The topic today is physically closer to home and both politically and economically more above board than all the ongoing speculation about the old power clique's underground "hedge fund" politics.

The central bank's controversial year-end move to put the brakes on the inflow of short-term "hot money" is bound to top the list of the "agenda on hot politics", which will haunt the Surayud government as 2007 dawns.

The central bank closed 2006 by issuing a statement saying that it would "evaluate" the impact of its 30 per cent reserve requirement on capital inflows during the middle of this month. This statement was issued only one day after the country's top economic think tank made a widely publicised plea for a review of the measure which, despite the overnight flip-flop, remains a highly divisive move.

Thailand Development Research Institute (TDRI) President Chalongphob Sussangkarn, in calling for a revision of the move during his meeting with the prime minister, insisted the reserve measure put into effect on December 18 could ruin efforts to develop the bond market. Developing a bond market has become increasingly important as the economy is expected to run a current account deficit in the future.

Take note: he didn't seek the total abolition of the "capital inflow tax" that kicked up such an uproar in the stock market. The well-known economist proposed that the central bank impose a reserve requirement for both the stock and bond markets, but with the reserve ratio set at a lower rate and made subject to revision by the central bank's Monetary Policy Committee.

Also take note that he was very careful not to allow political considerations to exert influence on the deliberations - a suspicion that has plagued the December 18 "hot move" all along. But inevitably a debate on the pros and cons of a "Tobin tax" for Thailand has been kicked up as a result. Nobel-prize winning economist James Tobin proposed in 1978 a worldwide tax on all foreign exchange transactions, arguing that it would reduce exchange rate volatility and improve macro-economic performance. Besides, the tax could bring in revenue to support international development efforts.

The defining characteristic of the Tobin tax is that it's a tax on gross transaction -meaning that the tax is paid twice, once when the foreign exchange is acquired and again when it's sold.

The crucial consequence of double taxation at a fixed rate is clear: it automatically discriminates against short-term capital flows. A recent article in the Federal Reserve Bank of San Francisco's newsletter explains the heavy "discrimination" imposed by the Tobin tax this way: "Suppose a 0.1 per cent tax is levied on all foreign exchange transactions, and that the (annualised) domestic interest rate is 5 per cent. Then, with a one-year holding period, the interest rate on a comparable foreign currency denominated asset would have to be at least 5.2 per cent to make foreign investment attractive. If instead the foreign asset is held for only a month then the foreign interest rate must be at least 7.4 per cent to offset the tax. For one-day round trips foreign rates would have to be at least 77 per cent! Thus, a small and enforceable Tobin tax could virtually shut off short-term capital inflows..."

What the Thai central bank decided on was not a Tobin tax, however. The bank decided on "reserve requirements", which do not necessarily discriminate against short-term capital inflow in favour of long-term investments. These requirements are a tax on net position-taking in which banks are required to deposit a portion of their net external liabilities (30 per cent in this case) with the central bank at zero interest rate.

Chile adopted this practice in 1991 - when the government required banks to maintain a reserve requirement against external liabilities for a period ranging from 90 days to a year. First, it was fixed at 20 per cent and the following year it was raised to 30 per cent, before being removed in 1998 in response to the international financial crisis.

No doubt some experts have argued that the measure was effective in keeping "hot money" out of Chile at the time and the government then even insisted that it did not unduly hinder long-term investment. Those opposed to any kind of capital control will of course argue that speculation is necessary in a system of floating exchange rates.

The real issue since the December 19 stock market debacle isn't about whether we should defend the baht against hedge-fund speculators to help Thai exporters or whether the government should take better care of investors in the stock market. The main concern is the fact that the big picture on the situation has been distorted by the fuzzy line between political considerations (epitomised by the highly visible role played by Finance Minister MR Pridiyathorn Devakula) and the professional judgement of the central bank, which was dimmed by the initially slow reaction of the new governor.

The crux of the problem that will definitely spill over into 2007 is the lack of an informed, transparent and robust debate on this over-arching and complicated issue geared at arriving at a well-balanced, rational and transparent set of policies on our capital, bond and financial markets. That's what is urgently required. That's what the first item on the national financial agenda for 2007 should specify.

Suthichai Yoon