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Diesel Price Hike May Cause an Economic Storm in Thailand

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The Federation of Thai Industries (FTI) warns the government it’s facing a perfect economic storm if it does not extend the diesel excise tax cut while reducing the diesel price subsidy on May 1.

In order to help maintain the domestic diesel price at 30 baht a liter, the Prayut government halved the tax for a period of three months. The tax reduction, however, will end on May 20.

Reports late last week cited a source at the Energy Ministry as saying that the government plans to limit its diesel subsidy, made through the Oil Fuel Fund, by allowing the price of diesel to increase by two baht per liter.

According to the FTI, policymakers in the Prayut government are undecided whether to extend the diesel excise tax cut for another three months.

According to Kriengkrai Thiennukul, chairman of the FTI, if the government does not approve the tax reduction extension at the time the subsidy is reduced, it will face a perfect storm.

A source from the Finance Ministry who requested anonymity reported that the ministry may extend the tax reduction period. However, the reduction rate will be set at 1.5 baht per liter, not 3 baht per liter as it is at the moment.

High level of household debt

In its statement, the FTI acknowledged the government’s heavy financial burden. In the absence of the tax cut and subsidy, it is estimated that diesel would cost 41 baht per liter.

As a result of the global surge in oil prices, manufacturing costs have increased.

Moreover, the increase in demand risks pushing Thailand’s inflation rate up to 5-7 percent, in line with a projection made by the IMF, which believes that inflation in developing countries and emerging markets will average between 7-8 percent, said Mr. Kriengkrai.

Besides rising energy prices, Thailand is also suffering from a high level of household debt, which has reached 90% of its GDP.

On April 27, Chanat Katanyu a representative of the Land Transport Federation of Thailand urged the state to keep the diesel price cap at 30 baht per liter for the full year 2022.

He said that in a typical economic climate, the public would understand and would not criticize the government for adjusting domestic diesel prices.

Higher diesel prices will cause more inflation

However, Thailand is not in a normal situation now. In addition to the Covid-19 disaster and the Russia-Ukraine conflict, Thailand has been battered by economic hardship,” he said.

The industrial sector has prepared for the increase in oil, gas, and electricity bills following Labour Day.

Manufacturers are doing a better job of managing raw materials as they look to reduce costs. He also said they are seeking new markets to buy raw materials to ensure continued production, particularly in the food industry.

Food exports, including frozen processed meat, appear to have bright prospects as Europe purchases food for stockpiling, he said.

Manufacturers who can’t cope with higher costs, especially in the chemical fertilizer and animal feed industries, will likely pass the costs on to consumers.

According to the Commerce Ministry if Thailand’s retail diesel price increases by 1 baht per liter after the price cap measures end, the Commerce Ministry estimates an increase of 0.23% in headline inflation.

The rates are expected to increase by 0.34%, 0.45%, 0.56%, and 0.67% if the price of diesel rises by 2 baht, 3 baht, 4 baht, and 5 baht per liter, respectively.

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