The unfortunate link between purchasing power and indebtedness

He is thus convinced that the economy would tilt upward if the poor had more to spend.

The Cabinet is today due to consider proposals from its new economic team for short-term measures to lift the economy. One of them will be a massive cash injection to the Village Fund scheme, which would give the rural poor access to a reported Bt59 billion in low-interest loans.

The brains behind previous loan schemes have highlighted the benefits of better access to finance, and the so-called multiplier effect – when an initial injection into the economy causes a bigger final increase in national income. Expect to hear more of the same from today. 

According to reports, new loans will only go to income-boosting enterprises. Let’s hope that the village committees overseeing the lending are able to screen the projects properly. Let’s also hope that the borrowers don’t use the money to buy unessential items, as has happened in the past.

Experience has shown that the poor are enthusiastic about loans that carry zero interest in the first two years. Yet, financial institutions are often reluctant to lend to the poor, given the uncertainty over repayment.

Household debt in Bangkok, Nonthaburi, Chon Buri and Samut Sakhon averaged more than Bt400,000 in 2011, National Statistical Office data shows, and more than 40 per cent of that debt went to finance house and/or land purchases.

In contrast, household debt in the Northeast and the South averaged below Bt200,000, with more than 40 per cent spent on household consumption. In the North it was also below Bt200,000, but most of it went to finance agricultural and other income-boosting projects. 

Meanwhile only 42 per cent of the poor are indebted, in contrast to 58 per cent of the non-poor.

The situation will not have changed much four years on. 

The data strongly suggests that the spending patterns of rural populations create a greater multiplier effect. Unfortunately, they don’t have much to spend. And with loan offers few and far between, they have to be discreet with their spending.

As such, they should welcome the rebooted Village Fund scheme. As in the past, many are likely to come up with business plans for income-boosting enterprises, only to use the loan to buy a new motorcycle for their private use. (Of course, this purchase may well benefit the economy, but only months from now, when the motorcycle makers pay tax.)

Farmers typically need to show a cultivation plan before the Bank for Agriculture and Agricultural Cooperatives will grant them a loan. Yet, a recent survey by a farmers’ network showed that most farmers in two central provinces used the loans to finance their children’s education or health expenses.

This time, as in the past, if the loans cannot boost their income, they will only boost their indebtedness.

Prime Minister Prayut Chan-o-cha has shown deep concern over debt levels among farmers. In July, he instructed his then deputy, Pridiyathorn Devakula, to lead three related ministries in tackling the problem of farmers burdened with high-interest loans, especially those who stand to lose their fields to loan sharks. That followed a report that 149,000 farmers owed loan sharks roughly Bt21 billion in total.

Early last month, Prayut was reportedly alarmed by an Interior Ministry report that 1.64 million farmers owed as much as Bt388 billion, or an average of Bt237,000 each. He instructed the Interior, Justice and Finance ministries, along with the Government Savings Bank and the Bank for Agriculture and Agricultural Cooperatives, to provide speedy aid to farmers facing the loss of their properties.

Indeed, the general level of debt among Thais is alarming. 

Average household income doubled over the decade up to 2011, and with it went average spending – up from Bt68,405 in 2001, to Bt134,900, according to official figures. Yet much of that spending was fuelled by loans: In 2011, household debt averaged Bt241,760.

In 2014, almost three-quarters (74.8 per cent) of Thai households were in debt, according to a survey by the University of the Thai Chamber of Commerce.

The respondents attributed their borrowing to the economic slowdown against the higher cost of living and education expenses. Some explained having to borrow to repair damage caused by natural disasters. Some had overspent with credit cards. Many farmers needed to take loans after their payments under the rice-pledging scheme were delayed.

Over the past two years, a drop in Thai exports has gone hand in hand with a slide in economic growth. Most policymakers have insisted that Thais’ purchasing power has remained strong, but that consumers have been afraid to spend because of the economic uncertainty.

Somkid has arrived with a new theory. It seems he is convinced that the poor hold the key to the health of the domestic economy. Prayut is also a believer, having publicly stressed the important role that low-income Thais have to play in lifting the economy.

It’s good to hear they agree that the poor need an injection of purchasing power. Yet it will be unfortunate if this treatment is administered in such a way that it boosts their indebtedness.