Thailand rice subsidy hurting economy

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(Editor’s Note: The following Reuters article explains what I warned about more than a year ago—the Thailand rice subsidy scheme causing financial woes for the country and the ruling political party. Prime Minister Yingluck Shinawatra came to power with extreme promises of better income to rice growers guaranteed by the government. I wrote that it appeared the subsidy scheme had potential to bankrupt the country because of the huge rice production that is being purchased at prices over world market levels. My two trips to Thailand sponsored by the previous ruling party showed me a lot about developing nations’ struggles and promises by politicians to the poorest people—usually the rural—to win elections.  –Richard Keller)    

Thailand scrambled on Tuesday to fund a rice subsidy scheme that has not paid out to farmers since Oct. 1, a delay that risks alienating key supporters of Prime Minister Yingluck Shinawatra.

A state bank will issue a 75 billion baht ($2.38 bln) bond to plug the funding gap by early December, as the government tries to head off the prospect of farmers joining protests that are already the biggest since it swept to power in 2011.

Farmers have been a traditional bastion of support for Yingluck, who has been facing escalating street rallies against a government-backed amnesty bill that critics say is an attempt to whitewash the crimes of her brother, former premier Thaksin Shinawatra.

The Commerce Ministry buys rice at 15,000 baht a tonne, well above market prices, but has struggled to sell enough to keep the subsidy scheme afloat. Since October it has taken 2 million tonnes of rice, worth about 30 billion baht, without paying for it, according to the state-backed agricultural bank that funds the scheme.

Thousands have complained that they have not been paid, according to the Rice Farmers Association.

"They are very angry and many of them have already joined a mass rally against the government in Bangkok," Prasit Boonchoey, head of the association, told Reuters.

"Getting the money by early December is very late. But poor farmers can't do anything, except wait."

Some farmers said they would block traffic in their areas to press for payment, an echo of action by rubber farmers in September. Others said they would march to Bangkok.

"My group will go to Bangkok to ask the commerce minister why we're not paid," said Vichien Phuanlamjiak, head of a farmers' group in Ayutthaya province, a major rice area north of Bangkok.

A government spokesman declined to comment on the late payments.

Bond Issue

While popular, the multi-billion dollar cost of the scheme has led to a warning from rating agency Moody's and a rebuke from the International Monetary Fund about the fiscal impact.

The Commerce Ministry has said it will spend 270 billion baht to buy 16.5 million tonnes of rice this financial year. Rice sales are meant to fund part of the scheme, but these have disappointed, leading to a build-up of stockpiles to around 15 million tonnes.

The three-year bond issued by the Bank of Agriculture and Agricultural Cooperatives (BAAC) will pay for the main harvest, and a second issue will be needed for the subsequent crop, a senior official at the Finance Ministry's Public Debt Management Office (PDMO) said on Tuesday.

"The bond will be offered for the public by November so that we can raise funds on time as farmers have started harvesting," said PDMO deputy director Suwit Rojanawanich, adding that the cash should be ready by early December.

"This is the biggest one, the next would not be that much."

The bond issue would be the biggest this year by the BAAC, and may get a frosty reception.

"The bond issue is huge. Fund managers may not buy as they don't like this name because of the rice scheme, which is not transparent," said a fund manager at a domestic bank.

He said bond auctions by the bank were cancelled last month because of low market interest, even though they offered higher yields than issues from other state enterprises.

Bangkok has spent 680 billion baht on rice since October 2011, but has only sold enough to get 156 billion baht to pay the BAAC for the loans that fund the scheme.

"We did not decline to pay the farmers, but we have some glitch with the legislative process that is beyond my authority. It needs to be approved by the cabinet," said Supat Eauchai, a BAAC vice-president.

The government set aside 82 billion baht from the 2013/14 fiscal budget to offset losses from its agricultural subsidy schemes, of which 50 billion baht could be used to meet outstanding payments, a finance ministry source said.

BAAC loans to pay for the subsidy scheme are guaranteed by the Finance Ministry, which is balking at backing more because the Commerce Ministry has not sold enough rice to repay the outstanding debt, the finance ministry source told Reuters.

"That was a limited budget given to the BAAC to offset losses and prevent the bank from having liquidity problems. It should not be used to prop up the scheme's shortcomings," said the Finance Ministry official, who asked not to be named. ($1 = 31.5750 Thai baht)

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