Deputy Prime Minister and Finance Minister MR Pridiyathorn Devakula will push for the amendment of laws to ensure greater independence for the Bank of Thailand by minimising political interference in the appointment of its governors, an informed source said late last week.

"This will revoke the finance minister's power to appoint and dismiss central bank governors," said the source, who asked not to be named. "This is part of his effort to reform the financial sector."

By December, Pridiyathorn is expected to send amendments to five laws that regulate the central bank and financial institutions to the National Legislative Assembly for approval.

The position of central bank governor has been a highly politicised one, though the Bank of Thailand - one of a few key economic pillars - deserves autonomy in its operations due to the extensive regulatory role it has over the financial market. Though a four-year term is mandated, some governors have faced sanctions when new governments are formed to ensure that they serve the new political masters.

Many former governors have been dismissed by finance ministers following differences in views over monetary policy. The most recent was MR Chatu Mongol Sonakul, who was turfed out of his job in 2001 after the Thai Rak Thai Party formed the first Thaksin Shinawatra government, in which Somkid Jatusripitak was finance minister.

Replacing Chatu Mongol was Pridiyathorn, then president of the Export-Import Bank of Thailand, who was handpicked by Somkid.

According to the source, Pridiyathorn wants to end the political interference. Under the planned amendments to the Bank of Thailand Act, the recruitment of new central bank governors and directors would be carried out by an independent committee. The law would spell out who can serve on the panel, to ensure that the central bank gets a governor who is competent and has integrity.

The governor would serve a five-year term, which could be extended twice for a total service of no more than 15 years.

Regarding the Bank of Thailand's supervisory role, Pridiyathorn aims to give the central bank the authority to shut down troubled financial institutions in the early stages of problems in order to prevent contagious effects.

Helping to cushion the effect of a financial institution's collapse would be a law to regulate a deposit insurance agency, which will be set up soon. After the new law is enacted, deposits of any savings account up to Bt50 million would be fully guaranteed in the first year. In the following years, the maximum guarantee would be reduced to Bt25 million, Bt10 million and eventually Bt1 million.

Without the agency, following the 1997 financial crisis the government spent hundreds of billions of baht on depositors of collapsed financial institutions. All the costs were shouldered by taxpayers.

Another proposal is that the supervisory role be raised to meet international standards, or so-called "consolidated supervision". The law amendment would also give the central bank leeway to diversify its investment portfolio for a better management of official reserves.

The source said central bank officials also wanted to have the power to set the interest-rate spread of deposit and lending rates for commercial banks.

Wichit Chaitrong

 The Nation