The Finance Ministry has been asked to change its policy for issuing bonds to help the central bank stabilise the baht, which has been strengthening rapidly and harming exports.

Sources at the ministry said the Bank of Thailand has asked to expand its short-term bond offers from Bt900 billion to Bt1.1 trillion in fiscal 2007.

They said the expansion was necessary as the issuing of bonds was an integral part of the central bank's efforts to stabilise the baht.

The Finance Ministry had planned to issue large amounts of bonds to finance the Bt146 billion budget deficit, replacing its Bt170 billion treasury bill with long-term bonds and compensating for the debts of the Financial Institutions Development Fund (FIDF).

Normally, it would issue long-term government bonds with maturity dates of between five and 20 years in order to manage public debt efficiently. But the source said now it would have to change tack and issue larger amounts on very long-term contracts only.

"In order to avoid competing with the central bank for funds from the short-term bond market, the ministry is going to have to opt for longer term bonds," the source said.

Exporters have raised concern over the baht's rapid rise, fearing it will damage their competitiveness by making their products more expensive.

The baht has strengthened by about 13 per cent against the US dollar this year while other regional currencies have appreciated by less than 10 per cent.

The central bank, however, said the baht had not moved any more quickly than other regional currencies over the past two years. It had risen only 7 per cent over the past two years in line with the 6-8 per cent rise of other regional

currencies, central bank governor Tarisa Watanagase said recently.

But some finance officials were becoming worried that turmoil in the exchange rate market was affecting fiscal policy.

The source said the central bank had had to use baht to buy US dol?lars in order to counter market forces over the past two years, and it had lost money in its exchange rate operations last year.

As the bank was unable to profit from its operations it had no money to pay the interest rate

on bonds which the Finance Ministry issued to finance the debt of the FIDF, incurred from

the 1997 financial institutions bailout, which cost about Bt1.4 trillion.

Wichit Chaitrong

The Nation