Change in Thailand's Exchange
Rate System
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The Minister of Finance, upon the recommendation
of the Bank of Thailand, on 2 July 1997, issued a Notification determining
that the value of the baht would henceforth be set by market forces.
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As from 2 November 1984, the baht value had been
set in reference to a basket of currencies of Thailand's major trading
partners. The exchange rate of the baht against the United States dollar
was announced daily by the Exchange Equalization Fund, which stood ready
to buy and sell US dollars with commercial banks at determined rates. This
system resulted in the baht becoming one of the most stable currencies
in the world and supported Thailand's rapid growth over the years.
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The tight monetary policy followed by the Bank of
Thailand since 1995 in order to contain incipient pressures on inflation
and the current account have had the desired effect on economic stability.
However, the coincidental sharp slowdown of exports and capital inflows
in 1996, together with problems in financial institutions resulted in a
rapid deceleration of investment and growth. Calls for a relaxation of
monetary policy evoked widespread speculation that exchange rate policy
might be adjusted to allow for reductions in interest rates. While the
authorities' interventions were successful in containing speculative pressure
in foreign exchange markets, the confidence of domestic businesses in the
authorities' exchange rate policy continued to weaken in the wake of widespread
speculation and criticisms.
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In order to end uncertainty over Thailand's exchange
rate policy, Thailand's exchange rate system will from 2 July 1997 be
a managed float, whereby the value of the baht will be determined by
market forces to reflect economic fundamentals.
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Under the new system, movements in the exchange rate
are expected to be quite large at the initial stage. However, relative
stability should be attained after a brief adjustment period. The Bank
of Thailand will intervene in foreign exchange markets from time to time
to achieve policy objectives and guard against excessive fluctuations.
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To support the new foreign exchange regime, a cautious
monetary policy stance will continue to be followed. Effective today, the
Bank of Thailand has raised the bank rate from 10.5 per cent to 12.5 percent.
In due course, the Bank will allow market forces to adjust interest rates
downward in the context of a stable or strengthening baht. In the longer
run, the managed float system will enable the authorities to implement
monetary policy consistent with domestic policy objectives and support
healthy capital inflows.
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Some slowdown in economic activity must be accepted
in wake of the new exchange rate regime. However, this will lay the groundwork
for growth with stability in the years ahead. In the short run, so as to
alleviate any negative effect on debt servicing and prices that may result
from an adjustment in the baht value, the authorities are prepared to consider
supplementary measures, particularly those related to prices of goods considered
as necessities, tax deduction for businesses suffering exchange losses,
and financing facilities for priority economic sectors.
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The Ministry of Finance and the Bank of Thailand
believe that the managed float system will benefit Thailand's overall economic
development. The new system will provide sufficient flexibility to accommodate
developments in Thailand's economy and respond to the situation in financial
and foreign exchange markets.
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No. 45/2540
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Ministry of Finance
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Bank of Thailand
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2 July 1997
Notification of the Ministry
of Finance
Re: Change of Foreign Exchange System.
By virtue of the power conferred upon him under
Section 8 Paragraph Three of the Currency Act B.E. 2501 as amended by the
Currency Act (No 4, B.E. 2516, The Finance Minister, upon the recommendation
of the Bank of Thailand, hereby issues this notification as follows:
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The Notification of the Ministry of Finance dated
2 November B.E. 2527 Re: Change of Foreign Exchange System is hereby repealed.
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The foreign exchange system shall be such that the
value of the baht is set by conditions in the foreign exchange market.
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The Bank of Thailand shall engage in buying and selling
of foreign currency for the purpose of maintaining the stability of the
baht under the system mentioned in 2.
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The Bank of Thailand shall from time to time as deemed
necessary, publish the exchange rates between the baht and foreign currencies
for use as a reference rate in conversion of foreign currencies into baht.
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Given on 2nd July B.E. 2540
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(signed) Thanong Bidaya
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Minister of Finance
Copyright (C) 1997, The Royal Thai Embassy,Washington,
D.C.
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