Yesterday, the baht hit a fresh nine-year high at 34.83 against the US dollar, due largely to dollar selling by exporters and local banks. In the offshore market, the baht was quoted yesterday at 32.72 to the dollar.

People in the financial markets have now set their sights on Bt33 to the dollar. But exporters are crying out that if the baht hits 32-33 to the dollar, they will close their businesses and factories.

So what has gone wrong with the central bank's foreign-exchange policy?

First, the baht can only become stronger, because Thailand is exporting more goods than it is importing. The trade surplus - US$271 million (Bt9.46 billion) last August, $1.4 billion last September, $732 million last October, $1.26 billion last November and $732 million last December - is pushing the baht stronger. With the economic slow-down, businesses are reluctant to import.

Second, there is no way to recycle the surplus out of the country. With the BOT's foreign-exchange restrictions, it is very difficult for Thais to invest abroad. The money is flowing along a one-way street. This is another factor that keeps the baht strong.

Third, the 30-per-cent reserve requirement is a shock treatment that has failed to arrest the baht's rise. It has also created detrimental side-effects. The baht cannot become weaker, because we still enjoy that huge trade surplus. Foreign money parked in non-resident accounts does not move out of the country. In the meantime, the reserve requirement has enormously harmed confidence in Thailand. It has created all kinds of confusion, bad sentiment and misunderstandings.

Fourth, the right remedy is to tax the speculative money inflows. Any foreign money flowing into Thailand to enjoy interest-rate differentials or speculate on the baht's movement should have been taxed heavily. This would have dealt more effectively with the baht speculation, instead of the ill-thought reserve requirement.

Fifth, the central bank's foreign-exchange policy has created a two-tier market - the offshore rate and the onshore rate for the baht. This does not bode well for foreign-exchange management, because the offshore rate can influence domestic sentiment about the direction of the baht. The situation is abnormal.

Sixth, importers are now faking their letters of credit to speculate on the baht. The central bank's mismanagement of the foreign exchange has led to further baht speculation.

Seventh, cutting the central bank's policy rates further will also help weaken the baht. Inflation now looks benign. There is ample room to cut the rate to stimulate the economy, which might grow less than 4 per cent this year.

In conclusion, the BOT should remove the 30-per-cent reserve requirement outright, because it does not work and has harmed confidence in Thailand. Instead, the BOT should move to impose withholding tax on capital inflows earmarked for baht speculation. Then it should go ahead to cut the rates more aggressively.

Thanong Khanthong

The Nation