IMF calls on Thailand to ditch rice support scheme

WASHINGTON Mon Nov 11, 2013 8:05pm EST

Rice farmers shout slogans during a protest outside the Government House in Bangkok June 25, 2013. REUTERS/Chaiwat Subprasom

Rice farmers shout slogans during a protest outside the Government House in Bangkok June 25, 2013.

Credit: Reuters/Chaiwat Subprasom

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WASHINGTON (Reuters) - The International Monetary Fund called on Thailand to scrap its pricy scheme to support rice farmers and scale back some other fiscal stimulus measures in order to balance the budget and contain rising public debt.

In its annual review of Thailand's economy, the IMF also said the government should do a better job of supervising public banks and non-bank financial institutions, which pose growing financial risks.

As Thailand continues to face risks from volatile capital flows and an uncertain global environment, the government should ensure it has enough money to respond to shocks, the IMF said, according to a staff report prepared in early September and released on Monday.

Gross domestic product data to be released next week is likely to show Southeast Asia's second-largest economy has struggled free of recession.

But exports, which account for more than 60 percent of the economy, and private consumption remain weak, and analysts reckon the government will need to spend to strengthen the recovery.

The government says its fiscal position is strong, but spending on populist schemes is jeopardizing its commitment to balance the budget.

The IMF said the central government's deficit would rise to 3.4 percent of GDP in the fiscal year that ended in September because of lower corporate tax rates and tax relief. And overall public debt is likely to rise to 53 percent of GDP by the end of 2018.

The government should consider reducing energy subsidies and increasing corporate income taxes, or eliminating some tax credits, to meet its budget goals, IMF staff said.

"The staff sees clear merit in replacing the rice pledging scheme with budgetary transfers targeted at low-income agricultural households," the IMF report added.

Pulling the plug on a rice price guarantee scheme for farmers might help stem the losses of billions of dollars of state funds, but Prime Minister Yingluck Shinawatra would risk losing crucial rural support by doing so.

Farmers helped Yingluck sweep to power in 2011, when she promised to bring back the subsidies and handouts that helped her brother Thaksin Shinawatra win two terms in office.

The rice policy has been a disaster, however, with losses of 136 billion baht ($4.3 billion) in the 2011-2012 crop year. After that, the government ceased reporting the losses, although former central bank governor and finance minister Pridiyathorn Devakula recently estimated the total at 425 billion baht.

The IMF said the government's agreement to pay about 40 percent above market prices for rice would make losses "inevitable," and a 410 billion fund to pay for the rice scheme was unlikely to contain all the losses.

The IMF said scaling back government policies aimed at boosting consumption could have a bigger negative economic impact than expected and cut farmers' incomes.

In response to the IMF report, Thai officials said government programs help boost productivity and encourage farmers to invest in new equipment.

"(But) they acknowledged the staff's concerns about the effectiveness and transparency of the (rice) scheme 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 their view included in the IMF's report.

IMF staff also highlighted risks from specialized financial institutions (SFIs), or public banks that carry out lending schemes for the government. While lending from these banks reached 27 percent of total banking credit last year, regulatory oversight of their activities is weaker than it is for commercial banks.

Other concerns were with credit cooperatives and with rising household debt, which reached 78 percent of GDP last year. Overall, the ratio of credit to GDP grew to 115 percent in the first quarter of this year, above Thailand's long-term trend and the rate in some similar economies.

"There is a growing need to enlarge the (Bank of Thailand's) regulatory and supervisory perimeter to include SFIs and credit cooperatives," the IMF said.

(Reporting by Anna Yukhananov. Editing by Andre Grenon)

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Comments (1)
Mott wrote:
This is how IMF and World-bank work.

Nov 11, 2013 8:17pm EST  --  Report as abuse
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