Thailand’s economy is losing steam as inflation cools down and external and domestic challenges weigh on growth prospects, according to the latest report by the International Monetary Fund (IMF).

The report, released on Tuesday, said that Thailand’s real gross domestic product (GDP) grew by 2.6 percent in 2022, but slowed down to 1.9 percent in the first three quarters of 2023. This is despite strong consumer spending supported by the rebound in tourism, which was hit hard by the Covid-19 pandemic.

The IMF attributed the sluggish growth to weak demand from abroad and low investment at home, as well as the impact of the political unrest that erupted in late 2023. The report also noted that inflation eased to 0.8 percent in November 2023, due to lower energy and food prices, tighter monetary policy, and extended subsidies for electricity and fuel.

The current account balance, which measures the difference between a country’s exports and imports, also deteriorated in 2022, reflecting higher costs of imported commodities and lower earnings from exports. However, the balance improved slightly in the first nine months of 2023, thanks to the recovery in tourist arrivals, lower shipping costs, and a bigger drop in imports than exports.

The IMF projected that Thailand’s economy will grow by 2.5 percent in 2023, driven by a pickup in services exports and private consumption in the last quarter of the year. Inflation is expected to average 1.3 percent in 2023, within the Bank of Thailand’s target range of 1-3 percent.

The report said that growth will accelerate to 3.2 percent in 2024, as external demand improves and the government’s fiscal stimulus boosts domestic demand. Inflation is expected to rise slightly to 1.6 percent in 2024, still within the central bank’s target.

However, the IMF warned that Thailand’s economic outlook is clouded by significant downside risks, both external and domestic. On the external front, the report cited the possibility of a global slowdown, especially in China, which is Thailand’s largest trading partner, as well as higher commodity prices, tighter global financial conditions, and increased geopolitical tensions.

On the domestic front, the report highlighted the risks of fiscal slippage, high private sector debt, and over-reliance on tourism, which could undermine macroeconomic and financial stability and increase vulnerability to external shocks.

The IMF also urged the Thai authorities to adopt prudent fiscal and monetary policies, as well as structural reforms, to support the economic recovery and address the long-term challenges of poverty, inequality, and low productivity.

The report said that the authorities should maintain a neutral fiscal stance, with targeted and sustained support for the poor and vulnerable groups, and enhance the progressivity of the tax system. The report also recommended that the authorities should aim to reduce public debt over the medium term, while creating fiscal space for public investment in human and physical capital and reducing contingent liabilities from state-owned enterprises and extra-budgetary funds.

The report also called for structural reforms to improve the business environment, upgrade the skills of the labor force, and reform the social protection system. The report also stressed the need to manage the risks and opportunities of the transition to a low-carbon economy and build resilience to natural disasters.