Exchange Rate Policy

1. Exchange Rate Policy

2. Just after WW2: high inflation, shortages of goods and foreign exchange • Began to use the multiple exchange rate system in 1947 • Official rates and market rate

3. Began to use the multiple exchange rate system in 1947 • Required exporters of rice, tin, and teak to sell foreign exchange at an official rate (12.50 baht/$ which was lower than the market rate)

4. Began to use the multiple exchange rate system in 1947 • Sold $ at an official rate for essential imports • Less inflation, and more $ available + government revenue from export taxes

5. Thailand became a member of IMF in 1949 • But no par value of the baht • The world adopted the Bretton Woods system of $ and gold + adjustable peg ER system

6. Thailand started liberalization of trade in 1955 • Abandoned the multiple ER system • Established the Exchange Equalization Fund (EEF) to maintain the baht value at 20 ฿/$

7. 6 periods of ER system in Thailand: • Period 1 (1955-1963) • no par value of the baht • Bank of Thailand (BOT) intervened (through EEF) to maintain the baht value • Small changes in ER, lowest at 21 ฿/$

8. Period 2 (1963-1978) • set par value of the baht at 20.88 ฿/$ + 1% • Rather stable, pegged with $ • Devalued with $ in 1972-73 • Adjusted parity to 20฿/$ in 1973 with a wider band + 2.25%

9. Period 3 (1978-1981): daily fixing • The global floating ER system • Thailand abandoned parity, and pegged the baht with a basket of currencies

10. Period 3 (1978-1981): daily fixing • BOT and banks jointly fixed exchange rates every morning by creating demand-supply balance • More fluctuation in the baht value (weakest at 21 ฿/$)

11. Period 4 (1981-1984): fixing by BOT • The baht began to depreciate against $ with BOP deficits (second oil crisis) • Speculation against the baht, with BOT defending and losing much of the reserves through the daily fixing

12. Period 4 (1981-1984): fixing by BOT • BOT stopped the daily fixing • BOT devalued the baht in 1981 from 21 to 23 ฿/$

13. Period 5 (1984-1997): basket peg • BOT pegged the baht with a basket of currencies (7 including $ with the biggest weight), aiming at more flexibility and independence from $

14. Period 5 (1984-1997): basket peg • BOT devalued the baht in 1984 to 27 ฿/$ • Exports and the economy recovered • In practice, the baht was more flexible, but still very much fixed with $

15. Period 5 (1984-1997): basket peg • Financial liberalization: no interest rate ceiling, free capital movement, BIBF • High economic growth, influx of capital inflows (high returns with no ER risk), real estate and stock speculative boom

16. Period 5 (1984-1997): basket peg • Export stagnation in 1996 triggered speculation against the baht, bursting the bubble • BOT lost most reserves in defending the baht

17. Period 6 (1997-present): managed float • BOT floated the baht on 2 July 1997 • The baht depreciated very quickly, weakest at 56 ฿/$ in early 1998

18. Period 6 (1997-present): managed float • Managed float: no target of ER to defend, but intervene only to reduce short-term fluctuations • During 1999-2000 the baht stabilized at 36-39 ฿/$

19. Period 6 (1997-present): managed float • During 2001-2002 the baht depreciated to 43 - 44 ฿/$ • Later stabilized at 40 - 41 ฿/$ during 2003-2005

20. Period 6 (1997-present): managed float • During 2006-2007 the baht appreciated to 33 - 38 ฿/$, while $ weakened worldwide • BOT introduced at end of 2006 a capital control measure (unremunerated required reserve for S-T capital inflow or URR) to slow down baht appreciation

21. Period 6 (1997-present): managed float • BOT abolished the Exchange Equalization Fund (EFF) in 2007 • BOT just ended the capital control measure (URR) in March 2008 • The baht has appreciated against the US dollar in recent years, due to the weak dollar worldwide

22. Period 6 (1997-present): managed float • The baht can be compared against a number of currencies