Downside risks stem from Thailand’s high dependence on trade and investment flows amid increasing global uncertainties. Tightening financial conditions in advanced economies may lead to weaker-than-expected external demand. As a large importer of oil, Thailand remains vulnerable to swings in global energy prices.

The most immediate short-term challenge for Thailand is the phase-out of special policy support measures introduced during the pandemic amidst high inflation. Fiscal and monetary policies should work hand in hand to rebuild fiscal buffers while closely monitoring remaining inflationary pressures.

Public debt has increased rapidly during the pandemic, and fiscal consolidation should continue at a gradual pace (Figure 1). Support for the most vulnerable population segments may be needed on a permanent basis. But it should be narrowly targeted to those most in need, for example by building on the recently expanded State Welfare Card benefit or non-contributory old-age pensions from the Old Age Allowance. A medium-term fiscal strategy should include a plan to lower the debt ceiling.

Current tax revenues of 16% of GDP will be insufficient to address future spending pressures. Rising social demands, population ageing and the green transition will likely call on additional public resources. A newly introduced property tax still awaits full implementation, personal income taxes could be expanded in a progressive manner and the reduction of the VAT rate from 10% to 7%, originally meant to be temporary, could be undone. Broadening the personal income tax base can also help increase tax revenues.

Maintaining the current monetary policy stance will help to anchor inflation expectations. Inflation has eased, after exceeding 6% in 2022 amid high energy and commodity prices. But demand pressures from the ongoing recovery will remain significant, and real interest rates remain low.

Income convergence with OECD economies has stalled as productivity gains have failed to deliver stronger improvements in material living standards over the last two decades (Figure 2). Boosting productivity and mastering the transition towards more sustainable and inclusive growth will require stepping up delayed structural reforms.

Competition remains limited across several sectors, likely due to market entry barriers and high regulatory burdens. This holds back innovation and productivity growth, and can deter both foreign and domestic investment. Previous regulatory reform efforts to reduce anti-competitive regulations have slowed, and a comprehensive review of existing regulations would help to eliminate or adapt outdated regulations. Despite considerable progress in trade facilitation, fees and charges remain an obstacle to international trade. Bilateral agreements have been key for integration into Global Value Chains, but their coverage remains limited. Economic governance could be improved through continued efforts to prevent and fight corruption.

Despite remarkable resilience of the labour market during the pandemic, young people have been disproportionally affected, and many of them have become inactive. Moreover, more than half of workers lack formal employment, and social security does not cover most of them. This calls for stronger social safety nets, especially amid accelerating population ageing.

Many youths are struggling to find quality jobs. Around 15% of the those aged 15-24 are neither in employment nor training and are largely left without policy support. Stronger and better-coordinated policy support through better education and active labour market policies, including training, job-search support and career guidance would help youths better integrate into the labour market.

Widespread informality of workers and firms creates challenges for social protection. The current social protection system is highly fragmented, and coordination needs to be improved. Despite a gradual decline among younger generations, labour informality is persistent (Figure 3). Digitalisation has given rise to new types of informal workers, notably platform workers. A tax-funded social pension provides a minimum income floor for elderly people, but the allowance is small. Raising it could allow Thailand to make significant inroads in the fight against poverty and inequality. Job discrimination on the basis of age is not prohibited but remains a common practice, making it more difficult for older workers to remain attached to the formal labour market.

Thailand has pledged to achieve net zero greenhouse gas emissions by 2065. Like in many other emerging-market economies, particular emphasis will need to be placed on making the green transition conducive to economic growth and further improvements in living standards.

Success will hinge on better policy coordination. Several ministries and agencies are involved in the design of environmental policies and there are different and sometimes overlapping plans, making policy coordination complex. A newly created leading environmental agency is tasked to coordinate the overall green transition strategy and monitor policy progress. Ensuring a strong mandate for this new agency will be paramount.

The energy sector is a major source of CO₂ emissions (Figure 4). Renewable power generation has advanced but is mostly limited to small-scale producers incentivised by feed-in tariffs. The overall share of renewable energy sources remains lower than in peer countries. More large-scale energy generation from renewable sources through public tenders and renewable energy certificates would help to address rising electricity demand and reduce emissions. That would require reducing private entry restrictions in the retail electricity market.

An effective carbon pricing mechanism is still lacking. A voluntary emission trading system is in operation, but carbon prices are low compared with OECD countries (Figure 5). Plans for the introduction of carbon pricing still lack detail. Although explicit energy subsidies are small, regulated energy prices, such as a cap on diesel prices, weaken the effect of market prices and fossil-fuel taxes. A mandatory cap-and-trade system for key sectors complemented by a carbon tax for the rest, consistent with the planned emission trajectory to net zero, should become a backbone of the green transition.

Stricter environmental regulations should complement consistent carbon pricing. A mix of price-based and regulatory measures is likely to enhance the effectiveness and political viability of mitigation efforts. Stricter air pollution standards could be one way forward, including on coal power plants and internal combustion engine cars.

Greening road transport is crucial. Biofuels are widely used, and the number of electric vehicles (EVs) is increasing rapidly, albeit from low levels. The government has strengthened tax incentives for EVs, aiming to boost new registrations of zero-emission cars. However, many vehicles do not meet current fuel economy standards, and the retirement of old cars is slow.

Green innovation could lead to new mitigation opportunities. Private green research and development has increased, and public investment is still low. A range of tax incentives for research and development exist, but limits on the carry-forward of unused allowances may hamper their effectiveness. Increased public-sector research and development in basic sciences and technologies could stimulate green innovation.

Promoting the circular economy could help to reduce the country’s carbon footprint and improve resource efficiency. Management of municipal solid waste has improved, but recycling and reusing of secondary material resources still remains weak.