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In 1997, the Bank of Thailand blundered badly by defending the baht until it ran out of foreign exchange reserves. Then capital started flowing out of Thailand en masse. The central bank did not want to alter the fixed foreign exchange system because it was afraid the Thai financial and corporate sectors, saddled with huge foreign currency debts, would go bankrupt with the foreign-exchange loses. In the end, the central bank had no choice but to float the baht outright. The Thai financial and corporate sectors predictably collapsed in its wake.

Ten years later, things have gone into reverse. There is now more money coming in than flowing out, putting upward pressure on the currency. Late last year, the Thai central bank acted out of desperation to stem the baht's rise by introducing a 30-per-cent reserve requirement or capital controls. Speculators were blamed for pushing the baht up too high and too quickly. The baht's rise has threatened the competitiveness of the export sector.

The central bank found the capital inflow undesirable this time, so it erected a wall to prevent it from entering. The result was the collapse of the Thai stock market and a loss of confidence in the government's macro management.

During the 1997 crisis, the central bank was afraid that devaluing the baht would hurt the balance sheets of commercial banks and Thai companies. But in 2006, the central bank, it seems to us, was afraid that it might suffer heavy losses on its books. Some critics argue that one of the motivations of the central bank, under governor Tarisa Watanagase, to introduce the current capital controls is to save the central bank itself.

Rerngchai Marakanond, the former central bank governor, was blamed for mismanaging the country's foreign exchange reserves. There was no limit for using the reserves to defend the baht. By June 1997, Thailand had only US$800 million left in foreign exchange reserves, prompting the country to seek a bail-out from the International Monetary Fund.

During the tenure of MR Pridiyathorn Devakula, the central bank sued Rerngchai for single-handedly causing massive losses to the bank. It should be noted that Thailand suffered the 1997 crisis because it lost all of its foreign exchange reserves. But there was no law to penalise an official for mismanagement of the reserves. So Pridiyathorn had to sue Rerngchai for causing almost Bt200 billion in losses to the central bank. For a similar reason, the central bank under Tarisa must also be seriously concerned with any book losses. Last year, the central bank lost Bt99 billion from its foreign exchange interventions to stem the baht's rise. The baht strengthened by about Bt5 to the dollar last year alone, inflicting heavy losses on the central bank for every dollar it used to keep the baht down.

In fact, Tarisa should have had a much easier job than Rerngchai in the management of the foreign exchange policy. Rerngchai was confronting capital outflows and a loss of confidence in the fixed exchange rate. Thailand's foreign exchange reserves then were borrowed reserves because the country was running a current account deficit. Most of the money that came into Thailand were borrowed funds to fill in the deficit. For every dollar that Rerngchai used to defend the baht, Thailand's reserves fell.

But in the case of Tarisa, the foreign exchange intervention now results in an increase of the foreign exchange reserves because she would like the baht to be weaker - not stronger. As a result, the country's foreign exchange reserves have shot up sharply to the US$60 billion level. Ironically, the dollars gained in foreign exchange reserves create a loss on the central bank's book. This is a dilemma facing Tarisa.

This brings us to the question of whether the Thai law should be revised to allow the central bank to post losses on its books in order to facilitate its foreign exchange management. In other words, the central bank should not care about profits or losses in its foreign exchange operations because it is the one organisation that prints the baht. It only needs to preserve the foreign exchange reserves, which represent the hard currencies that the country needs to facilitate its international trade and commercial transactions. This is the direction that we should move forward to.