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While experts expect the government's rice pledging scheme to incur a significant fiscal loss, they have mixed views about its potential impact on consumer prices and economic growth.

Kampon Adireksombat, a senior economist in Tisco Securities' Economic Strategy Unit, says the programme will cost the government 112 billion baht, or 1% of gross domestic product, in 2012.

His projection is based in part on the fact that the guarantee sets rice prices at 15,000 baht per tonne for white rice, a 57% increase, and 20,000 baht per tonne for Hom Mali rice, a 54% increase. The loss will also come from 10 billion baht in subsidies used to keep local rice prices unchanged.

With rice accounting for 20% of the raw food basket, analysts expect rising consumer prices. Local subsidies should partly offset the increase in retail domestic prices.

The pledging programme, planned for Oct 7 to Feb 12, is forecast to increase the headline inflation figure to 3.9% in 2012, while core inflation is expected to rise to 2.4% from 2%. The Bank of Thailand will be under pressure to raise the policy interest rate by a quarter percentage point to 3.75% by year-end.

Prasarn Trairatvorakul, the central bank governor, said inflationary pressure had remained high on all three fronts of supply, demand and expectations. But he said the bank could still let the real policy interest rate remain in negative territory if the impact on exports from the slowing world economy is significant.

Jun Trinidad, a senior economist at Citibank, expects the scheme to have a bigger effect on the fiscal deficit and a muted contribution to growth and consumer prices.

He said the fiscal cost from direct rice stock purchases and the loss from selling rice would range between 124 billion and 310 billion baht, based on 20% to 50% of total paddy output being bought by the government.

The net fiscal effect, excluding an increase in tax, would be 105 billion, or 1% of GDP at a minimum, to 271 billion baht, or 2.3% of GDP.

But Mr Trinidad expects a lift in economic growth by 0.7% to 2.2% in fiscal 2012 as the income transfer fuels consumption of non-durable goods.

He said the government would need to sell rice in the domestic market at a lower level than the purchase price in order to reduce retail prices, and this would mitigate the impact of the rice price increase on overall consumer prices.

Source: Bangkok post.


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