Countries and Regions

	Table of Contents
p. 11 of 17 BACK | NEXT Executive Summary Map I. Recent Economic Developments II. Short and Medium-Term Economic Prospects and Policy Issues A. Government Strategies B. Growth, Investment, and Savings C. Revenue, Expenditure, and the Fiscal Outlook D. Inflation, Monetary Policy, and the Financial Sector E. The External Sector Outlook F. Medium-Term Risks and Uncertainties III. Selected Policy Issues

Country Economic Review: Thailand : II. Short and Medium-Term Economic Prospects and Policy Issues

---

C. Revenue, Expenditure, and the Fiscal Outlook

41. Given weakening external demand, domestic demand recovery is crucial but hampered by incomplete restructuring. Government’s deficit spending measures are intended to provide some support for domestic demand. According to MOF, for FY2001, the budgetary deficit is expected to be B105 billion, or 2 percent of GDP. For FY2002, the budgetary deficit is projected to expand to B200 billion, or 3.7 percent of GDP. On the revenue side, the Government will defer annual revenue of about B70 billion in FY2001-FY2002,²¹ since it has decided to delay an increase in its VAT rate from 7 percent to 10 for another year until 30 September 2002. However, the Government raised the excise tax on alcohol and cigarettes from end-March 2001, which will raise annual revenue of about B3 billion.²² On the expenditure side, aside from current expenditures that account for 70 percent of total expenditures, most of the Government’s new economic initiatives require additional funding (Table 14).

42. The Government has committed to maintaining and intensifying the fight against poverty and has set a target to reduce the incidence of poverty to less than 10 percent by 2006. Several major initiatives are intended to assist the rural sector and the poor. Potentially, the impact of these initiatives on poverty is important if they are fully funded and effectively implemented. However, the effective implementation of the Village and Urban Revolving Fund remains a concern. The management capacity of villages and local governments and the supervision capacity of the central Government are crucial to ensure successful implementation and prevent the misuse of public funds. Otherwise, the fiscal stimulus and rural development objectives of these initiatives might prove insufficient to stimulate the economy and reduce poverty. In addition, detailed implementation mechanisms should be developed to ensure these initiatives are efficiently administered and benefits to the poor maximized.

43. To finance the projected fiscal deficit, the Government plans to borrow largely from the domestic capital market through Treasury securities (bonds and bills), as private commercial banks have high levels of liquidity and domestic interest rates are at low levels. However, external borrowing is likely to continue. First, as part of a prudent and cautious approach to public debt management, in the context of a narrowing current account caused by sharp decline of exports. Currently, as of March 2001, free international reserves, as defined by the gross reserves net of swap obligations and IMF package liabilities, are estimated to be about $18billion–20 billion.²³ Second, refinancing will be risky if the liquidity situation is tightened. Third, the availability of domestic financial resources may be squeezed if domestic demand picks up along with economic growth in 2002 onward. 44. Based on official estimates, the Government is likely to run a budget deficit over FY2001-FY2006. Nevertheless, according to a study on fiscal sustainability, fiscal balance could be achieved by FY2007. More discussion on fiscal sustainability in provided in paras. 54–63.

_______________________________________

Back B. Growth, Investment, and Savings	Next D. Inflation, Monetary Policy, and the Financial Sector