Rice-pledge catastrophe could be final straw for Thailand

The caretaker Yingluck government has already technically defaulted by failing to pay the Bt130 billion owed since October to farmers under the rice-pledge scheme. More than 200 farmers have asked the Lawyers' Council to represent them in a class action against the government. The farmers, the bottom rung in the Thai social hierarchy, are the creditors, the government the debtor. The rice pledge has become the Achilles' heel of the Yingluck government.

For this reason, caretaker Finance Minister Kittiratt Na Ranong is scrambling to raise Bt130 billion to pay the angry farmers, traditionally a political base of the ruling Pheu Thai Party. Farmers from several provinces, particularly in the North and Central regions, have blocked highways to protest against the government. Many of them have gone bankrupt and are having to rely on loan sharks to stay afloat. At least three farmers under the scheme have committed suicide. The farmers have also threatened to travel to Bangkok to join the mass rallies led by Suthep Thaugsuban. Both the farmers' plight and the Occupy Bangkok Movement have pushed Yingluck to the edge of the precipice.

Initially, Kittiratt kept the budget for the rice-pledging scheme at Bt500 billion. The money is channelled through the Bank for Agriculture and Agricultural Cooperatives, which acts as a go-between with the farmers. Once the farmers pledge their paddy, they receive a pledging document. With the document they can, in theory, claim their money at the Bank for Agriculture. The paddy goes to participating millers under the oversight of the Commerce Ministry. Proceeds from the sale of rice by the Commerce Ministry are supposed to be funnelled back to the Finance Ministry so that it has the liquidity to continue the rice-pledging scheme in the following harvest season.

Taken at face value, this populist policy designed to win farmers' votes is a fairy tale. The reality is that corruption is rampant in the rice-pledging scheme, which has extended its budget from Bt500 billion to more than Bt700 billion. Out of this, losses from both inefficiency and corruption are estimated at about Bt400 billion. So there was no money recycled back from the Commerce Ministry to start the fresh round of the scheme, which started last October. Kittiratt's Finance Ministry had never been prepared to raise the original Bt500-billion budget, hoping instead that the Commerce Ministry would send the proceeds from the rice sale, government-to-government deals or whatever, to keep the scheme alive. But the money never arrived.

As a result, the farmers who have pledged their paddy have not received any payment since October. When Premier Yingluck Shinawatra dissolved Parliament on December 9, she and her Cabinet forgot to approve a fresh budget for the rice pledge, which had been expanded due to failure of the Commerce Ministry to recycle the money back. Thus, it now has no money to pay to the farmers. In its reduced "caretaker" capacity, Kittiratt's Finance Ministry is constitutionally barred from borrowing money that would create obligations for the next government. Kittiratt has resorted to every means to come up the money to pay to the farmers. But he and others involved in attempts to secure the Bt130 billion risk violating the law.

Moody's and other rating agencies are keeping a close watch on the impact of the rice-pledging scheme on the Thai government's fiscal position. Moody's has already expressed concern that the scheme could hurt Thai public finances and affect the country's overall credit rating. Thailand's rating is now two notches above junk status. If its rating were to be downgraded, it would harm the country's public and private finances, as the cost of borrowing would rise sharply. And since the government has already technically defaulted on its debt to farmers, there is a risk that Thailand's credit rating could be compromised. With the US Federal Reserve having just tapered its quantitative easing programme by another $10 billion to $65 billion a month, interest rates are likely to rise and the emerging markets will be targeted for sell-offs.

The rice-pledging fiasco has added salt to Thailand's wounds at a time when it is already facing a full-blown political crisis and global financial crisis.