The Bank of Thailand's policy of weakening the level of the baht has caused a financial burden on the central bank because the massive amount of bonds issued is worth a combined Bt1.4 trillion since last year, said a source at the Finance Ministry.

In January alone, the central bank issued Bt900 billion of bonds. Moreover, the timing of the bond issues has created an interest burden to the central bank because the bonds were issued when the interest rate was at the high level of 5 per cent.

"The amount of bond issues is very high compared to the standards of other countries which adopt a floating exchange regime. These countries tend to issue only Bt300 billion to Bt400 billion a year," said the source.

According to the source, the Bank of Thailand has issued Bt1.4 trillion of bonds to absorb liquidity or "sterilise" the market since last year as part of its decision to intervene to weaken the baht.

Moreover, the issue of bonds has forced the Bank of Thailand to pile up foreign exchange reserves, which stood at US$66.73 billion (Bt2.3 trillion) as of February 9. In comparison, China's foreign reserves were around $1.06 trillion, Japan's $895.4 billion and Singapore's $136.7 billion.

"The Bank of Thailand has insisted all along that the high reserves reflected strong economic fundamentals. But it didn't reveal the fact that the central bank had the burden from issuing bonds worth Bt1.4 trillion," the source said, adding: "The Bank of Thailand kept a high interest-rate policy for too long."

He said the central bank had to issue the bonds because it refused to lower interest rates immediately after the baht started to appreciate last year.

The Bank of Thailand reasoned that the high rate was meant to fight inflation, even though the major cause of inflation at that time was a result of a cost-push factor, stemming from rising oil prices, rather than a "demand-pull" factor which could be curbed by high interest rates.

The high interest-rate policy prompted international investors to invest in the Thai currency market to benefit from the high interest rate, resulting in the appreciation of the baht. Thus, the Bank of Thailand had to issue bonds to absorb the liquidity from the market and, consequently, was burdened by high interest rates.

 Although the central bank decided to cut the rate during a meeting on January 17, the level of the rate cut was too small. The source expected that as a result the central bank would further cut the interest rate during a meeting on February 28.

"If the rate is cut by half a percentage point, (0.50 per cent), foreign investors are likely to withdraw more than Bt400 billion from the Thai stock and bond market. And the cut should not hurt the confidence of investors and consumers," he said.

Meanwhile, the Finance Ministry is looking for a new source of funds to repay the Financial Institutions Development Fund's debt.

The source said that over a 10-year period the debt burden of F-1 - the first lot of compensation that the ministry has to pay to the central bank for the cost of bailing out financial companies during the 1997 financial crisis - was reduced by only Bt30 billion.

"According to the law, the money for the repayment of F-1 capital and debt shall come from the money from privatisation and the net profit of the Bank of Thailand. But so far the money from the two sources is very small. Therefore, the ministry has to find new sources of money to repay the debt," he said.