Country Operational Strategy Study: Thailand (Interim)

Abstract

This interim country operational strategy for Thailand has been prepared to provide a strategic framework for Bank operations against the background of a severe economic crisis that has affected several major economies in the Asian region, and continuing uncertainties resulting from the crisis. The interim strategy will be followed by a new strategy after normal economic conditions are restored. When the crisis first emerged in Thailand in early 1997, the immediate challenge was to deal with the external financing gap and stabilize the economy. In response to the request of the Government, funding agencies responded with a $17.2 billion assistance package, linked to an International Monetary Fund Stand By Arrangement. On its part the Government introduced a comprehensive package of stabilization measures. These measures turned out to be very effective in closing the external financing gap. Imports fell sharply and the current account deficit was reduced from almost 8 percent in 1996 to only 2 percent in 1997. It is estimated that 1998 will close with a current account surplus equivalent to over 9 percent of gross domestic product. Gross foreign exchange reserves now exceed $28 billion or about eight months of imports. However, this closure of the external financing gap has been achieved at a high cost in terms of unemployment and underutilization of capacity in the real sector. The aggregate demand compression measures, combined with the contagion effect of adverse trends in other crisis -affected countries in the region, have set off a severe recession. GDP is now estimated to have declined by 7-8 percent this year and total unemployment is estimated at 1.8 million persons, including the seasonally inactive labor force. The main challenge of economic policy now is to arrest recession.