Thailand - Recent economic and financial developments

R E S T R I C T E D FII! COPY Rep o rt No. A.S. 52 This document was prepared for internal use in the Bank. In making it available to others, the Banrk assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAI BANK FOR RECONSTRUCTION AND DEVELOPMENT RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS IN T'HAILAND June 8, 1956 Department of Operations Asia and Middle EeLSt  CURRENCY QUIVALENTS Unit Baht Effective Rates For Valuing Principal Forex Assets U.S. $ - Baht 20 Export Rate (End of May 1956) U.S. $ - Baht 20.73 Import Rate (End of May 1956) U.S. $ - Baht 20.87 For Valuing Principal Forex Assets 1 Baht - U.S. $0.05 Export Rate (Endof May 1956) 1 Baht - U.S. $0.048 Import Rate (End of May 1956) 1 Baht - U.S. $0.048 1,000,000 Baht - U.S. $50,000.00  TABLE OF CONTENTS Paie No. BIASIC STAT)STICS ............. ............................. i-i CHAT .... V......a........et................................ SUMM,ARY OF DEVELOPTMNS AND PROSFECTS .......... ....... 1-3 APPENDIX I I. BACKGROUND OF THE ECONOMIC SITUATION IN 19. 1_-.3 II. RECENT DEVELOPMENTS ........ ........ ,*,*.* ...... ** 4-11 Balance of Payments ................ 4 Exchange Rate Adjustments .............4-6 3Import Controls 6......4 . .. 6 Rlevaluation of Exchange Reserves .............. 6-7 Exrternel Debt .................. 7-8 IJnternal Finance ....... . ..... . .... 8-.9 I:nternal Debt ..... ........................... 9 bloney and Prices ........... ........... ... 9-10 Ilroduction ....... .....O- .... 10-11 III. hPCO';PE-CT .............,.....................* 11-15 Balance of Payments .......... ............. 11-12 I:nternal Finance ................. ....13-14 Development Program ... .................. . 14-15 APPENDI)XI1.._.STATISTICAL TABLES .......................... 16-.34 1. %Summary of External National and Government Guaranteed Debt. ... .. 16 la. Summary of Service Payments on External National and Government-Guaranteed Debt .... ... 17 2. Estimated Balance of Payments and Change in Reserves ........0......*to 18 3. Principal Exports . ..........19 3a. Export Prices ....... ........ .............. 20 3b. Composition of Imports .......................... 21 4. Foreign Exchange Asset Position ................. 22 5. Public Expanditures . ....... . ....... , ,. 23 6. Goovernment Inve8tment Expenditures - 1955 and 1956 24 7. Iublic Revenue ............. ... ... . 25 8. Internal Debt ...a................. a*.......a..a.a..*....... 26 9. Financing the 1955 Cash Deficit ................. 27 10. Estimates of Changes in Tares and Profit on Exchange Derived from Selected Grades of Rice, Rubber and Tin Exports .............. ........... 28 11. Effective Exchange Rates ....................... 29 12. Note Issue and Money Supply in Private Sector ... 30 13. Factors Affecting Private Sector Money Supply, First Half 1955 ............a .. ................. 31 14. Cost of Living Index . . . . . .... .. ............ See. 32 15. Government Cash Holdings ........................ 33 16. lknual Production of Rice, Rubber and Tin ....... 34  BASI STYATISTICS Are-a 23(0000 sq. miles. Po(ulati:n tL954 estimate) 19.9 million. National Inccg (1953 estimate) %32 billion. Trade Statisi2j (Millions of US Dollars) 1252 1953 l9L 1955 (Preliminary) Exports (f.o.b.) 329 323 272 335 Imports (c.i.f.) 304 336 312 322 Princinal E3g2yrts 19 195i2 1253 194 1252 Rice (mi:Llion metric tons) 1.58 1.40 1.34 1.00 1.23 Rubber (thousand metric tons) 110 99 97 113 132 Tin (mets]l content thousand long tons) 12.5 12.9 14,2 13.3 14.4 GgverrmeDt Budpat (Billion Baht) .152 i2S3 1256 E25 (Preliminary) Revenue 3.34 3093 4.24 4.29 Expenditure L. ISO 54 QA 45 Deficit .93 1.64 .78 .66 Profits on foreign exchange .65 .58 .73 .22 Public Dett Internal (reported outstanding December 31, 1955 in millions of baht) Bonds (baht denominated) 777.4 Foreign exchange denominated but internally held 1,219.5 Treasury bills 3,266.3 Overdraft and suspense account with Bank of Thailand 798 Total 6,013,0 External (reported outstanding December 31, 1955 in millions of dollars) Dollars 51.2 Sterling 14.2 Other J.2 Total 70.6  Bank of Thailand Gold andForeign Exchange (Millions of Dollars) Der. Dec. 31. 195L Feb. 29. 1956 Gold 114 113 112 Sterling (Free) 7 32 51 Dollars 162 121 142 Other (Japanese Open Account) _A Total 287 266 293 siNx:lJ of Mon (billions of baht with the Public at end of period) 1953 - 5.44 1954 - 6.06 Oct. 1955 - 6.90 Prices (1953 = 100) End 19Q54 End 1955 Cost of living 99 105 Exports 93 92  THAI LAND GOVERNMENT FINANCE (BILLIONS OF BAHT) O 2 34 5 6 _, I-.REVENUES PLUS EXCHANGE FPROFITS 1951I 1952 1953 1954 1955 (Prelim.) TOTAL EXTERNAL TRADE (MILLIONS OF DOLLARS) 0 100 200 .300 400 1952 _::: ::: ::.:.......::: .;........::..:... 1954 _ I | ] I g EXPORTS (f.o.b.) 1955 _..... (Prelim.)I '~~~~~~~~-'--IMPORTS (c.i.f.)- COST OF LIVING (INDEX, 1953= 100) YEARLY 100 100 90 90 80 80 1951 1952 1953 1954 1955 1956 PRICES OF PRINCIPAL EXPORTS (INDEX, 195 S 100) I 200 QUARTERL.Y RUBBER_ 150 . 150 100 .....100 ALL EXPORTS RICEum-~~ - 50 ---A I I I 1 50 I 1 III I[V I 11 III IV I 11 III IV 1954 1955 1956 6/8/56 No. 1155 IBRD - Economic Staff  -1- SUMMARY OF DEVELOPMENTS AND PROSPECTS Introductorv 1. This report reviews economic developments in Thailand during 1955 and brings up-to-date the Bank's previous appraisals of Thailand's ec- onomic position and prospects.!/ The basic strength of the Thai economy was stressed in these appraisals including the increase of production per capita and the adequacy of exports to meet normal import needs and to provide additional resources for development if internal financial stability is maintained. It will be recalled, however, that Thai internal finances, specifically the substantial budget deficit incurred in 1953, was of concern to the Bank at that time. General Economic Position 2. Following a rapid economic recovery after World War II, an added boost was given to Thai rice and rubber sales (normally at least 70% of exports) by the war in Korea. Thailand then experienced three years of economic adjustment during 1952 through 1954. Government expenditures, particularly on defense and economic development, were rising while both foreign exchange receipts and internal revenues from major exports were levelling off or declining. Smaller rice harvests and, for a time, an- realistic export pricing, added to these difficulties. The decline in foreign exchange reserves was about 24%, and deficit financing resulting in an expantsion of the money supply aggregated nearly 13% of total Govern- ment expenditures over the three year period. Development projects, mainly in agriculture and transportation, made progress, but these are still in the construction phase for the most part. 3. Owing to some measures of expenditure retrenchment and better revenue collection, the budget deficit was cut roughly by 50% in 1954 as compared with 1953. Abnormally low rice production and declining rice prices, however, reduced export earnings from rice by over 30% and decreased im- ports resulting from reinforced import restrictions compensated for less than 40% of this loss. The trade balance was again unfavorable. 4. Moderate improvement was registered by Thailand in 1955 when a reason- ably well-balanced position on external account and further reduction in the cash deficit of the Treasury were achieved. Foreign exchange reserves in- creased by $27 million equivalent (about 10%), roughly equal to the foreign assistance received. Tentative data indicate that the cash deficit of the national government, excluding U.S. financed expenditures, was about 14% of total expenditures, as compared with about 30% in 1953 and 16% in 1954. A larger amount of the 1955 deficit was financed by inflationary means, howevert than in 1954, since exchange profits declined nearly 70%. During the first part of the year the combination of expanding bank credit, import restrictions and the balance of payments surplus resulted in a further expansion of the money supply by over 15% and the cost of living rose quite sharply. In the latter half of the year both the cost of living and the money supply were reasonably stable, though the domestic price of rice rose because of the more favorable effective export rate. 2/ AS 31--c of July 27, 1955, AS 21 of May 28, 1954 and AS 9 of M4y 19, 1953.  Exchanp-e Rate and Trade 5. Prior to 1955 Thailand had unified her exchange rate on the import side except for government purchases. In 1955 she completed the transition from multiple export rates to a sinigle free market rate applying to all exports. Also higher import duties were largely substituted for quantita- tive restrictions. Profits on exchange, heretofore a counter-inflationary offset to the government deficit, was replaced by higher export taxes on rice, rubber and tin. 6. The latimate effect on the trade balance of measures taken in 1955 is still uncertain since they were introduced only in August and September. However, the substantial trade surplus earned in the first half was replaced by a small deficit in the last six months of the year. A trade surplus of about $13 rillion was realized for the year as a whole. Prospects 7. Thailand will have to cope with adverse factors of some magnitude to preserve or enlarge the gains made in 1955. The most important of these is the further decline likely in the export price of rice, which may amount to 10% or more before a stable level is reached vis-a-vis other food grains. Also rubber prices have declined nearly 30% since the first of this year and the 1956 average will probably be below that of 1955. Lack of dive-sity of export and domestic production, and of sources of government finance can only be remedied gradually. However, Thailand should be able to increase volume of rice exports enough to compensate for any price decline likely in 1956. Some steps to rehabilitate her rubber plantations are being initiated. While Thai. imports financed from exports cannot be sustained at the rata which prevailed immediately after import restrictions were lifted., with the somewhat higher level of foreign assistance in prospect for 1956, imports adequate to her needs, or of about $315 - $330 million a year should be practicabl.e. 8. Large inventories and tight credit reduced imports in the first mLonths of 1956. However, the avoidance of deficit financing resulting in monetary expansion is a prerequisite to a balanced trade position without the use of import cointrols, particularly in view of the lack of success thus far ob- tained in government borrowing from sources other than the Central Bank. For 1956 a deficit of 91,163 million is projected, about equal to that budgeted for 1955 and again nearly equivalent to the investment expenditures of the government and its agencies. Although past experience indicates3 that the target of expenditures is unlikely to be reached, a decline in revenues as a result of some reduction in exports is a distinct possibility, an(d a further effort to prune government outlays may be necessary. The defi-lit which can be financed by non_inflationary means, such as U.S. aid, other capital inflows and the sale of government securities to the public may not exceed $700 million. If export goals are attained, fiscal operations in 1956 should not be more expansionary in respect to the money supply than in 1955. 9. As was stressed in previous economic reports, improvement:of fiscal administration, avoidance of unbuadgeted expenditures and better selection or projects and programing of investment expenditures remains essential. Thailand is now receiving further technical assistance in these fields. Followirng a suggestion of the Bank, a general Economic Advisor is expected to take up his duties in Thailand during July or August of this year.  -3- 10. No basic changes in the structure of Thailand's economy have occurred for mAny years or appear to be in prospect. At least 80% of the population is engaged in agriculture. Economic development is occurring along lines calculated to increase agricultural, forest and mineral production and to improve transportation. The Government's program to diversify the economyl somewhat by encouraging, and itself engaging in some industrial projects is a modest one, and is unlikely to alter substantially the traditional pattern of foreign trade or distribution of re3ources or incomes within Thailand at least within the next few decades. Credit Posit 11, Thailand's record in respect to her external obligations is good. Her present foreign public debt of about $66.5 millionlJ is about 22% of her foreign exchange reserves and a little lower percentage of her normal exports. A relatively large proportion of her external debt ($30.4 million as of December 31, 1955) consists of short- or medium-term suppliers' credits maturing in six years or less. Consequently near-term foreign debt service payments are relatively high. Most of these credits were obtained in 1954. The Government has agreed to consult with the Bank regarding any proposed additional borrowings of this type. Under present repayment schedules the principal amount of the debt would be reduced to $41.9 mil- lion equivalent by 1960, $18.2 million equivalent by 1965 and $3.5 milliona equivalent by 1970. Annual service on this debt rises from about $5.3 million equiivalent in 1956 to over $13 million in 1958. From 1960 to 1965 it remains fairly stable at $5 - $6 million equivalent and approximates $3 million equivalent from 1966 to 1970. Aside from repayment of short- and medium-term obligations, service charges range from 1% to 2% of Thai exports. Thai foreign exchange reserves amount to about 91% of 1955 imports. 12. Apart from the defense program for which US assistance is being pro- vided, Thail.and is capable of meeting current internal needs and paying for necessary imports for consumption from export receipts. In addition a modest but slowly increasing fund of resources should be available for domestic investment and for servicing external debt as the economy grows as a result of economic development. The amount of such increase will. depend upon the extent to which the investment of additional local and ext,ernal resources irncreases exports, the prices of such exports, and the success of the government in maintaining financial stability. A more orderly and purposeful direction of public investment programs, and larger and more diversified sources of public revenues and domestic loan funds, will become even more pressing needs as economic development proceeds. There is also room for savrings in current foreign exchange outlays without reduction of' essential imports. Assuming that her foreign exchange earnings will not be encumbered by obligations arising from projects of doubtful value or priority, and that, as seems likely, external US assistance for her defense program will contiinue, further Bank lending to Thailand seems justified. Additional foreign debt service payments of $10 million a year or the equiva- lent in foreign exchange outlays for new development projects seems well within the capacity of the Thai economy. With the present distribution of Thai exports (rubber and tin to the dollar and rice predominantly to the sterling areas) no special currency problems should arise in servicing foreign debt. 2/ Exclusi-ve of a $10 million US (ICA) loan repayable in baht or dollar13 at the option of Thailand.  APPENDIX I -1- I . BACKGROUND OF THE ECCNOMIC SITJATION IN 1955 1. The rapicd economic recovery of Thailand after the war was due primarily to the leading position she was able to assume as a rice exporter and to the rapid strides raade in rubber exports. In 1951 the quantity of Thai exports of rice and rubber were about 19% and 175% respectively above the pre-war average. Thai prosperity was prolonged by the war in Korea which gave a sharp boost to her terms of trade. The results of her favorable foreign trade position were reflected both in the accumulation of foreign exchange reserves at a rapid rate through 1951 and in her abiLity to use export levies and spreads between export exchange rates for rice, rubber and tin and import rates to accumulate funds to offset the inflationary effect of government deficits. The gold and foreign exchange assets of the Bank of Thailand rose over 65% to $342 million) between 1949 and 1951. The Government's borrowings from the Central Bank were offset by increases in the exchange profit accruing to the Bank. 2. 1952 was a turning point in the Thai economy. While rice prices con- tinued to increase through 1953, the price of rubber was sharply lower in 1952 than in 1951 and the quantities of both rice and rubber exports were well below 1951 levels. Although the Thai trade balance remained favorable in 1952, the surplus declined by about 66% as compared with 1951, and her total current account changed from an active balance of $61.9 million in 1951 to a passive balance of $5.5 million in 1952. Actjion taken by the Government was not well calculated to cope with the fiscal and foreign trade problems that were then in prospect. The Government deficit, already about 22% of expenditures in 1951, increased by over 30% in 1952, miainly becau3e of rapidly increasing da- fense expenditures.l/ This increase was inflationary since the Government' s borrowings from the Bank of Thailand exceeded the accumulation of profits on the Bank's foreign exchange transactions by about the amount of the increase in the deficit. Early in 1952, to reduce the prices of imported goods, the baht was appreciated by reducing the rate on the Bank of Thailand sales of sterling to the comnercial banks from about $51 to $45 to the pound. The free market dollar rate fell also from about $21.7 to $16.07. Thus the anti-in- flationary effect of the exchange rate system was reduced substantially and balance of payments prospects were unfavorably affected. 3. Mounting defense (including police) and development expenditures (152% and 70% increases in i953 as compared with 1950) resulted in a budget deficit of $1,635 million in 1953, approximately equal to the combined deficits of the previous two years, and over three times the profits on exchange transactions accumulated inl 1953. In that year the trade balance was in deficit by $14.4 million and foreign exchange balances fell by $51 million or over 14%h. Imports jg/_Deficits referred to are accounting rather than total cash deficits. T1he principal difference between the two is that this deficit (or surtplus) does not reflect expenditures from (or accretions to) deposit accounti held with the Treasury by a large number of Government entities. Also the time of expenditures for budget accounting purposes may differ from the time the actual disbursement is made. Deficits, as referred to here, however, at- tempt to reflect "extra-budgetary" expenditures as accurately as possible for the year in which the disbursement was made. The term "cash deficiLt" is used in this report in its usual sense i.e. the excess of cash outflow over inflow of the Government but not including Government corporations and autonomous or quasi autonomous agencies.  -2- increased over 12% and exports declined nearly 4% as compared with 1952. The decline in exports was due principally to a fall in the export volume of rice and in the price of rubber. Thailand took action to cope with her trade balance problem by introducing comprehensive import controls in November 1953, replacing the very limited controls enforced on a few items since 1948. However, these controls were not very effective until 1954 was well advanced and when a list of prohibited Ltuems was established. 4. Owing principally to some curtailment of Government expenditures (par-- ticularly extra-budgetary expenditures), some improvement in the fiscal situation was registered in 1954. The budget deficit in that year was about half that; of 1953 or about ]9784 million, only a little more than exchange profits. However, the foreign trade deficit increased from $14.4 million in 1953 to about $39 million in 1954. The total deficit on current account was $71 million in 1954, though official reserves fell by only $29 million. Use of suppliers' credits and probably some imports financed with funds that escaped exchange control (this may have been stimulated by the new import controls) probably accounted for most of this difference. The deterioration in Thailand's foreign trade position in 1954 was owing to a decline of #79 million in her rice exports due to both volume and price factors. Other exports increased and imports were reduced by $26 million or nearly 8%. 5e On the recommendation of the Bankts Special Representative who spent about three months in Thailand early in 1954, the Government carried out cer- tain measures designed to cope with its immediate financial problems. The improvement noted above in the internal fiscal situation in 1954 was largely due to these measures, They may be suummarized as folloves: (a) The fiscal improvement in 1954 was effected in part by reducing expenditures which were not provided for in the regular current year's budget but consist of funds spent in one fiscal year and included in the budget in the following year. These amounted to abc,ut $765 million in 1953 and appear to have been reduced to $41.0 million or possibly less in 1954.2V (b) Aside from exchange profits, the regular revenues of Government increased steadily, practically doubling between 1950 and 1954. In 1954 over $330 million was collected from rice exporters who hacL neglected to turn over their foreign exchange earnings at the) official rate to the Central Bank in previous years. Also higher tariffs were imposed in 1954 for revenue purposes. (c) In addition to import controls introduced in November 1953, the effective import rate structure was increased (baht was depreciated) by reducing the number of items eligible to be imported at preferential rates ($45 to the pound and about 016,07 to the dollar). 'The list of such commodities was reduced 2/ Extra-budgetary expenditures actually recorded in 1954 were only 7190 million buat it appears that some of the ministries spent "again" in 1954 a portion of the amount included in the 1954 budget as "legalization" of the 1953 extra-budgetary expenditures.  -3- from 19 to four in March 1954 and to two in June of that year. This action discouraged imports of these items by increasing their prices and increased the exchange profits realized by the Bank of Thailand on the sale of foreign exchange in the free market. 6. In summary, the following were the principal adverse developments that occurred over the four year period from the peak year of Thai prosperity in 1951 through 1954: (a) Rice (about 66% of total exports in 1953 and 51.3% in 1954), declined steadily in volume by a total of 36% between 1951 and 1954. While this decline in volume was offset by higher prices in 1952 and 1953, the average price of Thai rice was nearly 14% low.er in 1954 than in 1953 and export value was over 26% lower in 1954 than in 1951. While the volume of the other two leading exports, rubber and tin, was slightly higher in 1954 than in 1951, their export value hlad fallen by nearly 50% between the two years. Total export value was nearly 32% lower in 1954 than in 1951, whereas imports were nearly 13% higher. A trade surplus of 1100.9 million changed to a deficit of $39.3 million. (b) In Government finance, an aggregate net deficit (after deducting exchange profits accumulated by the Bank of Thailand) of about $1.9 billion was incurred over this four year period (1951-54), praetically all of which was financed by inflationary means. Money supply increased by about $2.1 billion, or roughly 53%. Reliable price indexes are lacking for Thailand, but it appears evident that the cost of living rcse much less than this monetary exp,ansion, due to expanded real income, a wider use of money throughout the economy and to currency hoarding. 7, A number of important inadequacies, both administrative and with regard to policies affecting the utilization of the economytg resources, were evident in 1953 and 1954. These were not altered fundamentally by the measures of financial retrenchment taken in the latter year. Government revenues remained heavily depenclent on prices and volume of exports, particularly of rice. Only a small -raction (about 7.6% in 1953) of the national receipts were ob- tained from direct taxes on incomes and property. This, together with sub- stantial Government control of the export trade in rice, was productive of adequate revenues only during periods particularly favorable to Thai exports such as during the Korean war period. On the other hand, the expenditure Elide of the budget was not adequately planned or executed. Centralized budgetary control over the expenditures of even the regular Government departm-nts was inadequate, and was almost entirely lacking in respect to the many independ!ent or quasi-independent agencies and Government corporations. Economic develc,pment expenditures, amounting to over a quarter of total expenditures in 1954, were not made in accordance with any comprehensive development program.  -4- II. RECENT DEVELOPMENTS Balance of Pannents 8. Although final data are not yet available for the entire year, Thailazd probably achieved a small trade surplus in 1955 of about $13.4 million (Table 2) as compared with the deficit of $39.3 million in 1954. By this trade surpl'us together with increased U.S. economic assistance (estimated at $11.2 million as compared with $6.4 million in 1954) and decreased imports of non-monetary gold, Thailand was able to reduce her deficit on current account to about $10 million, as compared with over seven times that amount in 1954. At the end of 1955, Thai ioreign exchange and gold reserves totalled $293 million, an increase of $2"7 million during the year (Table 4). Net capital inflows, plus foreign assistEnce, is estimated at $26.2 million. 9. Thai exports increased 23% in 1955, as compared with 1954 and imports only about 3%. However, had the gains registered in the first half been held throughout the year, exports would have risen nearly 28% and imports would have declined 8%. The substantial removal of import restrictions in September and the seasonal decline in rice exports (together with some fur- ther reductionE; in price) accounted for a trade deficit of about $10 million in the second half. The favorable swing of nearly $53 million in the Thai trade balance between 1954 and 1955 was almost entirely due to rubber exports. Although complete 1955 data are not yet available, it seems apparent that the 13% increase in export quantity and the two thirds increase in the New York price nearly doubled receipts from this commodity (Table 3 and 3a). This also accounts for ani improvement in Thailand's trade with the dollar area. While the quantity of rice shipments (1,223,927 metric tons of rice and about 94,000 metric tons of rice flour) was nearly 25% above the subnormal level of 1954, the decline in price (nearly 22%) was enough to prevent export proceeds from rising much above the level of that year. Other exports increased moderately. 10. In respect to currency areas, the largest improvements in the Thai balance of payments in 1955 occurred in trade with the United States and Canada, and with the non-sterling area in the Far East. With the former, a trade deficit of $7 million in 1954 changed to a surplus of $43.2 million in 1955, and with the latter the Thai deficit was reduced from $18.9 million to $1.9 million. However, her large surplus of over $47 million in 1954 with the sterling area was reduced nearly 70%. Exchange Rate Ad-iustment 11. The Thai exchange rate structure had undergone changes of considerable number and complexity prior to January 1, 1955 (Table 11). Before that date, the official buying rate ($12.45 = $1) applied to 20% of the foreign exchange earned from tin and rubber exports. It also applied, theoretically, (since collections were not well enforced) to foreign exchange earned from the private portion of rice exports. On the payments side, it applied to Government trans- actions including imports of capital equipment for Government enterprises, and to remittances for Thai students. 12. The move towards an effective free market rate for all Thai exports was started when the Government returned rice exports to private channels as  -5- of January 1, 1955.3/ This action was taken primarily to bolster flagging export receipts from rice. From January 1 to Auigust 13, 1955, foreign ex- change proceeds realized by private rice exports could be sold in part (on the average under 50%) in the free exchange market, the remainder had to be turned over tc, the Bank of Thailand at the official buying rate. The effective exchange rate varied with the grade of rice (fixed standard "prices" de- termined the amount surrendered) which governed the proportion of exchange proceeds subject to delivery to the Bank of Thailand at the official rate. Effective rates in June 1955, taking into account both the free market rate (about 22.17 baht to the dollar) and the percentages of exchange subject to surrender at the official rate varied between 16.39 and 16.98 for tho most im- portant grades0 For example, white rice 15% broken - accounting for 35% of rice exports in 1954 - yielded a rate of 16.85 in that month. On August 13, 1955, surrender obligations for new exports authorized after that date were eliminated. The only restriction now applicable to rice exporters is a re-r quirement that they sell 5% to the Government for domestic consumption. The Thai Government has followed a somewhat similar course in 1955 in respect to tin and rubber as for rice. From January 1 to August 13, 20% of the foreign exchange proceeds for both these commodities had to be turned over to the Bank of Thailand at the official rate. This requirement was eliminated for tin as of Augulst 13 and for rubber on September 15. The effect of these measures on average export rates for rice, rubber and tin is indicated in 3/ The Thai Government had become involved in the 'rice export trade because of an agreement between Great Britain, India and Thailand on January 1, 1946, under which Thailand agreed to supply 1.5 million metric tcns of rice iree of charge in connection with the post-war settlement. The Government declared a monopoly on the rice trade to fulfill this commitment as well as to control the price of rice to consumers. While this agreement was not carried out, it resulted in the Government establishing a fixed buying price for rice Ln Thailand. Later in 1946 the commitment for free export was modified to pro- vide for sales by Thailand at a price much below competitive prices abroad, thus creating a strong stimulus for smuggling. On August 31, 1947, the agree- ment mentioned above was terminat;ed but thereafter Thailand undertook to ex- port rice in accordance with international allocations (International Emergency Food Committee) and government-to-government contracts continued at prices well below the free market prices. The Government's attempts to en- force its monopoly of rice exports, including controls over internal trans- port and forced delivery of rice that was surplus to local needs to the Rice Bureau of the Government, led to serious administrative problems and con- siderable hoarding by farmers. Also, despite substantial increases in the Government's internal buying price, the margin of profit of the Rice Bureau the export tax imposed, plus the policy adopted of paying the rice supplier at the official exchange rate, provided a strong incentive for illicit rice. exports through private channels. International controls terminated at the end of 1949, but through 1950 most exports were shipped against allocations. In 1951, the Government began issuing permits for private commercial exports which could be made at prices above the prices in government-to-government contracts. Consequently supplies were diverted from government channels and government deliveries fell short of contract commitments. In 1952, one third of rice exports were private. This system of some private but predominantly government exports remained in effect until January 1, 1955, though private sales were increased somewhat by permitting rice dealers to export on private account rice up to a fraction (usually one fifth) of the rice they turned over to the Rice Bureau. In addition, certain grades were reserved for private export. Private exporters were supposed to surrender foreign exchange at the official rate for such exports in an amount equal to the Government export price and to pay the export tax on premium. These surrender require- ments fell badly in arrears, however, and in 1954 the Government settled large arrearages in baht based on the difference between the free market and the official exchange rate,  -6- Table 10. To compensate the Government for the loss of the exchange profit obtained from selling the surrendered portion of rice, rubber and tin exports on the free exchange market, in August and September the Government imposed additional export levies on these conr'odities. The effect of these measures on Government revenue is discussed in the next section of this report. 13. On the import side as of January 1, 1955, the last of the preferential private import categories (Table 11) receiving the benefit of selling rates about midway between the official and free market rates were eliminated. On August 11, 1955 the Government announced that henceforth, officials going abroad on official business would have to purchase their exchange on the free market. Import Controli 14. On September 15, 1955 Thailand abolished import licensing requirements for all except. some 23 items which are of minor importance except for auto- mobiles, cement and sugar.g The Thai authorities estimate that these re- maining import restrictions only apply to about 5% of total imports. A pro- hibited list consisting of 17 categories of minor vegetable and tropical wood products was also maintained. With the substantial removal of direct import controls, increased tariffs designed for protection were applied to items deemed capable of production in Thailand and higher revenue duties were assessed on canned foods and alcoholic beverages. Revaluation of Exchange Reserves 15. In February 1955 it was decided that, in mid-year the official rate of the baht woulti be changed from $12.5 to $20 to the dollar. Actually the formal action of changing the official rate has not yet been taken, but on March 18, 1955 the gold and foreign exchange reserves in the Issue Department of the Bank of Thailtmd were revalued at the new rate. The revaluation profit tot;alling something over p2.8 billion was used to write off certain frozen assets being used to make payments for war claims against Thailand and to cancel out certain claims of the Bank of Thailand against the Government. A balance of X1,260) million was transferred in the form of dollar exchange from the Issue Department to the newly established Equalization Fund.:/ ~/ With the exception' of automobiles and possibly a few other items licensed on an ad hoc basis, essentials had been licensed automatically and semi- essentials were licensed up to the highest level of imports for any of the previous five years. .5/ In addition to the $1,260 million ($63 million) transferred to the Exchange Equalization Fund, the remaining X1,568 million of revaluation profit was used as follows: (i) 308.3 million to write off in March an item listed in Issue Department assets as "Government Guarantee". This apparently was a balancing item representing a foreign exchange obligation of the Government to the Bank established to meet the legal requirement of 100% foreign asset coverage for the note issue. This requirement could be met fully after re- valuation without the retention of this item. (ii) $720 million to write down from $96 million to $60 million the Issue Department holdings of Thai Government dollar denominated bonds (leaving the baht amount the'same as be- fore revaluation or $1.2 billion). (iii) 29%.3 million to write off sterling assets (fixed deposits and bonds) which had been frozen by the UK and used to pay off British war compensation claims against Thailand. (iv) About $12.9 million for the write off of a frozen gold asset of the Issue Department in the UK and (v) $230.5 million was used for government expenditure still to be made at the former official rate of 12.5.  -7-- 16. The Exchange Equalization Fund was set up under an Emergency Decree of July 13, 1955. Its purpose was "to stabilize the level of the exchange rate compatible with the economic and financial situation of the country". Its management has the power to (a) purchase and sell foreign exchange and gold, (b) invest in Treasury bills or other short-term Government securities (holdings of such bills limited for any period to 20% of the total assets of the Fund),, (c) invest in high-grade,short-term foreign securities, and (d) borrow funds sufficient to maintain "proper level" of the exchange rate. The Fund is to be administered by a committee headed by the Minister of Finance, and including the Governor of the Bank of Thailand. Although there had been some specula- tion in the exchange market that the Equalization Fund might be used to ap- preciate the baht (supported perhaps by the anticipated new official rate of 20 to 1) and the baht has actually appreciated somewhat (from about 22.24 at the time of the Fund's first exchange transaction late in August to 20.43 at the end of February 1956) since the Fund was established, this seems to have been due to an increased supply of exchange in the free market because of the elimination of the surrender requirements for rice, rubber and tin. The Thal authorities seem to be aware of the risk of a substantial drain on reserves (the Equalization Fund holds about half the country s dollar balances and about one fifth its total foreign exchange reserves) should they attempt to support the baht at an unrealistic level. External Debt 17. The external debt of Thailand has been fairly small (about 22%) in re- lation to the country's foreign exchange reserves, and, apart from repayment obligations for short- and medium-term suppliers' credits and a three-year Bank of America loan received in 1954, service charges range between 1% and 2% of normal exports. 18. As of December 31, 1955, the external national and Government-guarantead debt amounted to $70.6 million equivalent, about $58.0 million equivalent of which was then disbursed and outstanding (Table 1). Of the total external debt, $51.2 million or 72.5% was repayable in dollars, $14.2 million or 20.1% in sterling, and $4.7 millicn or 6.7% through the open account with Japan.v A small amount was due in Swiss francs in connection with IBRD loans. $10 million out of about $38 million of U.S. economic aid to Thailand in U.S. fiscal year 1955-56 is on a loan bapis, repayable in baht or dollars at the option of Thailand. This is not included in the above-mentioned amounts. 19. $30.5 million or about 43% of the external debt of Thailand consisted, as of December 31, of medium-term credits maturing in six years or less. Under present repayment schedules, the principal amount of debt presently outstanding would be reduced to $41.9 million equivalent by 1960, $18.2 million equivalent by 1965 and $3.5 million equivalent by 1970. Final repay- ment would be accomplished in 1971. Annual service on this debt will rise from $5,325,c000 equivalent in 1956 to a peak of $13,239,000 equivalent,in S This open eLccount arrangement is now replaced with straight settlement in dollars or sterling. See footnote 11, page 12. The method of settlement of this debt is not yet known.  1958. It is fairly stable at $5 - $6 million equivalent from 1960 to 1965 and approximates $3 million equivalent from 1966 to 1970. 20. In accordance with previous understandings, the Thai Government consulted with the Bank in September 1955 regarding possible further loans of $6 million from the Bank of America for street railway and rural electrification and water works projects, the loans to be supported by Bank of Thailand time deposits in the Bank of America and repayment over four years. The Bank advised against the loans on grounds of unsound budgeting principle involved, the uncertain merit of the projects in terms of the over-all development of Thailand and the fact that the period of repayment of the loans would not conform to the timing of economic benefits from the project. Thailand achieved, in March 1955, the settlement of her yen claims against Japan. A total of $41.7 million was in- volved in the settlement, $15 million of actual payment to be made in sterling over a five-year period and the balance in credits. Internal Finance 21. Final revenue and expenditure data are not yet available for 1955. Tentative reports indicate that the budget deficit was about $650-675 million. The cash deficit appears to have been $629 million (Table 9) as compared with about $850 million in 1954. The inflationary financing involved in the 1955 cash deficit was about $247 million compared with about $120 million in 1954. Net Bank of Thailand advances of $549 million (Table 9) were offset to the extent of $219 million by exchange profits and $83 million by increased balances at central and provincial treasuries (Table 15). 22. Government revenues for 1955 closely approximated those for 1954 (Table 7), despite an anticipated decrease of $250 4300 million in receipts from rice.'/ Revenue from taxation increased by nearly $100 million as between the first half of 1954 and the corresponding period in 1955. Details of revenue collections are not yet available for the second half of 1955. 23. With the termination of the foreign exchange surrender requirements for rice, rubber and tin in August and September 1955, it was necessary to augment regular revenues to replace the exchange profits which would no longer accrue from the sale by the Bank of Thailand of the surrender proceeds. Ad- ditional export taxes, royalties and premiums were imposed on these commodities. Up to the end of 1954 the Government derived income from rice both in the form of profits on rice handled by the Rice Bureau and from the tax levied on rice exports. In addition, exchange profits were realized by the Bank of Thailand, equal to the difference between the free market and the official rate, on the proceeds of rice exports. In 1954 the Government revenues from profits of the Bureau (including a substantial amount of arrearages collected from private exporters who had failed to turn over their foreign exchange proceeds at the official rate) and from export taxes amounted to about M 9 million. By comparison income from the Rice Bureau was $233 million for the first half of 1955 and $438.8 million was budgeted for the entire year.  1-9- The amounts of these levies are shown in Table 10. It appears that on the basis of a free market export rate of 21 to the dollar, export prices of February 1956, and about the 1955 level of exports, the Government may receive a little less than prev:iously accrued from export premiums and exchange profits on rice. Receipts from rubber should increase, however, so as to leave the total ap- proximately unchanged. However, this should not be interpreted as a forecast since the export revenues collected in the future will depend on volume as well as price factors which cannot be predicted accurately. 24. Expenditulres for 1955 may have amounted to about $470 million less than was provided for in the budget. Aside from the large item for cost of living allowances of officials, which probably exceeded budget estimates, disburseraents for all categories of expenditure seem to have been at a little lower level than contemplated in the budget (Table 5). Security expenditures (including poLice) and for economic development including investment in government enterprises were about 44% and 24% respectively of total budgetary expenditures. In 1954, 40% of total expenditures were for security and 27% for economic development and investment in government enterprises. Cf the expenditures-classified as investment outlays in 1955, amounting to about $1,018 million, approximately 21% was for irrigation, about 40% for highways, 12% for other means of trans- portation, nearly 10% for investment in secondary industries, and 17P for miscellaneous purposes (Table 6). The proportion of public investment that went into industry was more than double that of the previous year. Internal Debt 25. While the nominal amount of the Governmentts internal debt, including overdraft and suspense account with the Bank of Thailand, is reported to have decreased by about $252 million during 1955 (Table 8), a total of about $932 million of Treasury Bills and of the overdraft held by the Bank of Thailand was written off against the Government's claims on the Bank, accumulated exchange profits and profits arising from the revaluation of foreign exchange assets. Without these adjustments the internal debt would have increased $675-680 million. $127 million of this increase was in debt held outside the Bank of Thailand. 7.6% of the Thai internal Government debt was held outside the Bank at the end of 1955, an increase of about 2% during the year. Money and Prices 26. The supply of money in the private sector of the economy probably in- creased by a little larger percentage in 1955 than. in 1954. During the first ten months of the year the increase was about 14%, as compared with less than 12% for all of 1954 (Table 12). The note issue, for which data for the entire year are avai]lable, increased by 15.6% from January through December.W/ S/ The note issue in Thailand has to be 100% backed by gold, foreign exchange and securities denominated in foreign exchange. The latter provision per- mitted the Government to borrow $96 million from the Bank of Thailand in 1953 and 1954 and substitute $1200 million worth of dollar denominated government bonds in the currency reserve. The purpose appears to have been to realize an exchange profit by selling some of the foreign exchange in the free market. These Thai dollar bonds plus a small amount ($21.7 million) of Thai sterling bonds make up about 21% of the currency backing at present. The balance is foreign exchange and gold.  -10- Probably over 70% of the increase in the money supply was attributable to the increase in foreign e;;change reserves and credit expansion in the private sector and less than 30% to Government operations. Estimates of factors af-. fecting the supply of money in the first half of the year are given in Table 13. The relatively sharp increase in private credit outstanding (increase of $228 million or 12% in the first five months of 1955) is probably attrib'u- table to the return of the rice trade to private hands with resulting in- creased need for export financing and advances to pay export premiums, and the increased requirements for import financing because of the elimination of' prefer- ential import rates. No significant change in credit policy occurred during, this period. At present the commercial banks are required to keep a cash reserve ratio of 10% to total deposits (legal reserve requirements may be varied between 20% and 9%) but in practice the banks maintain a ratio of 20% to 25%