 31, 1970, outstanding loans amounted to $16 million equivalent and IFCT had made one small equity investment. IFCT has sufficient resources to maintain an active lending program until mid-1971, when it will have to replenish its fcreign currency resources. The contribution of IFCT to the development of Thailand's capital market has been limited by somewhat conservative policies and by the family structure of Thai business. The Government is anxious to see IFCT grow into a major financing institution in Thailand, and recent changes in management, initiated by the Government, could herald an expansion of IFCT 's role. It is estimated that the industries IFCT has helped finance now provide 21,290 factory jobs and 2,38)4 office jobs. The Corporation, after a decade of slow progress, has built up a solid foundation which justifies the Government's intention to give it a greater role in the financing of industry and in the development of the capital market. Presumarly IFCT will in the process retain the characteristics of a soundly-run, essentially private development finance company The Bank for Agriculture and Agricultural Cooperatives (BAAC) was established in 1966 to make loans to individual farmers and agricultural cooperatives. It took over the business of the former Badc for Cooperatives. It is competing and collaborating with the five commercial banks engaged in the same field. During the past three years of operations, BAAC has expanded

47 rapidly subject to some organizational constraints. It has opened some 45 provincial branches serving almost 200,000 registered branch clients (the largest commercial bank in the field has about 150,000 customers). As a matter of policy, it supervises utilization of credit and does some extension woirk; these activities are costly (on average 4 percent of loans) and pose serious staff recruitment and training problems, especially for the remote areas. Resources are less of a problem for BAAC than organizational requirements. The Government has contributed capital funds and loans to it. BAAC can collect deposits from the public and has to observe the same maximium deposit rates to the public as commercial banks; but it is not as successful as they are in mobilizing deposits from merchants due to the specialized range of its services. By arrangement (mainly with Krung Thai Bank), commercial banks deposit seasonally idle funds with BAAC when it can use them. At December 31, 1969, outstanding loans of BAAC to cooperatives and individual farmers amounted to g317 million ($15.2 million) and '993 million ($47.6 million), respectively. Of the latter, 0353 million were short-term loans, mainly for main crop production and B286 million were medium-term loans for equipment and improvements. In a short period of time BAAC has built up a sizable volume of activities along sound lines and qualifies easily to receive further financial support from the Government and the Central Bank in line with its administrative capacity More recently, two types of financial institutions have appeared on the fringes of the banking system. A few companies have started issuing prormissory notes to the public to raise resources to finance the purchase of passenger cars and household appliances. The two most important are the Bangkok Investment Company and the Commercial Credit Company. Operating outside the Central Bank's controls, these companies have built up a rapidly expanding volume of sound business relying on consumers' demand for the products they are financing. In addition, four financial institutions have most recently been established, also outside the Central Bank's controls, with the support of major Thai, Japanese and U.S. banks. They can also issue promissory notes and deal in short-term commercial paper, operate on the call-money market, deal in long-term private securities, offer investment services, engage in underwriting, etc. The record of operations of these all-purpose finance houses is still too short to permit an assessment, and the volume of their business is still quite small, although rapidly expanding. Fears have already been expressed that the automobile and all-purpose finance houses were giving unfair competition to commercial banks and engaging in unsound practices because they operate in complete freedom. The Central Bank has acknowledged these fears and recognized that it was worried by the fact that it had little control over their financial instruments such as commercial paper. It is prepakring legis:lation andl regulations with the cooperation of the institutions concerned; enactment is expected in the next few months Thailand has a quite unsophisticated capital market and the new institutions, if they are soundly run, should be viewed as welcome additions to the existing financial system. This system, almost entirely dominated by commercial banks, has so far adequately served the requirements of the private sector if judged by the record of past economic expansion and stability.

48 It has also corresponded well with the prevailingl attitude of Thai businessmen who repor-tedly prefer the secrecy surrounding relationships between the banker and his customer to the disclosure requirements associated with a public corporation and the use of a stock exchange. Not surprisingly in such a con-text, taxation as we have seen favors private companies and encourages the move of private savings into time deposits. However, with the progress of industrialization and the advent of large-scale industrial projects, a less individualistic outlook and a more complex financial system have become necessary. For instance, the financing of large private industrial projects presents a problem in Thailand as there are no institutions capable of assembling in a convenient package the vast amount of resources required for them; perforce then, foreign sponsors play a more important role than they would if specialized Thai institutions were more prominent. Other gaps in the financial system besides large-scale industrial finance concern mortgage financing of private dwellings, provident funds, insurance companies and consumer credit. The Central Bank has appointed a task force to prepare recommendations for the development of a full-fledged capital market. This task force is at present working on the matter and first recommendations should be forthcoming in the next few months A number of points of general interest might be made in this respect. A first point is that the capital market may be a misleading appellation as the expression suggests a place where buyers and sellers meet, and invites concentration on the securities market (Stock Exchange) only. The market does include a wide variety of institutions besides the securities market, although its unity is preserved by the ease of capital transfers from one to the other. This observation has implications for taxation Taxation at present distorts the choices of savers among investment opportunities. Although information on financial flows is very limited, it may be surmized that private savings by and large originate mainly from the merchant class and also from large landowners, established industrialists, doctors, lawyers, and others engaged in lucrative professions. These persons have strong incentives to hold their savings in the form of time desposits or real estate, since income from these sources is exempted from personal income tax. A first step towards developing a capital market less biased in favor of commercial banks would be to eliminate or graduailly reduce these personal income tax exemptions as suggested in the fiscal part of this report. There seems no good reason for the time being to advocate preferential taxation of the yield of specific securities, such as dividends, because it would create revenue losses fo-r the Government and new tax shelters for the wealthy. IHowever, it would probably be desirable to encourage investors to hold private securities by exempting capital appreciation of securities held for a minimum period of time (say, one year) from personal income tax. There is also a case for eliminating stamp duties on securities transactions as such duties are an impediment to transactions and a minor source of revenue. Finally, there is an urgent need to review the income tax status of provident funds, insurance companies and investment funds to bring the investment opportunities they can offer to an equal level with other financial intermediaries and to allow them to become active participants in the securities market. A neutral role of taxation with respect to investment opportunities for private savings is emminently desirable under present Thai circumstances.

49 Besides, taxation at present discourages companies from going public, although the preference of Thai businessmen for the private company also originates in psychological and sociological considerations. In order to ensure an adequate supply of securities to the market, inducements favorable to public companies should be provided. In the field of taxation, these inducements could include a higher rate of corporate income tax for private than for public companies. Government could also be given powers to authorize tax-free mergers in exceptional and justified cases. Other tax advantages for public companies appear less desirable at this time as they would necessarily entail revenue losses for the Government A last point, may be made here. The development of capital markets has taken time in industrialized countries and the range of financial institutions and instruments competing for the public's savings continues to change. Some of the :industrialized countries have a more limited variety of institutions and instruments than cithers. In fact, each country's capital market has developed particular features to suit the specific needs of its economy and preferences of its business community. So will it be in the case of Thailand where the development of the capital market should be viewed as a continuing long-run process without copying financial institutions from abroad ahead of clearly identifiable needs and against local business preferences. W4hen institutions are established in such circumstances, their survival requires too many "artificial props" such as tax incentives and Government regulations. On the other hand, the activities of new institutions that are created to satisfy recognized needs (e.g., the st;ock exchange to deal in private securities) should not be discouraged by taxation cr other regulations.

50 TII. THE LONGER-TIfRM OUTEJOOK 127. At present, it is too early to evaluate in any detail the economic prospects of Thailand for the next five to six years. A mid-tern appraisal of the Second Five-Year Plan ( '71) is being prepared by NEDB for distribution later during the current year. Preparations for the Third Five- Year Plan ( ) have started, but most of the work is still at an early stage. The drafting of the Plan itself will begin in early 1971, coinciding with the appraisal of projects submitted for inclusion in the Plan. A draft Plan is scheduled for completion by the middle of 1971, when the Executive Committee of' the NEDB will meet to decide on its final shape and contents. Development Strategy 128. At this stage it would be premature to attempt any detailed projections of economic growth and *the composition of inves-tment. Project identification has hardly begun, and the direction of policies to promote private inves-tment has not yet been determined. However, ef'forts to outline the Plan strategy are afoot and first indications are for a significant shift in some crucial areas. The implications of strategy changes have not yet been fully analyzed, and considerable time and effort will be required to reflect these changes in the composition of the investment program and in the policy framework within which the economy will operate during the Plan period It appears that the Government intends to put more emphasis on the development o'' the agricultural sector. It is realized that the largest part of the population is still tied to the soil and its ou-tput and that the disparity between urban and rural incomes has widened rapidly in past years. Secondly, agricultural commodities still provide a major portion of exports and in all probability will remain in that position for a number of years. Thirdiy, the potential for increasing agricultural productivity is high, /given the predominant use of traditional techniques and inputs The agricultural development program must be geared to the proi duction of commodities for which there is a market, either abroad or domes- I tically. The recent trend for rice would indicate that world markets may I not be favorable for some major crops. Diversification of agricultural output appears therefore necessary in order to promote agricultural growth 'and exports. Farm land andirrigation water are limiting factors, as idemonstrated by the-decrease of the average size of-farm-hold'lngs; diversi-!fication of agricultural output must theiefohre be-obtained simultaneously with the intensification of use of existing natural and infrastructure facilities This emphasis is in line with findings and recommendations of earlier Bank missions. It had been observed that farmers were making surprisingly little use of the irrigation facilities constructed in the

51 past; at least-for-the-immediate future it appeared, therefore, that the main emphasis should be on improving thetcapacity$ of the existing system to provide -wate-at;-'the proper time-and in the required quantities, instead of adding ructures-.-j--since Sfrthe--majs a-substantial part of the irrigation system isi-main'ly supplying water for rice cultivation, there is some, more doubt½ab-out-the usefulness of -new -irrigation works as rice market prospects are uncertain and may not be sufficiently favorable to warrant major new investments Marketing arrangements for agricultural products are considered b:y the Government to be inadequate and insufficient.- -There -is a feeling that too many trading s}tages result in a low return to the farmer. Very little comprehensivie information is-a-vailable on the organization of trade in agri-cultural*products and on the costs involved. The mission is of the opinion that' it wyould' b6 desirable to undertake a number of~sutrveys--and _- studies to provide better knowledge of these problems. The rapid growth of exports of tapioca, kenaf and maize in the 'sixties, involving considerable changes in cropping patterns would indicate that trade channels are not as bad as is sometimes asserted and that prices to the farmers were adequate.ncentives for a major increase of production. The Composi-tion of Investment 133. Intensification of agricultural production combined with diversification of output is a task of considerable dimensions having implications for programs in several other sectors of the economy. This is demonstrated by a proposal presently under study within the Government to concentrate intensification efforts in specifically designated areas where farmer organizations have been successfully created in recent years and where the basic infrastructure facilities - transport and irrigation in narticular - are relatively well developed. Su'ch a course of action would have an impact on the type of new projects to be undertaken in the transport field; the existing network would be used as the basis for the construction of a rystem of feeder roads. These would not only be needed to assure farmer ' access to markets for their products - a precondition for output diversification - but also to reach the farmer with supplies of modern inputs and extension service Postponemen-t of major new investment in irrigation works and concentracion on the completion of existing facilities will involve a substantial shift in the investment program in this sector. As irrigation structures are also used f'or the generation of power, future planning in the power sector may have to be directed to a larger extent to other than hydrosources; and this w:ill be of significance for the composition of the longer term investment program. The provision of adequate storage facilities will be as essential as the creation of feeder roads for the success of the program; price support policies to farmers for new products may be required and would have budgetary or monetary implications. Finally, the Government wants to

52 put renewed emphasis on local processing of agricultural products as a means to stimulate inidustrial development outside Bangkok. This has implications for industrial promotion policies which need timely attention. Policy Coordination 135. A program of agricultural intensification no-t only requires a shift in investment priorities but also a large effort to organize, coordinate and manage the program. At present responsibility for agricultural development is dispersed over a large number of agencies and departments. Overlapping of activities in some fields is matched by absence of programs in others, and coordination of work is far from ideal. The serious lack of tecinically qualified personnel in almost all agencies concerned adds to the problem. All these factors may stand in the way of a proper implementation of the agricull-ural program The basic approach of establishing coordinated prograns in selected areas seems appropriate. In this way available s-taf'f and financial resolrces can be concentrated in those areas, instead of being spread in different degrees of unevenness over the entire country. It would also constitute a good basis for the promotion of farmers' associations, which in due course should bear a sizeable part of the responsibility for the maintenance of local irrigation and drainage works aril the distribution of water, input supplies and credit; -their role in selecting cropping patterns and in the improvement of marketing could also be substantial. In order to provide support to farmers' associations in each of those fields, the responsibilities of each department or agency should be clearly defined and suvficient scope should be provided for decentralization of authority for the implementation of the program at the local level Coordination is needed not only at the local level but also at the level where policies relevant to agricultural development are formulated and programs are identified and planned. The Government is fully aware of this need and is taking first steps to find ways of meeting it adequately. This process will necessarily take -time, but the emphasis on intensive agricultural development makes it all the more necessary to establish a new structure for planning and plan implementation within the shortest possible time. Project Preparation 138. The proposed strategy for the Third Plan will be implemented by way of projects and programs designed to meet the specified targets. Considerable lead-time will be required for the preparation of these programs and projects, even more so if they have to be, at least for a good part, of a different nature from the ones of the past. If implementation ol' the new development program is to begin immediately with the start of the next Plan

53 - h1 - period, i.e., October 1971, the project content needs to be identified about a year in advance in order to leave enough time to prepare for actual implementation Some of the projects and programs which probably will be included in the Plan cannot be identified properly until surveys and studies are conducted. This will require even longer lead-times and the Government is therefore composinge a list of studies which need to be undertaken on a priority basis. These are expected to lead to the formula-tion of programs and the identification of projects geared to the targets and priorities of thle Plan. Given the time perspective of these efforts it is essential that priority studies receive the fullest support through financial and technical assistance from external sources. At the next stage, when projects are prepared and their implementation is plarned - which incluzdes the screening of organizational, managerial and manpower capabilities - external assistance can again play a useful role Projects and programs in the important education sec-tor will also claim a part of the f'inancial, technical and organizational resources of the public sector. To a large extent these efforts will be guided by the expected need for trained and skilled manpower; an expansion of the labor force by about 20 percent over the Plan period can be matched by an equivalent growth of eimployment only if the required skills are available. Implementation 141. The magnitude and composition of a medium-term development program as sketched out above will demand more initiative and management capability :rom the implementing agencies and departments and will require vast improvemerits in the coordination of their actions and programs. Similar problems can be expected at tne policy level, where more active guidance of the economy has become vitally important. In the preceding chapters, it was shown that the marnagement of' the balance of payments, the Government budget and the monetary situation h.ave become considerably more difficulb than in thle past. Dr'.f'erent ministries in charge of domestic and external trade, finance, budget control, iiivesb-nent promotion and price policies must coordinate their actions in liue wi-th the overall directives of the Plan and within the confines of minetary stability. )JI2. First steps towards better coordination, both at the general policy level and with regard to program implementation, have recently been taken. The Cabinet has established a coordination center, headed by the Deputy Prime Minister in charge of national development, which is to be the f'ocal point lzor all issues where coordinated action or delineation of tasks and responsibilities is needed. A small staff will man the center, but for each particular issue a task force can be brought together from the departments and agencies in-volved. The emphasis will be on speedy decisions, avoidingy the present delays caused by -technical committees, sub-committees and long deliberation

54 of reports. Direc-t access to the Pri.me Minister will help to obtain quick and authoritative decisions with regard to coordinsa.tion Questions. -1b3. 4Another area where improvements are needed and where tlle Government is preparing measures is the administration of the development program. Presently the form in which projects are submitted to the National Economic DevelopTment Board Cor screening and approval provides only rudimentary data on their physical, financial and economic characteristics. This shortcominv makes proper evaluation of project proposals diffficult and does nol provide scope for the linkage of projects in one sector to Chose in. other, related sectors. The coherence of the development program would benefit from. improvements in the form used for project proposal submissions Progress evaluation both in the physical and financial sense would benefit also: absence of information on activities p:lanned for each period during the time in which a project is implemented makes it at present rather difficult to judge actual progress. In fact, N1 I3 presently receives progress reports for only a limited number of projects. Physical progress is reportled only in terras of completion of construction work, usually as a percentage of ljhe total estimated volume to be undertaken. The proposed improvements which are uncer discussion would lhelp considerably in future evaluation work. Basic Information 145. At this point some observations must be made withl regard to the availability of statistical inf rmation and its quality. It i-s a well-lmown fact that the statistical basis for most productioi, income and price data is weak, In a number of instances approximative methods are used where relatively small amounts of money and some additional s-taff could brin(g the information up to international standards in a shorlt time. Agricul-tural production figures, even for some of Ithe major crops, are weak and need therefore continuous checking against informati on on price developments and export results. The production of the manufacturing sector i-s no't adequately reported and for some of the service sectors only crude estimates can be made. l46. Here, as in other areas of Government activity, part o, the problem is the dispersal of responsibility for data collection and recarding over a large number of offices, a lack of clear definit4ion of' what is required in each field and inadequate coordination of statistical activity and data reporting, The pro'oiem is made more serious by the long delays between acttual occur.rence, recording and time of availability of the information. This even applies to such important economic indicators as Government revenues and expenditures and international trade data Economic policies which are to take effect at; the proper time and to have the intended impact cannot be formullated on the basis of defective and belated statistical information. [Zforts need to be made to streamline the statistical organization by concentrating activities in fewer agencies,

55 defining data requirements more clearly and speeding up the production process. The more difficult economic problems which the country may be facing in the coming years will require a more active economic policy which in turn can only be formulated and implemented with confidence if the statistical basis for analysis and monitoring of the impact is reliable. Economic Policy '48- The implementation of a development program with a new orientation as the Government is now considering requires careful monitoring from the stage of project identification through the aetual implementation. Strengthening of the administrative and executing structures, coordination of efforts and removal of bottlenecks in implementation deserve high priority. Measures taken so far and new proposals under consideration indicate the Government's awareness of the need to increase its capacity to execute an expanding development program. This need is given additional emphasis by the expected rise of foreign capital requirements in the public sector. This must be accompanied by an enlarged portfolio of well-prepared projects for external financing, in most cases preceded by pre-investment studies and project preparation work One of the attractive characteristics of the proposed Plan strategy is its focus on the major problem area: the promotion of exports as the main instrument to strengthen the balance of payments. NEDB has advanced proposals for a large number of studies, ranging from the promotion of the production of exportables, improvements in marketing, storage, transportation and credit to the provision of research and training facilities and the enccamraaement of new industries producing for the export market on the basis of domestic raw materials. It is intended to use the results of these studies as the basis for specific policy recommendations The projection of export growth over the next six years must be based on the results of those studies and on an assessment of the effects of proposed policies. As this work is just starting at present, only a rather crude project-on can be made. The mission has attempted to assess the prospects for the major export commodittes; the Bank of Thailand has undertaken a similar exercise. It is no surprise that these projections are significantly different as underlying policy assumptions are not the same. By presenting both estimates later :in this report, the impact of export promotion policies and their importance for the course of economic developments over the next years are highlighted The second area of concern is the financial position of the Government. As described in the preceding chapter, the widening gap between revenues and expendituires may already have repercussions on the monetary stability of the country during the latter part of 1970 and also in later years if no other ways are found to narrow the relative size of the budget deficits. Alternatively the monetary expansion may, as in the past, largely

56 result in further growth of import demand and thus aggravate the balance of payments problem Public sector expenditures which have risen rapidly in the past may continue to do so for compelling reasons. Implementation of the Plan will require substantial growth of public fixed investment; the rising debt service burden will have a significant impact; the need to provide for larger maintenance and operating expenditures with the completion of many development projects will also claim larger amounts. The political and military situation along Thailand's borders introduces a major element of uncertainty in the projections, both in terms of expenditure levels and with respect to special externaldassistance Thirdly, the promotion of private investment must now be reviewed in the light of changed circumstances. Private industry has in past years contributed substantially to economic growth, both in the form of investment and expanded output. It has also contributed to the growth of imports and the deterioration ov the balance of payments but has not made any significant addition to exports The Board of Investment has gradually moved in the direction of more selective oromotion of industries with the intention of restricting new import-dependent production activities. Although this is a commendable action, it does not really address itself to the central problem: the insufficiently competitive structure of the industrial sector. The structure of the import tariff is to some extent a reflection of this situation as industries operating below an economic scale have been established in the past behind tailor-made protective tariffs. This lack of competitive costs of production explains the limited contribution to exports Strengthening of the Board of Investment to make it into an organization which is better capable of analyzing and evaluating investment proposals on their economic merits is needed. The Board is aware of this need and has arranged to obtain external assistance. Assistance to prospective investors in processing their applications is another important area where the Board of Investment should become more active. Evaluation of the performance of completed projects is yet another area which requires more attention The importance of providing infrastructure facilities for industry must be very strongly stressed. Competition on this score is increasing rapidly in Southeast Asia, and there are indications that some investors which otherwise would have come to Thailand have gone elsewhere because of the substantial disparity in these facilities. The creation of new industrial estates, properly equipped with public services and communications, may become easier once land speculation is reduced by appropriate changes in the tax treatment of capital gainso 157. In the field of mining and mineral exploration, existing legislation is inadequate and some of the present requirements imposed on such ventures

57 are hampering activity. The Government recognizes the need to enact new legislation, which is an essential precondition for the conclusion of contracts for of'fshore oil exploration; negotiations have gone on for a long time and were difficult because of the absence of proper legal provisions. The present requirement that in most of Thailand mining ventures must have a large domestic capital participation is unrealistic in view of the expenditures involved and has resulted in an almost total absence of interest by foreign investors in the exploration for minerals. As the latter usually takes time and, if successful, results in productive activi-ty only after many years, reconsideration of this issue should be a matter of urgency Private investment has in the past found an attractive climate for productive ventures in Thailand and barring any presently unforeseen political developments in the region, this should continue to be the case. The suggestions made above would enhance the investment climate, if implemented in the coming years. This is essential not only'in order to maintain production growth but even more so to boost future growth of exports. Further diversification of exports is needed to regain the momentum of growth in foreign exchange earnings which played a major role in the past decade. The success of this diversification effort will depend to a large degree on proper industrialization policies geared to redirect industrial growth towards international competitiveness and export sales. Economic Prospects 159. Although it is too early for a detailed quantification of the economic outlook for Thailand and of the problems encountered on the way, some insight can be gained from a projection of the main variables. The Government is engaged in similar work, but of a more detailed nature, in preparation of the 'Tflhird Five-Year Plan. Where results of this work were available, the mission used them to best advantage; however, the projections presented below remain essentially those of the mission. The mission has assumed as a working hypothesis that national product at market prices will grow through 1976 at a real rate of 7 percent, and by about 9 percent in norritia] terms. The Public Sector 160. Current as well as capital expenditures are projected to grow rapidly in the years ahead, although somewhat less than in the past. Both elements may on average increase by 10 to 11 percent a year. A number of uncertainties surround these estimates, partly related to the availability of resources for the public sector, partly depending on external factors, outside the power of the Government, and for a third part on policies which may be introduced during the coming years.

58 Public investment expenditure cannot be projected with any degree of accuracy as the shape and composition of the new Jive-year plan, the main determinant, is not yet known. The tasks before the Government are of such magnitude, however, that there can be little doubt about the need to expand public investment. The growth rate mentioned above is lower than that of the past, wlen the program started from a very low base but will, nevertheless, put a heavy burden on the Government's capacity to implement the program effectively Somewhat more can be said about the level and growth of current expenditure. The political and military situation along Thailand's Eastern and Northern borders does not appear to permit a reduction of security efforts, nor are there any major changes in the domestic situation that would allow significant expenditure reductions. Account must also be taken of the expected decrease of U.S. grant assistance for the strengthening of domestic security forces, which is not reflected in the budget Ebcpenditure for general administration - including pensions and miscellaneous outlays - could be projected at about the same level in relation to GDP for the future, but for one factor. Sa:Laries in the public sector, notwithstanding a recent upward adjustment, are stili lagging behind those in the private sector. Further adjustment will be needed to give the public sector full scope for tne recruitment of qualified staff which is indispensable if the Government wants to preserve and improve the standard of public services. It must be emphasized, however, that selective salary increases and rnore efficient use of available staff would be preferable to a repetition of the large across-the-board increase which took place in Such adjustments would result in a rising share of personnel outlays in total national expenditure. They would also affect militaary costs and the level of expenditure for economic and social services The growth of the latter category follows the completion of public sector development programs. Roads, irrigation works, educational and social facilities require adequate funds to be opexated and maintained properly. In the past, i-t appears that current expenditure on economic and social services increased by about $12-15 million, following each 100 million of public sector investment spending. On this basis, even a constan-t level of public investment over the next six years ( ) would raise current expenditure for economic and social services by about 10 percen-t a year. Their share would rise from less than 5 percent in 1969 to 5.5 percent of GDP in With investment expenditures rising and salary adjustments to be made, this percentage may climb to oo of GDP This increase of current expenditure for economic and social services does not appear to be unreasonable. However, the amounts involved will be a reflection of the degree to which the Government continues to carry the recurring burden of development. Poad user charges, water rates for irrigation, and charges which the Government may impose for the provision of social services will have an impact on the size of this burden. An important contribution to

59 revenue can be expected from the recovery of costs of economic and social services ancd needs careful study Interest payments are for the largest part on internal debt and therefore relate directly to thle domestic financing of budget deficits. Government domestic debt outstanding has risen rapidly after 1965 in conjunction with the mounting deficits incurred: the total went up from about $10 billion at the end of 1965 to almost $20 million at the end of Interestl payments have also risen rapidly as a result of increasing indebtedness and the increase of the average rate at which the Government borrows. Interest on domestic debt cculd well increase from $1.h4 billion in FY 1970 to around $3.50 billion in 1976 on the basis of reasonable assumptions regardin- domestic borrowing by the Government over this period. Interest on external debt has reached $237 million in FY 1970 and is projected to more than double by The tax measures taken recently will mi-tigate the growth of the budget deficit in FY But, in future years, these measures alone cannot prevent deficits from increasing further. Total expenditure now is 30 percent larger than revenue. Therefore, a 1.3 percent growth of revenue is required to match in absolute terms a 1 percent growth in total expenditure. If expenditure was to expand by 10 percent, wnich the mission considers a bare minimum to adequately meet the Government's requirements in the next few years, then re-venue would have to -row at 13 percent annually to keep tihe deficit at its present level. The possibility that revenue could increase at this rate withoub new aeasures is to be excluded under the assumption of a 9 percent economic,growth rate, because it would imply a muich greater responsiveness of revenue to economic growth than has prevailed during the 's. L68. The mission, therefore, has examined the possibility that deticits will increase, under the assumptions that revenue will respond to economic -,rowth as it did during the past decade and that expenditure growth is kept at 11 percent per annum. The revenue assurnption means that revenue would increase by percent per ;anuum if annual economic growth is 9 percent. Table 13 present,s the orders of magnitude of *the Government budget for the next six years on such- assumptions.

60 Table 13: Government Expenditure and Revenue, (Billions of baht) FY 1970 FY 1971 FY 1976 Average Revised Preliminary Mission FY Estimate Forecast Projection FY 1976 Current Revenue 1/ )46 Total Expenditure L Deficit Financed by: External Sources Domestic Sources (Non-expansionary) (1.42) (1.4o) (2.bz1) (1.95) (Expansionary) (3.38) (3.87) (5.69) (4.96) CGap / Includes additional revenue from new tax measures of K250 million in FY 1970 and $1200 million in FY On the above assumptions the total budget deficit increases by somewhat mcre t-ian 13 percent a year. This would give rise to difficult financing problems, as is apparen-t from the last lines of Table 13. As show,n in the table, the mission does not expect tha-t the net inflow of external resources for the Government will increase to any appreciable extent.: increases in net receipts from foreign loans will be entirely o.fset by a reduction of -rant disbursements. The entire increase of the doficit must then be financed by domestic resources The mission believes that, withi appropriate measures, the Central Government could again expand sales o.f government bonds to the Government Savings Bank and to investors other than commercial banks. In Table 13, net receipts from these sources are projected to increase by 12 percen-t per annum (as mentioned in paragraphl 79, such receipts have increased by 19 percent per annum flrom FZY 1961 to FY 1967). After taking these receipts into acccunt, a tinancing need remains which the banking system could not, in the mission's opinion, accommodate wi-thout uncily restricting, private credit expansion or causing larger losses ojf foreign exchange than shown in

61 Table 16. 1/ Hence, the gap shown in Table 13 above This gap could be met by additional revenue. Alternatively, the overnment could prevent its appearance by restric-ting the annual growth of expenditure to around 9.5 percent. The large financial aap still in prospect after assuming fairly restrained spending, another large tax increase nex-t year, and, liberal allowance for expansionary as well as non-expansionary deflicit financing, inlicates the serious magnitude of the fiscal problem with which Thailand is faced. This is a major challeng-e in its demcand.or some combination ou further restraint on non-development expenditure and an even greater effort at domestic resource mobilization. It is a kind of c-hal:lenge to which Thailand has not been accustomed in the recent years of rising external receipts. Yet -the rewards of success,fully meeting this challenge are likely to be high - continuing realization of Thailand's demonstrated potential for rapid economic growth. It would be unfortunate indeed, if excessive diversion of resources from development or an insufficient financial effort were to result in either a loss of economic momentum or a drain of reserves to seriously low levels or perhaps both. Investmen-t and Savin 172. IJhen comparing investment growth with the growth of output, an apparent decline in theiproductivity of capital can be observed. In the early 1960's the capital/output ratio was around but in more recent years) it increased to about It is difficult, in the absence of data on sectoral investment expenditure, to identify the factors responsible for this development. Residential construction, which usually has a high ratio, declined over the decade in relative importance - from around 25 percent to about 15 percent of fixed investment. The share of nonresidential construclion to-ether with land improvement also declined, although less sharply. The major increases are in non-building construction - roads, irrigation works - and machinery and equipment. Although these changes in the composition of investment give some indication of the direction of sectoral investment, they are inadequa-te as a basis for -the an1 Lysi.o of the relationship between investment and output. 1/ To reach this conclusion,the mission has assumed tihat, as during the 1960l's,. increases in money and quasi-money would be closely related to economic growth, and that the drawdown of foreign exchange reserves would be of the magnitude shown in Table 16. Under these assumptions the banking system would have the resources to double domestic credit over the period , while money supply would rise by 9 percent per anmum (the same rate as GDP at current prices) and quasi-money by 15 percent per annum. The public sector would receive half of the increase in domestic credit leaving private credit -to expand at an annual rate of 13 percent.

62 Capital efl'iciency in future years wjill depend on thie sectoral composition o' investment, the length of gestation periods of projects a.nd the degree of capac;.ty utilization. Part ofr the rise of the capital/output ratio over the p- st years can probably be attributed to the latter factor; the promo-lion policies as implemented by the Board. of Investment may have resulted in tenmporary overcapacity in some industrial sectors It would be logical to expect a further rise of capital costs per unit of' output in fulure, as technologtically more cornplex industrles are established which may take longer to construct and need More Lime to reach full capacity operation. Their links to other industries and sectors of the economy may involve complementary investments wjhich may take time to complete and therefore hamper full capacity operations. Rising e:xpenditures for education and health services and Cor urban development will work in this direction as well. An offsetting factor could be capacity utilization, not only in the industria.l sector but also in irrigation where in the past major structures have been built which hlave not yet added appreciably to outpu-t growth. The mission has assumed a slow further rise in capital costs per unit of output in the next :f'ew years 'The reduced growth rate of the economy, which is assumed for the coming years, will be reflected in the level of required investment. In 1970 economic growth is expected to remain below that of previous years and investment measured in constant prices to hold its 1969 share of GDP. For future g7rowth of GDP (in real terms) of' 7 percent, the investment ratio should be gradually rising to about percent of GDP by the middle of the 'seventies, a growth in real terms of about 8 percent per year Savings have grown substantially in the past, reaching one-fifth of GDP in The rate of savings has been strongly influenced by the rate of growth of the economy, as is evident from an analysis of the past decade. It appears that an acceleration of growth in any particular year led to an even larger acceleration of savings, and vice versa. There was an apparent tendiency to increase consumption each year roughly at the same rate as in the previous year; thus year to year changes in income growth were reflected strongly in variations in the rate of savings The marginal rate of savings during the 1960's, calculated on the basis of gross domestic product at f'actor cost, averaged 27 percent. Some reduction of the savings effort appears to have occurred, as in the first five years of the decade the marginal rate was almost 32 percent, followed by 2h percent during the next five years. To a large extent this is explained by the performance of the public sector; public inarginal savings in relation to total revenue were close -to the national average during the firs-t five years - at 28 percent - but declined to less than 16 percent in the subsequent five-year period. A smaller decline was noticeable in the private sector. The lower rate of growth of the economy expected in 1970 and the difficult financial position of the Government sector in this year will probably reduce savings rates somewhat further.

63 The investmen.t requirements estimated above do not imply a major additional savings effort of the nation, although they do in the public sector; a marginal savings rate of about 20 percent would be sufficient. However, the reduced rate of economic growth projected for the coming years may tend to diminish the propensity to save. The saving7s rate required here therefore still implies careful consideration of the effect on saving of new policy measures, especially regarding additional taxation The magnitude of the statistical discrepancy in the national accounts makes it rather difficult to undertake a more detailed analysis of savings -trends during past years and to make projections for the futare. Since most of the estimates of sectoral savings are obtained as residuals in the sectora.1 production and income accounts, the data must be considered unreliable. Projections of household or corporate saving-s are therefore too speculati-ve to be attempted here. In sum, the overall savings effort required in the years through 1976 can be considered feasible in the light of past developments, under conditions of economic stability and with private foreign capital inflows encouraged by appropriate policies. i3{port Prospects Preliminary projections of the Bank of Thailand, now being studied by a working group including representatives of all departments and agencies concerned, indicate a.growth of merchandise exports over the period of 7.9 percent a year. The mission accepted the projection of export volume for the major commodities, with the exception of tobacco, tapioca products and sh.rimps. For the growth of total export volume, the estimates of the Bank of Thailand and of the mission are both in the order o:f 6 percent per annum. However, price projections differlsignificantly. The Tha:i projection implies an average annual price increase of 2 percent, whereas the mission assumes no significant clange in average export prices. The latter projection implies some further deterioration of prices, for a number O f rnmajor export commodities compensated by improved prices for minor items Prospects.tor the nine major export commodities i/ over the next five to six years are analysed in some more detail in Annex I. In total, these nimne comrmodities are expected to-grow by about 6 percent a year in volume, thouglh with a significant slowdown,of growth during the later years. I'Jith few exceptions, prices are projected to decline from their exceptionally high levels in 1968 and 1969 and because of changing world market conditions. J.Tie increase in export value of the nine items is therefore estimated at only 3.3 percent a year. 1/ RUice, rubber, maize, tin, tapioca products, kenaf, shrimp, tobacco leaves, teak.

64 182. The slowdown of export grow-th after 1972 is largely due to the projected levellin- off of rice exports af.'ter th.at year. Prospects.for rice exports are rather uncertain and it would be imprudent to Lorecast; higher Levels of cxports than the 1.5 million Lons which are assumed here. In fact rice exiorts might level off at an earlier date and at a lower volume it must be noted that the export projections in volume terms exceed past growth rates consid0rably. The nine nrwjor commodities showed a growth of volume between 1962 and 1969 of about, 20 percent compared to a projected growth of close to 40 percent. However, price developments in the past were very favorable for Thailand. The unit value index.o. the nine major exports rose by 20 percent in , compared to a projected decline of over 10 percent through The growth of export value is thus expected to be only somewhat more than half of that between 1962 and In contrast, the group of other exports, which has gained considerable importance in the past five years reaching a share of one-fourth of the total export bill, is projected to grow more rapidly in the f-uture (at 13.5 against 11.6 percent a year). This reflects the expectation that in bhe comuing years the Government will give special attention to export promotion. As a result, total merchandise exports are estimated to increase by about 6.5 percent a year in Table 14: Development of Exchange Earnings (Billions of baht) X/ L, 1976 Merchandise Expor-ts Major Nine Commodities Other Exports Total Adjustment for B/P lo o Merchandise Exports, f.o.-o. 13.U b.39 T 17.7LI l0 Service Receipts U.S. Military Expenditures Travel 2/ Transportation and Insurance o.18 o.53 o Investment Income o6 o ½cports of Goods and Services / Preliminary. 2/ Excludes spendina of U.S. soldiers on R & R leave.

65 Considerable uncertainty exists also withl respect to the future level of receipts from services. In 1968, $453 million and in 1969 $438 million were earned on this account, of which more than half represented U.S. military expenditures in Thailand. The rapid increase of these expenditures since early 1966 had a major impact on the growth of foreign exchange reserves The political and military situation along Thailand's borders makes it difficult to forecast receipts from the U.S. military in the years to come showed a first decline of about $20 million as the military construction program was completed. In view of the planned gradual U.S. disengagement f'rom the area it appears realistic to assume further reductions. The mission estimates that this decline will continue until a level of around $ million is reached Investment income, mainly to the public sector on account of investments of foreign exchange holdings, will decline also, in line with the expec-ted reduction of foreign exchange reserves. The major growth elements in the services account are income from travel (excluding U.S. military expenditures in that category) and earnings from transport, insurance and miscellaneous sources. The mission has projected travel income to double over the years Despite the optimistic assumptions regarding foreign exchange earnings from services other than U.S. military expenditures, total service receipts will decline substantially during the next three years reaching a low of abou-t $380 million in 1973; but the upward movement expected in later years should bring them back to about the 1969 level Together, the projections for merchandise exports and service receipts result in a rather unsatisfactory growth of total foreign exchange earnings. For , the average growth rate is around 4.5 percent or less than half the rate experienced in the 1960's. It must be stressed that this substan-tial deceleration is to a large extent due to factors which are not within the control of the Government. On merchandise account, the main single factor is the projected price decrease for major export items, and the expected reduction of U.S. military expenditures in Thailand is just compensated by further growth of other services Total exports in 1970 may amount to about 17 percent of GDP. 1/ In real terms, the projections discussed above imply the maintenance of this share over the coming years. In current prices the outlook is quite dif'ferent, as domestic prices areprojected to increase further at about percent per year. This compares to the expected decline of export prices, concentrated in the group of agricultural commodities. 1/ 15 percent following national accounts definitions.

66 191. Although the Goverrment may further reduce, or completely eliminate, export duties on agricultural products, particularly on rice, a decline of agricultural export prices would be reflected in domestic agricultural prices and incomes. Deteriorating terms of trade for the agricultural sector, which could be larger than the improvements in past years, would have important adverse ef'fects on production. Implementation of programs for the intensification of agriculture would become more difficult and the need for Govenment programs to guarantee miniimum farm prices would be more pressing. Equally important would be policies to maintain low prices f'or agricultural inputs. On that account the mission is critical of recent measures taken by the Government to ban imports of some types of fertilizer, in order to leave the market larg,ely to the sole domestic producer, a state enterprise. Even if producing at i'ull capacity, this enterprise would be unable to satisfy more than a fraction of present demand. If' the required additional imports are to be offered at prices designed not to hurt the operation of the Government plant, -this would discourage -the use of this important agricultural input. Economic Growth 192. Autonomous demand represented by investment expenditure, exports and government consumption weakened considerably in 1968 and 1969 and is expected to grow a-t roughly the same rate in 1970, i.e., around 7-8 percent in real terms. Future economic growth will depend to a large extent on the growth of demand, especially in the non-agricultural sectors, but in the longer run in the agricultural sector as wjell The projections made in the preceding paragraphs for each of the main variables can now be brought togethler and compared to past rates. It is found that in real terms autonomous demand may grow by about nerceni a year; in nominal terms, the rate would be about the same because the decline in export prices offsets the expected price increases f'or domestic expenditures. On the basis of past experience, the resulting growth rate of gross domestic product would be around 7 percen-t in real terms. This is considerably less than was recorded in the recent past (9 percent), but it would still be a satisfactory achievement considering thle changed condi- -tions under which the economy is expected to operate in -the future. Balance of Payments Prospects was a turning point in the development of the balance of payments; the uninterrupted accumulation of exchange reserves since 1958 was followed by a decline of j48 million and there wi]l probably be a I'urtlier reduction during The rather pessimistic outlook for exports of goods and services discussed earlier in this chapter poses a major problem for the future. As

67 demand for imports is linked directly to the growth of the economy, and to the growth of investment activity in particular, it is clear that import growth could easily exceed the increase in foreign exchange earnings. This would lead to larger reserve losses, unless foreign capital inflows increase in line. In t-he following paragraphs an attempt is made to quantify possible Tfuture developments. ]96. Import demand can be analyzed, as was done in the first chapter, in three categories: imports related directly to investment adtivity, imports induced by U.S. military expenditures in Thailand, and other imports of goods and services which are largely linked to domestic consumption Investment in fixed assets is projected to grow by abou-t 8 percent per arlumu. In the past, investment-related impor-ts as classified by NIMB maintained a constan-t share of fixed investment in volume terms. However, divergent price trends for domestic and imported investment goods lowered their share in current prices. The mission has projected growth of investment-related imports on that basis at an annual rate of 7 percent in the early 'seventies. For , a growth ra-te of 5-6 percent is used to reflect a modest amount of import substitution. 19C. Imports induced by U.S. military expenditures are projected to decline at the same rate as receipts from this source. Between 1970 and 1976, these imports will thus drop by about 50 percent Other irmorts of goods and services have in the past been closely related to domestic consumption. However, in 1970 and in the following years these imports axie expected to grow at a lower rate -than could be assumed on the basis of past experience as a result of -the import tax measures introduced in July 1970 and farther measures of an indirect nature 1/ which the Government plans to take if these prove insufficient. From 1971 onwards, othesr imports of goods and services are projected to increase by less than 4 percent a year. This is a very conservative estima-te; of course, should exports -turn out to be larger than now projec-ted by the mission, this category of imports could be allowed to grow more ran'dly. Projections of the balance of paym*nts current account through 1976 are shown in Table 15 below. 1/ There is no intention on the part of the Government to impose quantitative controls.

68 T'able L5: Balance of' Payments Current Account (Billions oi baht) (Prelim.) (Estimate) (Projected) (Projected) Fxports Merchandise, f.o.b o J0 Services Imports, c.i.f Investment-related U.S. Expenditure Induced Other Goods and Services Net Transfer Payments Current Account Deficit Notwithstanding measures to restrict import demand, the current account deficit will increase further as a result of the developments projected above reinforced by the decline in transfers - mainly U.S. grants - which is now expected. However, this increase will be much less rapid than in the recent past and thne deficit will stabilize at around $300 million annually in the later years of the projection period Financing deficits of this magnitude will not be an easy task. Under the assumption that the political situation remains stable and that the favorable investment climate does not change, private capitai inflows may be expected to cover a sizeable portion of these deficits. Direct private investment, which has risen significantly in recent years, is likely to remain an important source Of external finance. Eurther, the mission assumes that disbursements from private loans and suppliers' credits will grow rou ;ghly in line with the estiimated growth of investmentrelated imporls. Hlowever, fast increasini serv- ce palments will result in declining net inflows on this account, reducing average growth of total private capital inflows (net) to 4.5 percent for the period Prjections of public sector capital inflows are based on tentative estimates of public investmen-l in the coming years. For , the resulting growth rate of disbursements is close to 12 percent annually, which compares to a negative growth iate in the preceding seven years. A clearer picture is obtained by comparing disbursements during the current

69 i'ive-year Deve-Lopment Plan (FY ) with projected disbursements during the Third Five-Year Plan (FY ): disbursements would rise from a total of' $300 million for the current plan to $530 million in the next plan period In order to obtain disbursements of this magnitude, commitments of about $ million would be needed. Disbursements in 1971 and 1972 would be made 'Largely out of the pipeline of foreign financing commitments available at the end of 1970 (around $175 million) and new commitments obiained in / To achieve the required acceleration of disbursements in subsequent years, conmitments of $ million would be needed in each of these years, beginning in A sufficiently large portfolio of projects is essential. for that purpose and due attention should be given to the timely initiation of pre-investment studies to ensure continuity in the preparation, financing and implernentaticn of projects. It would be important to establish machinery in the Government, preferably in NEDB, to generate and promote new studies of projects and of sectors and to coordinate their timely implementation. Table 16: Financing of the Current Account Deficit (Billions of baht) (Prelim.) (Estimate) (Projection)(Projection) Current Account Deficit w Net Private Capital L Direct Investment, Net (1.08) (1.15) (1.52) (2.33) Loans and Credits, Gross (3.65) (3e65) (4.59) (5.71) Loans and Credits Net (1.23) (0.92) (0.90) (0.77) Net Public Capital Draw:ings (1.11) (1.50) (2.10) (2.40) Riepayr en IIs (1.05) (O 70.7),I/ (0,64) (1.00) Use of Reserves o.61 Errors and Omissions o o / Including Bank of Thailand participations in IBRD loans of p357 million in 1969 and p200 million in )4. Table 16 shows that on the basis of the expected growth of disburseinents, net public capital inflows double between 1970 and 1976 despi-te a sizeable increase in debt service obligations and that errors and omissions (smuggling, unrecorded capital flows) are assumed to remain at a high level. 1/ See Vol. I:l, Table 3.7.

70 Despite t,he sabstaiitlial capital inflows projected by the mission, exch:--n-e reserves would have to be drawn upon in increasing ciiounts to flinpnce the residual deficit. Only toward the end of the project-ion periocl would the annual reserve loss drop below -that experienced in As a result, exchan"ge reserves would decline from -their end-1969 level of $37)4 million to around. $5 o0 million a-t. the end of 1976, equivalen-' Lto sli.-tly more 1,Than tlhree monohs' imports of goods and services in that year Thailand's external debt outs-tandinrg and disbursed has risen by about $230 million since 1965, reaching jiust over $600 million in Thlis increase was thie resul-t of a 150 percent rise in private sector debt, mainly because o. f'asl-expanding use of suppliers' credit, while public external debt went up by less than 20 percent. Debt service payments amounted to d;$i.7 million in 1969, of which over $90 million were payable by Lile privat,e sector. The debt service ratio was 12.5 percent of exports of goods and services (1966: 10.1 percent). Inclusion of service payments on non-guaranteed. public sector loans and credits would raise this ratio marginally to 12.6 percent. Table 17: External Debt Service Liabilities 1/ (Millions of $) Actual Prelim. Estimate Forecast Private Sector Loans Suppliers' Credits Public Sector 2/ TOTAL Debt Service Ratio 3/ / Debt with a maturity of over one year. 2/ Central Government and guaranteed debt of state enterprises. 3/ Percent of exports of goods and services. Source: Vol. II, Table 4.3.

71 fas a consequence of the rising inflow of primrate as well as publi.c capital projected by the mission through 1976, external debt and debt service payments will continue to grow rapidly. Assuming that the shiare of imports financed, by private suppliers' credits remains roughly the same as in during the coming years 1/ and assuming further thxat public capital inflows are mainly in the form of long-term loans 2/, total external debt will rise to nearly $1.4 billion in 1976 and service payments on this debt to over $290 million. This would be equivalent to over 19 percent of' projected exports of goods and services. The share of private debt service obligations in this total would increase somewhat compared to fexternal debt service obligaticns of the magnitude predicted in this repor-t have become more comnon among developing countries. A number o.f them have indeed managed to meet their obliga-tions, but it would be overconfident to expect tnis gernerally to be the case. For Thiailand, however, there are reasons to accept higher debt service ratios than in many oblher cases. 'I'he countr-y has in the.past established an impeccable record as a debtor and its ample exchange reserves ($874 million at the end of L969) wilj.. be of g:reat help in maintainingr confidence. Even after account-in' for the substan-tial reserve drawdown projected through 1976, service payments on private and public external debt as a percentage of exports plus exchange reserves would be less than 15 percent (1969: 7.0 percent) The fact remains that a projected debt service ratio of near:ly 20 percent represents a substantial burden on the balance of payments and requires more justification than just saying that it would be 15 percen-t wilhen measured differently. Incurring external debt of the size projected seems justified if the Government designs policies to assure that the inflowing capital is put to its most productive use. Moreover, the Bank of Thai:land must be endowed with the power and the means to maintain a balanced structure Of total external deb-t and of private indebtedness in particular in view of preventing debt service from becoming unmanageable in the years beyond the projection period. The mission feels that the Go wrnmenti;is in a position to cope with these problems foreign capital contribution of the magnitude projected would constitute a significant increase of external assistance and would put the operating agencies of the Government to the test of their ability to prepare and. implement a program of such size. It must be stressed that this estimate is not based on the assumption of unchanged efforts by the Government to maintain stability and growth. On the contrary, it assumes very subs-tantial efforts in the fields of taxation, monetary, import, export and investment policies, combined with large sacrifices in the form of declining foreign exchange reserves. Still, on -the basis of present knowledge, the sum of these efforts, by the Government and the donor countries, wi.ll not be sufficient to repeat the growth performance of the past' and econo?nic stability will be more precarious than before. Lesser ef'forts 1/ In addition, no deterioration of terms is assumed. 2/ Averagie terms oi' 25 including 3 grace years and 7 percent interest p.a. have been assumed for these loans.

72 on either side and on any of the crucial issues would reduce growth even further, make stability more difficult to maintpin and extend the transition period. over more years. Firmly implemented domestic policies together with adequate financial and technical assistance from abroaid should establish Thailand on a new growth path in accordance with the chonged conditions under whiclh the economy must operate in future,

73 ANNEX I Export Projections The following gives a more detailed account of the basis for the export projections presented in Chapter III. 2. Rice: The volume of rice exports declined from the high levels of almost 1.9mT1lion metric tons reached in 1964 and 1965 to just over 1.0 million tons in :1969. The drop in export value was less dramatic since between 1965 and 1968 prices increased steadily from $110 to $170 per ton (+ 55 percent). However, 1969, along with a further marginal decline in volume, brought a fall in prices of nearly 20 percent to $138 per ton. 3. World market developments have not been favorable for Thailand. Growth of world rice production picked up after the bad harvest years of 1966 and 1967, reducing dependence on imports in some countries and even generating small export surpluses in some others which for many years had to import par-t of their requirements. Larger exports from the United States, of which a growing share was under government programs involving concessional terms, have added to Tlailand's export problems. 4. Rice production in Thailand has grown in the past by over 4 percent a year. Official estimates (by NEDB):show a rapid increase of rice stocks during the last three yrears to about 3 million tons of milled rice at the end of This figure seems too high looking at direct evidence on rice stocks in the country. It is more likely that the rice crop was overestimated in the last few years. Nevertheless, stocks must have grown considerably and may have amounted to some 1.4 mi-llion tons of milled rice at the end of A further increase by about 0.6 rnillion tons may be expected in 1970 on the basis of available crop estimates and an export target of 1.3 million tons (see Table T-1). Table I-1: Rice Production and Disposal, (Millions of metric tons) Actual Prelim. Estimate Projection 1. Rice Mill Output 1/ 2. Domestic Absorption o Exports Total Uses (2 + 3) Change in Stocks (L - 4) Erd-year Stock / See Annex II for derivation of data for

74 Annex I Page 2 5. World market prospects for rice appear to be unfavorable and therefore Thailand's exports in 1976 have been put at 1.5 million tons. Table I-1 shows that for this export level rice mill output would have to rise about 25 percent from the average (5.90 million tons), which means production growth of just over 2.5 percent a year if stocks of milled rice are kept at a level of about 20 percent of annual output. In the past, stocks used to be even lower. 6. Under the assumptions made above the past growth rate of rice production could only be maintained during the next five to six years if exports went up to about 2.2.million tons by Although the possibility of reaching an export level of around 2 million tons cannot be entirely ruled out, the uncertain market outlook would make it imprudent to project such a level firmly. In this respect, export performance in 1970 will be a good test of the price elasticity of world demand for Thai rice. Export prices are projected to decline further to about $125 per ton and may drop to $120 per ton in 1971 (see Table I-2). Thereafter, a slight improvement is assumed with prices maintaining a level of about $125 per ton from 1973 onward. 7. Rubber: Export volume of natural rubber is expected to grow by about 5 percent a year between 1969 and This means a continuation of growth of output at the rate achieved during the past seven years. New supplies should come mainly from unrecorded plantings, estimated to have increased by 12,000 to 16,000 ha a year since 1962, but also from some replantings which will reach mature stage in These new supplies will be additional to production of old trees 1/ which will continue to give constant though low yields. Reduced tapping of these high-cost old plantings due to lower world market prices expected in may slow down annual production growth in these years. Given the favorable outlook for natural rubber from newly planted and replanted areas with lower production costs, present Government policy to increase the Replanting Fund to a total of J'200 million for a period of 10 years in order to achieve a replanting rate of 16,000 to 23,000 ha a year appears to be the correct move. The past replanting rate had been limited by lack of funds and an increase of funds will therefore, most probably, lead to the desired rate. 8. The Government is also giving increased attention to group processing and bloc rubber production. Such policy should take account of the fact that demand for tire rubber is for low grade, low priced rubbers. In arn case, it will probably not lead to significant results in the period through 1976 because of technical difficulties in obtaining sufficiently clean rubber for conversion into bloc rubber. Continued testing in pilot projects is necessary to exploit these new lines to assure the competitiveness of Thai rubber exports in the longer run. 1/ Smallholder trees, due to a much lower rate of annual exploitation, have a longer productive life than estate trees.

75 Annex I Page 3 9. Maize: Maize exports increased rapidly during the 's wqithl Japan as the najor customer, followed by Hongkong and Singapore (see Vol. II, Table 3.23). In recent years, the Republic of China and Malaysia have become important markets for Thai maize. Export volume went up from 0.54 million tons (average ) to 1.48 million tons (average ) and export value from $574 Rmllion to.1,614 million. Strong world demand for maize is expected to continue over the next years. There is some uncert.ainty regarding Thailand's capacity to transport and s-tore increasing volumes of maize. Prcduction and exports are therefore projected to grow by about 6.5 percent a year in Prices are assumed to remain at around thie average level. This compares to a growth of about 13 percent witln no significant price changes during the past seven years. 1/ 10. Tin: Growth of tin exports is expected to continue although at a lower rate than in the past. Offshore mining on the West Coast undemtaken by major foreign companies will be the main source of new supplies. In -the case of renewed control of exports by the International Tin Council production and exports would have to be reduced only slightly, since Thailand's prospective quota will be large enough to allow nearly all production to be exported. 11. Tapioca Products: Demand for tapioca is mainly from Western Europe with the Netherlands absorbing nearly 50 percent of Thai exports. Future export growth is expected to be lower than in the past. Volume growth is estimated to level off at around 1.3 million tons in the midseventies. Prices fluctuated in the past between $42 and $50 per ton; a slight increase is projected from the relatively low level of Thus, export viqlue may grow at about half the rate achieved during Kenaf: Excport volume went up from 237,000 tons in 1962 to a peak of 473,000 tons in 1966 and dropped back again to 253,000 tons in This development was entirely due to India's entering and leaving the market, as Indian demandc surged from almost zero (average : 2,900 tons) to 116,000 tons in 1965 and 272,000 tons in 1966, falling back to an average of 34,000 tons in the following three years. Since prices stayed relatively high export value in 1969 was still a third above 1962 compared to only 7 percent for volume. Fu,ture growth of export value is estimated to be about 2.5 percent a yeiar, which implie's a f&rther decline in prices to about the 1967 level. 13. Shrimps: &xport volume from marine fishing sources is expected to stagna-te during the next years. Overfishing is reducing catches in Thai coastal waters and catches-in Malaysian waters may just be sufficient to o.ffset this decline. Therefore, the Thai Government intends to start a crash program to increase shrimp output from coastal shrimp cultures which at present supply about 5 percent of exports. The target is to increase 1/ The average export volume for has been used to compute the growth rate through 1969.

76 Annex I Page 4 production from this source by 10,000 tons a year over a period of five years. Coastal shrimp farming is difficult to manage, however, arid it may not be feasible to expand the area by more than 100 percent durincg the next five years, i.e., from 6,000 ha to about 12,000 ha. Estima ted output from the additional area would be around 3,000 tons a year which might be reached by Production of shrimps in coastal farms will improve the quality of Thai exports. Price es-timates therefore follow the rise in prices projected for shrimps of good quality, i.e., they increase by about 2 percent a year from 1971 onwards. 14. A forecast of export developments for 1970 to 1976 is presented in Table I-2 below.

77 Table 1-2 s bx,wt PrgJoctiOn -Grot Rate 17.L / L I. ILce =o00 metric tdns 1, , , ,300 1,400 1,500 1,500 1,.500 1,500 1, NiflIions of babt 4, , ,938 3,380 3,500 3,825 3,90t 3,900 3,900 3, Unit, value 3, , ,872 2,600 2,500 2,550 2,6o0 2,600 2,600 2, ($ equivalent) (150.9) (169.9) (138.1) (125.0) (120.2) (122.6) (125.0) (u25.0) (125.0) (125.0) 2. Rubber 1T,J0 metric tons mlllions ct baht 1, , ,664 2,616 2,556 2,453 2,572 2,501 2,427 2, Unit value 7, , ,612 8,440 7,700 6,970 6,970 6,600 6,240 6, ($ equivalent) (358.5) (3146.2) (462.1) (405-8) (370.2) (335.1) (335.1) (317-3) (300.0) (300.0) 3. Maise,6doo metric tona 1, , ,700 1,800 1,900 2,000 2,100 2,200 2, Mlliorn of baht 1, , ,671 1,870 1,980 2,090 2,200 2,310 2,420 2, Md t Value 1, ,(I.0 1,335 1,100 1,100 1,100 1,100 1,100 1,100 1, ($ equivalent) (59.7) (50.5) (54.6) (52.9) (52.9) (52.9) (52.9) (52.9) (52.9) (52.9) 4. Tin (Patal) T,000.atrxc tow ifi=a of bdbt 1, , ,631 1,582 1,664 1,756 1,871 1,913 1,948 1, Unt va:im 67, , ,612 70,000 68,180 68,865 70,585 7o,585 70,585 70, ($ eqnuialent) (3,240.7) (3,Ce4.9) (3,3b6.7) (3,365.4) (3,277.9) (3,310.8) (3,393.5) (3,393.5) (3,393.5) (3,365.4) 5. Tsa prdm to I'm0 retalc tons ,150 1,200 1,250 1,250 1,300 1,300 1, MHLliea of bast ,075 1,128 1,188 1,200 1,248 1,248 1, Undt value ($ equivalent) (44.7) (I1.7) (43.2) (44-9) (45.2) (45.7) (46.2) (46.2) (46.2) (46.2) 6. senae T,00 metric tm lt'llons of bahit o Unit value 2, , ,055 2,700 2,70D 2,700 2,700 2,700 2,700 2, ($ eqtuivelt) (133.2) (112.0) (146.9) (1.29.8) (129.8) (129.8) (129.8) (129.8) (129.8) (129.8) 7. ShrL 1,0 metrie, tons fillions of be.t Ihrlt valui 29, , ,246 34,590 35,280 35,985 36,705 37,440 38,190 38, ($ aqpivant) (1,415.0) (1,8.7.7) (1,616.4) (1,663.0) (1,696.2) (1,730.0) (1,764.7) (1,800.0) (1,836.0) (1,872.6) 8. Tobacco loaves 1,o jmtic t, IlllLDnDD of babi A Uidt value 17, , , ,00O 18,500 19,000 19,500 20,000 20,500 21,0C0 2.6 ($ equvalant) (821.8) (915.3) (844.0) (865.4) (889.4) (913.5) (937.5) (961.5) (985.6) (1,009.6) 9. "onk,ood cubic metero o.5 N132lias of babt unit nv:nuc 5,k41.0 5, ,716 5,750 5,800 5,850 5,900 5,950 6,0o0 6, (4 equivalc'z.) (261.2) (2/6.3) (274.8) (276.1) (278.8) (2I1.2) (283.?) (286.1) (288.5) (290.9) Tvtal Value 1-9 1;, , ,136 11,905 12,289 12,870 13,380 13,591 13,745 13, OtUIr Worta 2, ,93U3.0 3,656 4,095 4,660 5,8 6,o00 6,815 7,755 8, Tutal E prts 14, ,6T9.0 14,792 16,0^0 16,99 18,155 19,380 20,406 21,500 22, kdjuntaet for 8/P N%erchendjse gpoartu, f.o.b. 13, , ,S89 i5,600 16,5lP 17,740 18,960 19,980 21,070 22, ti Pre..izdnary. 5 1'.2e, Deparltmt of CUat4w; Buk of TbailazD VD IBILD e9t2latet.

78

79 ANNEX II Production of Paddy and Rice in Thailand 1. Until some years ago, estimates of paddy production were made by the Rice Department, Ministry of Agriculture. Admittedly, estimation methods were imperfect and therefore the estimates had to be treated with some care. Beginning writh the crop year 1966/67, the National Statistical Office (NSO) was entrusted with the task of recording paddy production. During the three years the estimates of NSO have exceeded those of the Rice Department by 15 percent on average. This is a matter of concern as this difference does not show a tendency to diminish over time. As NSO had little previous experience in collecting paddy production data - certainly as compared to the Rice Department - there is reason to suspect overestimation by NSO during the last few years. 2. For purposes of national accounting, the National Economic Development Board (NEDB) has accepted NSO's estimates for the years since This seems to be somewhat premature as there has been only little analysis applied in NEDB to test the quality of NSO's estimates. In addition, serious problems arise in reconstructing series of data for years earlier than Some of these will be described here in some detail, because of their implications for the analysis of Thailand's past economic performance and more specifically for the analysis of export supplies. 3. Until 1969 NIDB used paddy production estimates of the Rice Department for all years through 1966 with an upward adjustment of 16.3 percent per year. In this way., total paddy output for a 10-year period ( ) was equalized to total demand for paddy in the same period as estimated by NEDB. Tnis adjustment was based on an estimate for one year only and depended largely on the assumption that the estimate of per capita consumption of rice obtained from the 1963 Agricultural Census (corrected upward by 6.1 percent on the basis of a post-enumeration survey) was more reliable than the Rice Department production figures. Secondly, NEDB made the assumption that per capita consumption of rice is constant over time. 4. In new calculations NEDB makes the same assumptions regarding per capita consumption levels and their constancy over time, but makes the adjustment to the Rice Department production figures over a--longer time span, As a result, the adjustment percentage is raised from 16.3 to 21.4 percent. This adjustment, amounting on average to million tons of paddy per year,. is entirely based on constant per capita consumption of 155 kg (of rice). 5. To what extent do estimates of the Rice Department justify the assumption of constant per capita consumption at that level? Taking the Rice Department estimates for the entire period as a starting point, first, losses and seed requirements are subtracted from output and the remaining output converted into its milled rice equivalent, at NEDB's

80 Annex II Page 2 fixed ratio of kg of milled rice per 100 kg of paddy. As the harvest season begins in November, only one-third of the crop is assumed to be milled in the harvest year and the rest is carried over to the next year. From this calculation results a series of estimates of rnilled rice available in each calendar year, from which exports and industrial uses must be subtracted in order to find quantities of rice available for domestic consumption. Dividing -the latter figures by population numbers in each year, an estimate of per capita milled rice availability for domestic consumption is obtained. 6. For the years average per capita availability is found to be 120 kg per year; when it is accepted that the Rice Department underestimates the crop consistently by 6 percent (as appeared to be the case when the 1963 Agricultural Census was taken), then average pei capita availability would be about 130 kg per year, considerably below the figure used by NEDB. A disturbing finding is that on a trend basis per capita consumption availabilities rise by 1.1 percent per year. On a trend basis again, consumption availabilities seem to have risen from some 100 kg per capita in 1952 to 130 kg in This finding was also made by Silcock (Thailand, Social and Economic Studies in Development, 1967, page 239) for the decade 1952-l963 and he concluded that production estimates for the early 1950's were too low. However, after 1963 statistics show an even more rapid increase of per capita availabilities; for the years their average annual increase is not less than 2.9 percent. 7. A test of the validity of rice production and availability data is a comparison with price developments. In Thailand this is somewhat complicated by the fact that a substantial part of the crop is exported, so that world market prices inevitably influence domestic prices; a further complication is the existence of the rice premium which results in different international and domestic prices. The effect of the rice premium is, however, unimportant in all years through 1967 as it was hardly changed. This is demonstrated by the fact that year-to-year percentage changes in the net export price (i.e., the gross export price less the rice premium and the export tax, Pen) follow changes in the gross exrort price (peg) very closely: : Pen = 1.29 Peg (R = *977) 8. Further, it can be demonstrated that the domestic wholesale price (Pw) follows fairly closely year-to-year movements of the net export price and of per capita consumption availabilities (Ac): : Pw =079 Pen Ac (R =.918) Here, of course, per capita availability of rice for consumption (AC) is calculated as the previous year's harvest less waste, seed, industrial use and exports. It makes little sense to take account of the halvest in the last two months of the year, as its influence on prices during most of the year must be considered negligible.

81 Annex II Page 3 9. The interesting fact is that this equation "explains" reasonably well in all years covered, with the exception of the price decline that occurred from 1963 to 1964 and the price increase from 1965 to The data show that there was a slight decline in per capita availabilities in 1964, whereas price developments would suggest a rather substantial increase in the quantity of rice available for domestic consumption. Availabilities in 1964 are determined by the crop of 1963, so that either the crop was underestimated in 1963 or overestimated in As the 1963 crop was estimated on the basis of the Census of Agriculture, it appears logical to put more confidence in the 1963 figure. Data for earlier years, taking account of the implicit rise of domestic availabilities since 1952, probably include an increasing bias to the high side; early figures for the years through 1955 or 1956 are probabl;y closer to actual production than those for more recent years through 1962 when there is an increasing degree of overestimation. A correction to this bias is then made in 1963 on the basis of the Census of Agricullure, resulting in an apparent - but not real - decline of per capita domestic availability for consumption. 10. Of more interest are developments after The Rice Department's estimate of the crop (available to the market in 1965) was somewhat too high, but the 1965 crop was underestimated. Price developments in 1966 would be much better explained if the 1965 crop were assumed to have been about percent larger than the official estimate. In subsequent years movements of the crop from year to year fit reasonably well with price developments, but there may be a consistent overestimate in those years. A different approach to statistics will demonstrate this point. 11. Following NEDB's method of making annual rice balance sheets, the final result of the comparison of supply and demand in each year is a change in stocks of rice between year ends. Using production estimates of the Rice Department for all years, which imply an average consumption availability of 125 kg per capita over the period , the latter figure is substituted for ;0EDB's estimate of 155 kg. This makes no difference for the final results, as NEDB simply increases the Rice Department figures by 21.4 percent in each year to accommodate a higher consumption figure. 12. Assuming that in any year stocks of milled rice will not be reduced below 10 percent of total milled rice output (given the period during which milling takes place, percent would be miore realistic), the implication of the production and constant per capita consumption figures is an increase of stocks of milled rice from 545,000 tons at the end of 1965 to 2,478,000 tons by the end of Projecting a slightly smaller crop in 1970, stocks at the end of 1970 could well exceed 3.1 million tons. If NEDB's higher production and consumption figures are used, stock esti~mates are increased proportionally, reaching 3.4 million by the end of 1969 and 4.2 million tons by the end of Not only do these stock estimates deviate very substantially from the ones obtained from surveys conducted by NSO, they also cannot be correct