Thailand Rice scheme may be storing up trouble

The government's plan to continue the rice pledging scheme for another year is good news for farmers, but the issue worries economists.

Farmers will obtain the same prices for the first round _ 15,000 and 20,000 baht per tonne _ when pledging white rice and fragrant Hom Mali rice to millers that have joined the scheme.

Critics say big losses from the rice scheme could cause public debt to rise sharply in 2013 to as much as 50% of gross domestic product (GDP) from 40.22% posted as of Sept 30, the end of the fiscal year.

In the first year of the scheme, the Finance Ministry reported that about 350 billion baht was used to pledge 18 million tonnes of paddy.

Of the money, 260 billion baht was state-guaranteed loans, while 90 billion baht was the cash flow of the Bank for Agriculture and Agricultural Cooperatives (BAAC), which charges 3% interest.

For the 2012-13 crop, 405 billion baht is planned to finance 25 million tonnes of paddy. The figure could rise because production is estimated at 37 million tonnes.

The cabinet approved only 150 billion baht as state-guaranteed loans and instructed the Commerce Ministry to speed up repayments to the BAAC to save interest expenses and allow the bank to have enough cash flow to continue this year's pledging process.

The ministry was only able to repay 72 billion baht to the BAAC from the 85 billion due this year.

The failure stemmed from the ministry's poor performance in selling rice to domestic and foreign markets.

As it paid farmers 40-50% above market prices, rice exports faced strong competition from much cheaper rice from India, Vietnam and Pakistan.

World Bank senior economist Kirida Bhaopichitr estimates the state may shoulder losses as high as 100 billion baht from rice sales each year, resulting in higher public debt.

At the current pace, public debt could reach 50% of GDP, but the former governor of the Bank of Thailand, MR Pridiyathorn Devakula, warned the level could rise to 61% by 2019.

Apart from a possible financial crisis, the scheme also has implications for storing rice. The government may build enough silos to keep as much as 4 million tonnes of rice for 7-8 years, longer than the current 2-3 years.

The move could indicate that the government expects to last for a few years.