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Is it about time the Bank of Thailand considered using its international reserves to help stimulate the sagging economy? Well-known economist, Dr Narongchai Arkasanee, yesterday called for the central bank to use the US$20 billion to $30 billion (Bt684 billion to Bt1.03 trillion) sitting in its international reserves to prop up the economy. Using the reserves would also help weaken the baht and boost exports. He also warned that the baht could strengthen to Bt33 against the US dollar if the central bank were to do nothing.

Narongchai also closely scrutinised the government's deteriorating financial position - government coffers have emptied. As of April in this fiscal year beginning October, the government was only able to collect Bt655 billion in revenue, while its expenditure hit Bt1.1 trillion. There was a big black hole in terms of revenue shortfall worth Bt458.50 billion.

Besides, there is an excess of liquidity of Bt1.7 trillion in the financial system that the government should tap. Half of this amount is the daily cash flow in the economy, while the other half is parked in short-term treasuries. Narongchai has suggested the government tap this excess liquidity, as well as use the excess from the Bank of Thailand's reserves to help stimulate the economy.

However, we are not sure we can agree with Narongchai's suggestion. Using international reserves to prop up the economy is not necessarily a wise policy. Most other central banks do not resort to this practice. If the central bank were to use the international reserves for economic stimulus and investment, it would have to convert the American dollar into baht, and then the currency would flood the financial system. If the central bank were to use the baht directly from one of its own accounts, then that too would amount to releasing excess money into the financial system.

In fact, Bank of Thailand governor Tarisa Watanagase discussed the issue with Prime Minister Abhisit Vejjajiva and Finance Minister Korn Chatikavanij in their early days in government. She stood firm against any attempt to use the reserves for economic stimulus, something Korn wanted. Eventually, both the PM and Finance Minister backed off from meddling in the central bank's affair, leading the government to rely instead on borrowing Bt800 billion, introduced through two separate bills in Parliament, from the market to finance government expenditure and to fill the hole in the budget deficit.

On the other hand, if the government were to persuade the central bank to use its foreign reserves on investing in assets overseas, then Tarisa and the central bank would have little objection since that would not complicate their monetary and foreign-exchange management.

Many economists have suggested the government dole out large sums to stimulate the economy. The stimulus will mainly go to benefit the modern sector, which has already benefited from economic growth and opportunities over the past few decades. Few have come up with a comprehensive recommendation on how the government may invest wisely to help the agricultural sector, which is now absorbing 12.5 million workers many of whom have been laid off from the modern sector and have been forced to return to farming.

The government's borrowing of Bt800 billion would raise the public sector debt to gross domestic product from 40 per cent to 61 per cent. If the government does not restrain its bad habits, its debts could easily run away with it.

Instead of raising huge sums to finance the deficit, the government should instead opt for cost cutting. Businesses, companies and factories have already downsized their operations to take into account the economic weakness. Few are expanding their operations during the recession, and the government sector should do the same.

The government sector is bloated with inefficiency and it is becoming expensive for the country to maintain a huge bureaucratic system. More than 70 per cent of the annual budget goes toward the salaries and welfare of civil servants. If half the bureaucratic system were to be slashed, the government would have a smaller financial burden and have more cash left behind to invest in other programmes that would be more beneficial to the country in the long term.

With regard to the central bank's reserves, it is better to take a look at how it is managing the reserves. China is now converting its holdings of US treasuries into hard assets. Fearing the dollar could collapse or weaken further, China has chosen to hold on to hard assets such as oil, copper and soybean instead of wealth in paper.

The Thai central bank should also come up with a strategy to diversify the management of its reserves away from US dollar assets. Hard assets would provide a cushion during this global financial crisis when paper wealth is fast eroding. This should be the central bank's main objective now, rather than spending reserves outright to boosting the domestic economy.