International Monetary Fund Takes Aim at Thailand’s Costly Rice Subsidy

The government has spent about 670 billion baht, or $21.2 billion since the program began buying rice at premiums of 35%-50% above market rates. In July, the Commerce Ministry reported losses of 136 billion baht, or $4.3 billion, in the 2011-‘12 crop year, the most recent for which they provided estimates

 

BANGKOK – The International Monetary Fund urged Thailand to drop its multibillion-dollar rice subsidy program and scale back some other fiscal stimulus measures to reach a balanced budget and make room for spending on projects that enhance growth.

The IMF’s recommendations, part of its annual consultations with Thailand, come after Thailand extended its rice subsidy program for a third year in October.

The program, under which the government buys rice from local farmers for a set price above market rates, was launched in 2011 after Prime Minister Yingluck Shinawatra took office. It was a bid to stimulate spending in rural areas and support Thai farmers, a key constituency for Ms. Yingluck’s Pheu Thai Party.

The government also hoped that by hoarding rice supplies it could drive up global prices. But the plan backfired as other exporters such as India and Vietnam filled the void in the market, displacing Thailand from its perch as the world’s biggest rice exporter.

The subsidy program left Ms. Yingluck’s administration with a big bill and millions of tons of unsold rice. The government has spent about 670 billion baht, or $21.2 billion since the program began buying rice at premiums of 35%-50% above market rates. In July, the Commerce Ministry reported losses of 136 billion baht, or $4.3 billion, in the 2011-‘12 crop year, the most recent for which they provided estimates.

“It is inevitable for the government to incur losses as long as the scheme remains unchanged,” the IMF said.

Thai Finance Minister Kittiratt Na-Ranong told reporters Tuesday he hadn’t seen the IMF’s recommendations yet and would not comment. But he said the Finance Ministry isn’t worried about the subsidy program.

The rice support program is one of several stimulus programs of the Yingluck administration that have come in for criticism by economists and academics, who say such populist policies jeopardize a government commitment to balance the budget by 2017 and keep public debt below 50% of GDP. Thailand’s public debt was 45.5% of GDP as of September, according to data from the Public Debt Management Office.

Last month, a former central bank governor and finance minister, Pridiyathorn Devakula, joined the call to scrap the rice subsidy, estimating that the program’s losses have reached 425 billion baht, or $13.5 billion.

Commerce Minister Niwatthamrong Boonsongpaisal refuted the claim, telling reporters last week that losses from the program “should be not over 100 billion baht [$3.2 billion] a year.”

Thai authorities said the subsidy aims to address economic inequality and help poor farmers improve productivity.

Thai officials acknowledged concerns about the effectiveness and transparency of the program and “suggested that a reduction in the pledging prices or limits on the amount of purchase might be needed to ensure the sustainability of the policy,” according to a summary of Thai officials’ views included in the IMF report.

For the third subsidy year, which began last month, the government made some minor moves to scale back the subsidy, including lowering the rice purchase price and limiting the amount of rice each household can sell. But the government is still expected to pay around $8.6 billion on the subsidy for 2013-‘14.

The IMF said it sees “clear merit” in replacing the rice scheme with a more effective measure to support low-income agricultural households, such as targeted cash transfers.

“Uncertainty and lack of data concerning the rice paddy pledging scheme has eroded confidence in Thailand’s public finance,” the report said. , In June, Moody’s Investors Service warned in June that losses from the subsidy could threaten Thailand’s credit rating.

The government also finds itself with 15 million tons of rice in its stockpiles, just as the U.S. Department of Agriculture has estimated that global output would rise 1.7% to an all-time high in 2013-2014.

Prices for Thailand’s 5% broken rice have continued to fall. In October, Thai 5% broken rice was exported at $440 a metric ton, almost 24% lower than a year earlier, according to the Food and Agriculture Organization.

Thailand’s total rice exports in the first nine months of 2013 came to approximately 4.63 million metric tons, down 1.8% from a year earlier, the Thai Rice Exporters Association reported. However, the Thai government still expects to export 7.5-8 million tons of rice this year and has stepped up efforts to unload rice via government-to-government sales.

Ms. Yingluck’s government signed six proposals during Chinese Premier Li Keqiang’s visit to Thailand last month, including a proposal to barter rice and other agricultural products to help pay for Chinese assistance in developing a high-speed train network in Thailand. By Warangkana Chomchuen