There has been overwhelming focus on Thailand’s short-term economic woes and how to combat immediate hardships.
But multiple studies and assessments show there is no quick-fix for the country’s long-term economic challenges, which is exacerbated by an ageing population.
Recently, the World Bank lowered its economic growth forecast for Thailand this year by 0.4 percentage point to 2.4 per cent from 2.8 per cent in April, citing delayed approval of the government budget bill for fiscal year 2024 and weaker-than-expected export growth early in the year.
Like the World Bank, other research houses such as Kasikorn Research Center and SCB Economic Intelligence Center have also revised downward their economic growth forecasts to 2.6 per cent and 2.5 per cent this year respectively.
Despite the sluggish economy, the Bank of Thailand (BOT) has kept the policy rate at 2.5 per cent per annum despite calls for a rate cut. The BOT argues that it needs to safeguard financial stability.
The central bank is also worried that a lower rate could encourage people to accumulate more debt, as past experience has shown an increased inclination to borrow when the interest rate drops.
Thailand can ill-afford laxity in that area when household debt is a staggering 90 per cent of gross domestic product (GDP).
BOT Governor Sethaput Suthiwartnarueput also said that the central bank had to take into account the outlook for the future.
The World Bank has commented in its report that the BOT was reluctant to cut the rate because it was worried about uncertainty in fiscal policy.
If the government implements the digital wallet cash handout costing 500 billion baht, it could create inflationary pressure.
The World Bank said the economy this year would be driven by sustained consumer spending, recovery of tourism and a turnaround in exports.
It projected tourist arrivals to surge to 36.1 million, well above the 28.2 million arrivals in 2023 and nearing the pre-pandemic peak of close to 40 million.
Total arrivals are expected to reach 41.1 million next year, surpassing the pre-pandemic level, as Chinese visitors return in large numbers.
Economic growth is expected to reach 2.8 per cent in 2025, supported by stronger demand at home and overseas, as well as increased government spending.
While Thailand’s public debt is projected to remain sustainable, the government faces increasing pressure for social spending and public investment to support an aging population.
“Thailand is at a pivotal moment needing to address key challenges including productivity and a decline in the working population due to an unfavorable demographic trajectory,” said Fabrizio Zarcone, World Bank country manager for Thailand.
Sethaput shares the World Bank executive’s views. He pointed out that between 2004-2013, Thailand’s labor force expanded 1.2 per cent and productivity rate was 2.6 per cent.
In comparison, the labor force grew just 0.04 per cent from 2014-2023 and productivity was stagnant at 2.6 per cent.
To achieve higher economic growth the country needs a bigger workforce, or it has to increase the productivity per worker. An increase in the number of workers is unlikely as the country has become an aged society.
Thailand’s potential GDP growth is currently at just 2.7 per cent, down from 4 per cent in the previous decade.
World Bank on the digital wallet scheme
Public debt is projected to rise to 64.6 per cent in fiscal year 2025. The fiscal deficit is projected to increase to 3.6 per cent of GDP as budget execution normalizes and fiscal stimulus measures aimed at boosting consumption are implemented, in line with the government’s medium-term fiscal framework, according to the World Bank.
Thailand faces the mounting challenge of reconciling fiscal sustainability and short-term stimulus. The government has projected that public debt will rise to 68.6 per cent of GDP by 2028 as spending needs rise.
Pro-growth measures aimed at stimulating consumption, such as the digital wallet scheme, have added to this pressure, the World Bank warned.
Recently, Deputy Finance Minister Paopoom Rojanasakul said that the Digital Wallet committee had decided to cut the project size to 450 billion baht from 500 billion baht, which would cover about 80-90 per cent of the previous target of 50 million receivers.
The reduction in numbers was attributed to 90% of the eligible population on average participating in previous schemes. He predicted the economy would grow by another 1.3-1.8 percentage point over 12 months.
Revitalize economy via secondary cities
To revitalize the economy, the World Bank has urged Thailand to accelerate the development of secondary cities.
Thailand’s urbanization has been heavily focused on Bangkok, the World Bank said in the report. Bangkok is one of the prime global cities, enjoying a strategic geographical position within Southeast Asia.
The development of world-class infrastructure and transportation networks has fostered economic growth and activities within the city and surrounding areas.
At the same time, Bangkok has become ever more congested, and the inefficiencies and problems related to that congestion are becoming more expensive and harder to overcome.
“The 2011 floods also highlighted Thailand’s vulnerabilities due to the concentration of critical industries in Bangkok. Climate change will further strain Bangkok’s infrastructure and the nation’s economy, emphasizing the need for a more diversified economic base,” the World Bank report said.
Bangkok provides world-class services for business and government, while medium-sized cities may be better suited for manufacturing.
Many of Thailand’s secondary cities are already regional centres of economic activity, with a diverse array of industries and sectors.
These cities are vitally important in their regions, and they have the potential to be much stronger contributors to a balanced national economy, according to the World Bank.
Thailand’s secondary cities are overly dependent on nationally raised revenues.
Because they have little control over their own spatial planning, infrastructure development, and fiscal policies, these cities depend heavily on transfers from the national budget to support the required infrastructure development.
This has held them back from realizing their economic potential.
If local governments have greater authority over urban planning, infrastructure development, and access to long-term financing mechanisms— complemented by robust fiscal instruments such as property taxes, income tax piggybacking, and user charges — these cities could effectively chart their own economic growth trajectories.
These instruments could include property tax with more local control, or surcharges on national income taxes, the report said.
Thailand’s cities do not have the authority to set their own property tax rates or tax base. This lack of control impairs the adequacy and reliability of local taxation, starving cities of the revenue they need for operations and investment.
If greater autonomy and reliability in property taxes proves difficult in the Thai context, an alternative could be a “piggyback” local tax which relies on the national personal income tax collection system.
Empowering local authorities to implement fair and reasonable taxes, in consultation with their communities, would be an important first step in ensuring fiscal sustainability, according to the report.
Risk of lost decades
Former finance minister Korn Chatikavanij strikes a pessimistic note about the future. He said the country had faced the lost decade and would face another lost decade if there were no reforms in the economy and politics.
He urged the government to liberalize the energy sector by allowing people to use their solar roofs to produce electricity and sell excess capacity back to the Electricity Generating Authority of Thailand (Egat), a state enterprise which currently monopolizes the electricity trade.
People could sell their excess capacity among them via Egat’s grid, he suggested.
Currently households that deploy solar roof panels to produce electricity cannot trade their excess electricity, resulting in high cost of investment as most families use less electricity than they produce during day time.
“If the energy sector is liberalized, investment would increase and the government would not need to spend any money,” said Korn.
He blamed the political power of some energy companies for standing in the way of energy liberalization.
By Thai PBS World’s Business Desk
