Nov 13, 2013

About the IMF's call on the rice subsidies in Thailand

There are reports about the IMF's suggestion to stop the rice subsidies to poor farmer in Thailand which is the chief policy of the current Yingluck's government to gaining support from the majority in Thailand.

For people who interested into the issue, here is the link of the whole IMF report and the original quotes from the report regarding to the financial situation of Thailand. 

Thailand: 2013 Article IV Consultation

Publication Date: November 11, 2013


The Thai economy has shown an impressive resilience to shocks and staged a strong recovery in 2012. However, growth slowed significantly in the first half of 2013 on account of the expiration of some domestic stimulus programs that were taken in 2012 in the wake of the flood disaster and weak external demand. The economy is being supported by strong fundamentals and expansionary fiscal and monetary policies. The government is seeking to shift public expenditure from boosting domestic consumption to infrastructure investment. Volatile capital flows have presented a challenge to macroeconomic policy. Outlook and risks. Growth is expected to recover in the second half of the year, but at a more gradual pace than in the past, with low inflation. The global economy presents downside risks from a possible slowdown in EM growth and capital flow volatility. In addition, the impact of unwinding policies to boost consumption may be larger than anticipated, while public investment projects might be delayed. Labor skills mismatches and infrastructure bottlenecks are holding back potential growth. Policy recommendations. With solid macroeconomic conditions, the key challenge is to foster higher inclusive growth with stability. Key recommendations are: ? Creating fiscal space for priority spending and gradually rebuilding policy buffers to prepare for adverse shocks. The government's commitment to fiscal discipline would be buttressed by strengthening the medium-term fiscal framework. ? Allowing the exchange rate to continue to move flexibly in line with fundamentals and respond with a mix of macroeconomic policies and, if needed, capital flow measures to deal with capital flow surges. ? While the banking sector remains sound, the regulatory and supervisory frameworks for specialized and non-bank institutions needs to be strengthened. ? Planned infrastructure investments should be implemented to enhance competitiveness and promote inclusive growth.

Series: Country Report No. 13/323


Text link: Online Preview click here


Rice subsidies contents in the report:

IMF's Views:

14. The authorities should consider additional measures to ensure meeting their fiscal objectives. Possible new actions to reduce the fiscal deficit and reallocate spending to priority sectors include further reducing generalized energy subsidies and replacing the rice pledging scheme with budgetary transfers targeted to low-income rural households. Since savings from these policies alone are unlikely to suffice to achieve the targets, revenue-enhancing measures should also be considered, including raising consumption and property taxes, and widening the income tax base through the elimination of personal income tax credits. Finally, tax administration can build on recent improvements by strengthening compliance enforcement further. (P.8)

48. The staff sees clear merit in replacing the rice pledging scheme with budgetary transfers targeted at low-income agricultural households. Targeted cash transfers are more effective in supporting those households most in need and could be made conditional on schooling and other measures to improve the labor market chances of the younger generation. Moreover, uncertainty and lack of data concerning the rice paddy pledging scheme has eroded confidence in Thailand's public finance. With the pledging prices about 40 percent above market prices, it is inevitable for the government to incur losses as long as the scheme remains unchanged. The government has committed 410 billion baht to the revolving fund for managing the scheme, but it is unclear how losses will be contained within the size of the fund. (P.24)

60. While Thailand's record of economic development in recent decades has been remarkable, the authorities' goals of strengthening inclusive growth are appropriate. ASEAN integration has the potential to bring about productivity gains derived from economies of scale. Infrastructure projects are aimed at lowering logistics costs, while plans to strengthen vocational training would target shortages of skilled labor. Strengthening inclusive growth may require replacing generalized subsidies, in particular energy and the rice pledging scheme, with programs targeted at vulnerable groups, thereby also strengthening market confidence in the public finances. Addressing infrastructure bottlenecks and continued skills upgrading of the labor force are critical to sustaining growth in the medium and long term. (P.26)

Thailand Government's Views

49. The authorities stressed that their income-support programs are also positive for productivity. The minimum wage hikes have prompted a reallocation of low value-added industries to less developed neighboring countries, while the laid-off workers have quickly found more productive jobs (including in the auto industry). They also triggered technological upgrades and capital investment aimed at raising labor productivity.5 The rice pledging scheme and other policies are helping the farmers improve their balance sheets, which could allow them to invest in new equipment. In addition, the government is working with the farmers to diversify their production to better benefit from higher prices in world markets. (P.24)

50. The authorities also reiterated that the key objectives of the rice pledging scheme were to address economic inequality in the country and to help poor farmers improve their productivity. They acknowledged the staff's concerns about the effectiveness and transparency of the 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. (P.24)


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