Another recent factor that has served to ease inflationary pressures is that rapid growth in national expenditure  BIS Review 18/2004  5  has primarily been channelled into increased imports. It has therefore exerted less pressure on domestic factors of production than otherwise, but is reflected in a widening current account deficit, as I have discussed. In the long run, an excessive current account deficit could undermine the exchange rate and fuel inflation, although this does not appear to be much of a threat within the horizon of the latest forecast. The Bank’s macroeconomic forecast now assumes that the Norðurál aluminium smelter expansion will go ahead, which raises projected output growth to 3½% in 2004 and 4½% in 2005. The appreciation of the króna, strong increase in productivity in 2003 and large share of foreign labour employed on hydropower and aluminium projects will result in less pressure on domestic factors of production and prices than would otherwise be the case. As I mentioned earlier, it is likely that some of the appreciation of the króna in the first half of last year was connected with planned investments in aluminium and hydropower projects. Had these plans not materialised, it is almost certain that the Central Bank’s policy rate would be lower today. Due to the strengthening of the króna in 2003 and the proposed tightening of the fiscal stance implied by the budget for this year, the Central Bank’s policy interest rate has remained unchanged since February last year.
Thailand’s better performance this year, notwithstanding a lackluster global economy, has been supported by the strong momentum in both domestic demand and exports. Front-loaded fiscal measure sparked up the initial momentum in domestic demand, while private consumption and investment are now adding firmly to the growth process. As the regional economies began to recover in the last five months, export growth has also provided an additional impetus to the recovery. Along with this recovery, inflation remains subdued, credit growth has turned positive, and business profits are improving, encouraging firms to expand their capacities through new investment. These broad movements are indicative of a positive dynamic linked to the current recovery. The most significant improvement since the crisis, however, has been the strengthening of external stability. Continued current account surpluses have allowed external debt to run down in concomitant with a build-up of international reserves. The coverage ratio of reserve to short-term debt has risen to 290% in July 2002, four times the ratio at the end of 1997. Ladies and Gentlemen, Although I share the view that the worst may now be behind us, I believe Thailand still has some way to go. The key question is how can we make it last, especially now that the global economic recovery  BIS Review 62/2002  1  may be somewhat slower than earlier anticipated? The answer to this question probably lies in the answers to yet another important question: what have we learnt from the recent crisis?