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p. 5 of 17 BACK | NEXT Executive Summary Map I. Recent Economic Developments A. Growth, Employment, Saving, and Investment B. Fiscal Developments C. Monetary Development and Prices D. External Trade and Balance of Payments II. Short and Medium-Term Economic Prospects and Policy Issues III. Selected Policy Issues

Country Economic Review: Thailand : I. Recent Economic Developments

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B. Fiscal Developments

11. In FY2000 (ending 30 September 2000) the Government registered a consolidated central Government deficit³ of B153.9 billion, or 3.2 percent of GDP, a significant reduction from B512.5 billion, or 11.2 percent of GDP in FY1999 (Table 4). This marked the fourth successive budget deficit year since FY1997. The sharp reduction in deficit was due to the decline in capital transfers to the financial sector in FY 2000 over FY1999. Despite the reduced deficit, the overall fiscal stance remained broadly supportive of growth. The Government launched two economic packages in August and October 2000. The August package focused on social safety nets including supporting rural and community development, and the October package aimed at strengthening the economic and social foundations for long-term sustainable growth.

12. On the revenue side, total revenue increased by about 7 percent in 2000, amounting to 16.4 percent of GDP. Current revenue increased by 6 percent. The tax to GDP ratio remained steady at about 14 percent in FY2000, with nontax revenues contributing another 2 percent of GDP. Income taxes accounted for the largest share, about 30 percent of total revenue. Consumption tax, i.e., value-added tax (VAT), was the second most important revenue source, accounting for about 20 percent of total revenue. Meanwhile, capital revenue increased sharply, from B247 million in FY1999 to B50 billion in FY2000, due to the sale of government assets.⁴

13. On the expenditure side, total expenditure contracted by about 24 percent. But current expenditure increased by about 10 percent, mainly as the Government expanded the coverage of the consolidated central Government in FY2000, which now includes some extrabudgetary funds.⁵ In FY2000 high priority was given to education affairs and services, which accounted for 25 percent of total public expenditure (Appendix Table A6). However, capital expenditure declined sharply by 59 percent from B564 billion in FY1999 to B232 billion in FY2000, largely reflecting the one-off impact of a capital transfer to the Financial Institutions Development Fund (FIDF) of B300 billion in FY1999. Net lending to the FIDF also declined to B48 billion in FY2000 from B96 billion in FY1999, due to large repayments.

14. The public sector deficit was mainly financed by domestic sources. There is little evidence that government’s call on funds crowded out private investment. Domestic markets had excess liquidity and real private investments grew by 14.6 percent year-on-year in 2000. However, capital expenditure has been slashed, reflecting concerns about rising public debt levels. In FY2000, capital expenditure in nominal baht terms was almost half of its level in FY1997.

15. As a result of successive deficit spending measures to stimulate the economy and support for financial sector restructuring, four years of fiscal deficits have led to a substantial increase in public debt (Table 5). Total public debt outstanding was estimated at about B2.8 trillion at the end of 2000, equivalent to around 58 percent of GDP. This is almost four times its precrisis level of 15 percent of GDP in 1996. Public debt includes direct government debt, nonfinancial state enterprises debt (guaranteed and nonguaranteed), as well as FIDF debt. In particular, FIDF debt accounted for 16 percent of GDP in 2000, a sharp increase from 1.3 percent of GDP in 1996.

16. While sharply rising public debt is a cause for concern, Thailand’s public debt position remains manageable (see more discussion on debt dynamics in para. 58). In June 2000, Moody's Investors Service upgraded its rating for the country, an indicator that over the long-term economic recovery is expected to be sustaining. Sovereign long-term foreign currency debt was rated at investment grade Baa3 instead of speculative grade Ba1 and the outlook was designated "stable." However, the servicing of the public debt will continue to absorb a large amount of the annual budget. As indicated in Table 6, total government debt service obligations (external and domestic) absorbed 10.7 percent of government revenues in FY2000, compared with only 4.5 percent before the crisis in FY1996. The high level of public debt and debt service payments could result in budget inflexibility, and could constrain public expenditure and revenue options. In particular, it could create the risk of upward pressure on nominal and real interest rates (paras. 54–63 discuss fiscal sustainability).

17. To strengthen management of public debt, and contingent liabilities⁶ that have accumulated primarily in the banking and state enterprise sectors, the Government established the Public Debt Management Office in the Ministry of Finance in October 1999. The mandate of the office includes debt service projections, active debt management, cash management, risk management, project finance related transactions, and tracking and dealing with contingent liabilities of the Government. A public debt management bill is being drafted to provide a legal framework for debt management.⁷

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