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Strengthening the political independence of Thailand's central bank

By Jon Fernquest

[Introduction|Vocabulary|Article]
[Reading Questions|Answers]

Last week, the Bangkok Post business section featured two articles that gave readers a peek at how Thailand's central bank operates. Today we give you the second of these two articles. Also check out the first article:

Thai baht fully backed by foreign reserves (November 14, 2006)

Reading Questions

Here are some questions to guide your reading (See answers at end):

1. Will the Bank of Thailand be strengthened by a new law?

2. How much independence does the Thai central bank governor currently have?

3. How will the amendment strengthen the independence of the central bank governor?

4. Are any similar changes planned for securities market regulators?

5. What effect did lack of independence in the BOT and the SEC have on the 1997 economic crisis?

6. What negative effects on securities markets has the SEC's lack of independence allegedly had recently?

7. What effect would changes in the term that the central bank governor serves have on central bank independence?

8. How is financial-sector supervision currently combined with monetary policy responsibilities?
How do some want to change this?

Bangkok Post Article: November 13, 2006

Law to shield central bank from politics

WICHIT CHANTANUSORNSIRI

Authorities are working on an amendment to the Bank of Thailand Act to strengthen the political independence of the central bank.

Current law gives the finance minister the authority to hire - and fire - the central bank governor with cabinet approval.

Under a draft amendment to the BoT Act, the process of appointing and dismissing the central bank governor is likely to be shifted from the executive government to the legislature, to help strengthen the independence of the body.

The move follows a similar change announced last Friday, when M.R. Pridiyathorn Devakula, the finance minister, announced his intention to make the chairman of the Securities and Exchange Commission independent from politics. The finance minister is currently the SEC chairman by position.

The issue of political independence of the central bank and SEC was highlighted during the 1997 economic crisis. Observers say the crisis was heightened by political intervention in the central bank's role in regulating the banking system and overseeing monetary policy.

The SEC's responsibilities over the capital market have also come under fire over the past several years, with critics charging the regulator of shying away from investigating possible insider trading or fraud at companies related to local politicians.

For the central bank, one proposal would be to have the central bank governor selected from a special search committee comprised of two former bank governors, two former permanent secretaries of the finance and commerce ministries and two former heads of the National Economic and Social Development Board.

A clear term of service would also be set for the governor, possibly at five years with the opportunity to extend for a second five-year term. The central bank governor currently has no fixed term, but faces mandatory retirement at 60.

But others argue that appointment of the central bank governor should remain at the discretion of the government, which holds ultimate responsibility for the direction of the economy. Proponents of this concept point to the fact that nearly every central bank in the world has its senior executives appointed through the authority of its elected government, albeit with different degrees of independence.

Another proposal previously debated between the Finance Ministry and central bank regarding the issue of regulatory independence is the question of the central bank's own role in regulating the financial sector and implementing monetary policy.

Senior Finance Ministry officials had supported the idea of separating financial-sector supervision from the central bank, arguing that this would remove potential conflicts of interest in setting monetary policy. But M.R. Pridiyathorn, a former central bank governor, is opposed to the idea, having argued that separation would weaken oversight in both areas.

Vocabulary (in discussion above)

shield - protect from danger or risk

central bank - the government's bank that controls all the other banks in a country, sets monetary policy, maintains the stability of the national currency and money supply, sets interest rates and inflation targets, saves failing banks as a lender of last resort during times of financial crisis (See Wikipedia)

an amendment - a new section added to a law that changes it

Bank of Thailand (BOT) - Thailand's central bank (Read description at Mahidol University)

Bank of Thailand Act - the law that defines the responsibilities of the Bank of Thailand (Read the law)-

draft amendment - an early version of an amendment, not the final amendment (people may discuss and change it and mistakes may be corrected)

dismissing the governor - the governor's job is taken away

M.R. Pridiyathorn Devakula - served as Governor of the Bank of Thailand from 2001 and then was appointed to be Minister of Finance by the post-coup of 2006 interim government (See Wikipedia)

an intention to - a plan to, an idea to

Securities and Exchange Commission (SEC) - supervises and polices the stock market and other capital markets, it is an independent Thai government agency founded in 1992 (See the website of the Thai SEC, its history, and Wikipedia on the US SEC)

1997 economic crisis - the period of economic unrest that started in July 1997 in Thailand and affected currencies, stock markets, and asset prices in Asian countries such as South Korea(See Wikipedia)

monetary policy - "the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. Monetary policy can involve changing certain interest rates, either directly or indirectly through open market operations, setting reserve requirements, or trading in foreign exchange markets" (See Wikipedia)

to come under fire - to be attacked

shying away from - avoiding (because it might be embarassing)

insider trading - the trading of a stock for gain by people who have special knowledge about the company that is not available to the public like managers who work for the company (See Wikipedia)

fraud - the crime of lying or tricking people to get money (See Wikipedia)

x is comprised of y - x has y has parts or members

National Economic and Social Development Board -

term, term of service - the period of time that a government official holds their job (official was appointed or elected)

mandatory - required

x is at the discretion of y - x only happens if y decides to let it happen

hold x responsible for y - blame x for y, claim that x did y

ultimate - the original source or cause of something

holds the ultimate responsibility for - among the several people who might be responsible, the one person who actually is

proponents of y - people who support y

albeit - introduces a comment going against what you already said (similar to "but" or "on the other hand...)

interest groups - a group formed to change government policy, the group can range from businesses in an industry to homeowners in a neighborhood to people concerned about the environment (See Wikipedia)

regulatory independence - when a government body is protected politically from interference from special interest groups

conflicts of interest - "a situation in which someone in a position of trust, such as a lawyer, a politician, or an executive or director of a corporation, has competing professional or personal interests. Such competing interests can make it difficult to fulfill his or her duties impartially." (See Wikipedia)

oversight - making sure something works correctly, efficiently, and fairy

Answer Key:

1. Will the Bank of Thailand be strengthened by a new law?

No, an amendment will be added to an already existing law, the bank of Thailand Act.

(Sorry, this was a bit of a trick question. Just wanted to get you to realise the difference between an "amendment" and a "new law".)

2. How much independence does the Thai central bank governor currently have?

Not much indepdence, because the finance minister has "the authority to hire - and fire - the central bank governor with cabinet approval" which means effectively that the prime minister can replace him whenever he wants.

3. How will the amendment strengthen the independence of the central bank governor?

By shifting the appointment and dismissal from the executive branch (prime minister) to the legislative branch (National Assembly) of the government.

4. Are any similar changes planned for securities market regulators?

Yes, the chairmanship of the SEC will also be made independent. Currently, it is held by the Finance Minister.

5. What effect did lack of independence in the BOT and the SEC have on the 1997 economic crisis?

The situation was made worse by "political intervention in the central bank's role in regulating the banking system and overseeing monetary policy."

6. What negative effects on securities markets has the SEC's lack of independence allegedly had recently?

The SEC is alleged to have avoided "investigating possible insider trading or fraud at companies related to local politicians."

7. What effect would changes in the term that the central bank governor serves have on central bank independence?

Currently, there is no fixed term, so if the prime minister wants him fired, he can may be able to fire him any time he wants.

Under the proposed system, the governor would have a five year term during which he could make decisions without the fear of being fired.

In the United States the Chairman of the Federal Reserve, the American equivalent of a central bank governor, is appointed for a four year term by the US President. This term provides independence.