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Published on November 23, 2007

However, Deputy Prime Minister and Industry Minister Kosit Panpiemras said investment would help drive the economy to grow 5 per cent next year as projected. The economy's growth has not been up to its potential, he said.

Former deputy finance minister Pisit Leeahtam said the reserve requirement was ineffective in slowing down the inflow of capital while at the same time it discouraged foreign direct investment. Foreign small and medium-sized enterprises have been reluctant to bring money into the Kingdom as they fear they will not be allowed to take it out.

"Thailand is not an oasis of investment as it was 15 years ago; now we have to compete with rivals. Investors' concern will continue as long as some obstacles remain," Pisit told a seminar organised by Thammasat University's Faculty of Commerce and Accountancy.

His view is line with that of other economists and the Democrat and Matchima Thipataya parties, which have made revoking the reserve requirement part of their campaign policy because they consider it an obstacle to investment.

Faculty lecturer Anya Khanthavit questioned the introduction and maintaining of the unremunerated reserve requirement, saying capital inflows have hardly had an impact on the rise of the baht.

According to his study based on data between January 1999 and June 2007,  capital flows into the stock market resulted in higher stock prices and sudden appreciation of the baht. However, the baht usually correct itself within a month.

Capital inflows that caused the nominal effective exchange rate (NEER), a basket of currencies, to change by 8 per cent would cause a change of less than 1 per cent in the baht against the greenback.

"The capital flows in stock and bond markets have a slight impact on the baht, so I do not understand why the central bank introduced and continues with the measure," said Anya.

However, Amporn Sangmanee, a director of the central bank's Monetary Policy Committee, defended the BOT's measure, asking relevant parties to consider it in the overall picture of the economy and not simply as a capital control.

Deputy Premier Kosit said the economy, without investment, could grow moderately with its potential amid volatility in economic and financial factors, such as fluctuating capital movement, the sub-prime mortgage crisis and economic slowdown in the US, and the steep rise in oil prices.

He said economic growth, which was 4.3 per cent in the first half this year, could reach 5 per cent next year if investment got back on track. Without investment, the economy would be able to grow about 4.5 per cent. Economic growth excluding investment was only 4.6 per cent in 1995, compared with 9.2 per cent overall growth. It rose to 4.7 per cent in 2003, when the entire economy recorded 7.1 per cent growth.

Anoma Srisukkasem

 The Nation