Pledging the future

The government's costly rice scheme and commitment to fiscal discipline are difficult to square

While private economists caution that Thailand's public debt figures could escalate dangerously in the medium term, government policymakers continue to insist that the country's commitment to fiscal discipline remains intact.

Much is riding on how efficiently the government can sell off its massive stockpile of rice. PHRAKRIT JUNTAWONG

The difference in views, however, rests on one large assumption by the Finance Ministry: that the existing budget allocated to the rice pledging programme will remain unchanged and that pledged rice now held by the government will eventually be sold at a minimal loss.

Based on this assumption, one Finance Ministry official said the Public Debt Management Office is confident that public debt, as a percentage of gross domestic product, will remain below 50% through 2017. The 50% debt-to-GDP level is a target of the PDMO, still comfortably below the 60% target set by the Finance Ministry itself.

Public debt levels, as projected by the PDMO, are estimated at 47.5% of GDP this year and 48.4% in 2014, peaking at 48.5% in 2015 before dropping to 47.2% by 2017.

Debt service obligations, currently capped at 15% of annual government expenditures, are projected at 7.4% of total spending in fiscal 2013, rising to more than 11% of annual spending during 2014-17.

The debt forecasts include costs associated with the proposed 2-trillion-baht infrastructure investment programme, as well as 350 billion baht in new debt authorised to support flood prevention and water management schemes.

The ministry official said the debt forecasts are based on projected costs of about 400 billion baht for the rice pledging scheme. The government allocated 269 billion baht to the programme for the 2011-12 harvest, and an additional 150 billion for the 2012-13 harvest.

The rice pledging scheme offers rice farmers up to 15,000 baht per tonne for white rice paddy and 20,000 baht for Hom Mali paddy. Launched in 2011, the programme has essentially made the government the sole purchaser of rice in the country.

Critics have lambasted the programme as lacking means-testing or controls. The pledging price remains significantly higher than world market prices, and with no limits on the pledging amount, critics say the government is essentially subsidising both small-scale and wealthy large farms under the scheme.

Whether budgetary outlays for the rice programme increase depends not solely on rice production, but also how successful the Commerce Ministry is in selling off pledged rice from government stockpiles. Funds from government rice sales would then be returned to the Bank for Agriculture and Agricultural Cooperatives (BAAC) to be recycled into the programme.

The Commerce Ministry, though, has been coy about its auction plans, with little information made public about sales or purchasers. At the same time, BAAC officials have privately cautioned that delays in rice sales would only raise financial pressure on the state-owned bank to increase its borrowings from the money markets to finance new rice pledges.

If the Commerce Ministry is unsuccessful in selling off its rice stocks, or does so at a significant loss from the costs paid under the pledging programme, the loss will ultimately be paid by taxpayers and potentially result in the need for increased borrowing and a rise in public debt levels.

The Finance Ministry, in its medium-term forecasts, assumes financial losses from the pledging scheme of 60 to 70 billion baht per season, which will be covered under current expenditures under the Budget Act for that year. If losses are contained within the amount estimated, there would be no impact on public debt levels, though the funds would "squeeze out" other spending programmes, whether they be new public investments or funding for existing programmes and services.

Complicating the task of managing the country's finances is the government's commitment to reducing the budget deficit by 25% per year over the next several years. The 2013 fiscal budget calls for a deficit of 300 billion baht, down from 400 billion last year.

Last week, former finance minister MR Pridiyathorn Devakula warned that public debt could rise to as much as 10.3 trillion baht, or 63.7% of GDP, by 2019 as a result of unchecked costs from the rice pledging programme. Thailand's GDP in 2019 is projected at 16.16 trillion baht, up from 11 trillion now.

Public debt at the end of fiscal 2012 last September was 4.93 trillion baht, or 43.9% of GDP.

MR Pridiyathorn, also a former central bank governor, said his estimate included other costs from the government's various "populist" programmes, including the tax rebate for first-time car buyers and expenses from the infrastructure investment programme.

He said losses from the rice pledging programme over the next six years could reach 1.47 trillion baht overall.

Officials privately acknowledge that the rice pledging scheme ultimately must be adjusted, possibly either through changes in the pledging price, limits in the amount of rice accepted under the programme per farmer or the implementation of a zoning programme setting eligibility for pledges.

About the author

Writer: Wichit Chantanusornsiri
Position: Business Reporter