Inflation risk from rice policy?
Introspective
|
Posted on May 08, 2017
I am pleased to share an economic brief my colleague, Christine
Tang and I wrote for GlobalSource Partners (globalsourcepartners.com) a month ago.
The Secretary of Finance and the Bangko Sentral ng Pilipinas have likewise weighed in on the issue, stressing the importance of timely rice importation for price stability and supporting the call for liberalizing rice trade by many think tanks, including the Foundation for Economic Freedom (FEF) and the Philippine Institute for Development Studies.
PHOTO
To read the statement of the FEF, please visit the
link http://bit.ly/FEFFB.
To read the PIDS Policy Note, “Quantitative restriction on rice imports: Issues and alternatives,” please visit the link http://bit.ly/PIDSQR or use a smartphone to scan the QR code.
This overdue reform measure will not only help stabilize prices, but also reduce poverty, wage uncompetitiveness, and relieve the public of wasteful government interventions.
In a column last Saturday, Dr. Mahar Mangahas observed that poverty indicators have bumped up notably recently, reversing a favorable trend. “Personally, I think the culprit is the rise in annual inflation to 3%, from only 1.5% the previous two years.”
He further noted that the simplest and quickest way to bring down the cost of food and hunger is to end the legal monopoly of the National Food Authority on foreign trade in rice and corn. We agree. Here is our April 12 brief.
“Many economic watchers have raised concerns about recent increases in consumer prices. From below 2% in the 16 months to August 2016, the headline inflation rate climbed past 3% in February and March 2017, with the BSP expecting the uptrend to continue through 3Q17 when inflation is forecast to be ‘very close’ to the upper end of the 2-4% target band. Despite what seems like a rapid rise, inflation outturns, traced in part to price pressures from rising international crude oil and a weaker peso, are in line with our own expectations of the inflation path... so far.
An emergent risk that could “shock” inflation forecasts is government’s rice policy.
Last week, the President curiously and unceremoniously fired the undersecretary of one of his most trusted aides, Cabinet Secretary and Chair of the NFA Council, Leoncio Evasco, for supposedly insisting on importing rice. Without it seems consulting Secretary Evasco, the President announced during a harvest festival the dismissal of the deputy, adding that the National Food Authority (NFA) should buy from local farmers rather than import rice to build up buffer stocks.
Under the law, the NFA, which has a mandate to stabilize food prices to benefit consumers while supporting farm prices to benefit rice farmers (effectively to “buy high and sell low”), is required to hold 15 days’ worth of rice stocks at any time and 30 days’ worth during the lean months of July to September. It also has the exclusive right to import rice and the prerogative to allocate import quotas to private traders. Rice continues to be protected by quantitative import restrictions (QRs) under a waiver secured from the World Trade Organization (WTO) in 2014, a special treatment that is set to expire in June 2017.
The President’s stance created a fair amount of confusion and news reports following the announcement revealed a brewing struggle within the NFA. Apparently, the dismissed undersecretary was merely trying to implement an order of the NFA Council, the inter-agency governing body of the NFA, to allow private traders to import rice, an order that the NFA administrator reportedly refused to carry out. Apparently too, the issue is not whether to import or not; the NFA’s rice stocks as of March were equivalent to about 12 days’ worth of consumption and it would need imported stocks to meet the higher required buffer for the lean season. Rather, the issue appears to be whether the importation should be done by the NFA, favored by the NFA administrator, or by private traders, favored by the NFA Council.
The struggle that led to the President insisting on the NFA buying local rice risks the country’s rice stocks falling further (especially if domestic farm outputs fall short of expectations) and thus, domestic rice prices spiking. Rice accounts for close to 9% of the CPI basket and given the projected inflation path, double-digit increases during the lean months would push the headline inflation rate well over the upper end of the BSP’s inflation target band.
Two recent episodes of surges in rice prices are instructive. The more dramatic crisis in 2008 saw rice prices, as captured in the CPI basket, rising from over 10% in March to over 50% by July causing headline inflation to surge past 10% from June to October, with rice contributing as much as 4.7ppt to the headline rate. A milder episode happened in 2013-2014 when rice price inflation increased from 10% in January to over 14% in June 2014, adding over 1ppt to headline inflation throughout most of the year. The former was associated with very low NFA buffer stocks sustained over most of the previous year through 1Q08. The latter saw NFA stocks markedly below required buffers for only 4 months in late 2013/early 2014.
Will the country see a repeat of either of these episodes? As strange as it sounds, the answer depends on the President. With rice prices starting to inch up recently and import lags of anywhere from one to four months, a decision to allow importation would help allay fears of impending shortages that could lead to higher price increases in anticipation of the demand/supply gap.
To avoid delays in light of the internal NFA disagreement and ensure that a decision to import is quickly carried out, the President might as well decide also whether NFA itself should import or allow private traders to do it.
But that is not the end of it.
By July this year, WTO rules require the current QR on rice to be converted into tariffs. Economists are one is supporting this transition to free up the rice market, expected to have significant beneficial knock-on effects on food prices, wage rates, overall inflation, public finances not to mention the country’s competitiveness.
With the tariff-equivalent of the QR estimated at 40%, the oft-cited tariff rate to be put in place is 35% which appears to be a compromise rate to balance the interests of consumers and local producers. Other economists are advocating lower rates ranging from 10% to 30%.
From what we gather, this will not happen; at least not by July, nor perhaps anytime this year. Domestic law affords rice permanent protection under a QR regime which means that in order to “tariffy” rice, the law has to be amended by Congress.
And in another struggle, the President’s economic managers, who favor a tariff regime, are at odds with his Agriculture secretary, who favor a continuation of the QR regime. The former sent word to the WTO last month that the country will not extend the waiver on the QR and will instead impose tariffs, while the latter is reported to have informed the WTO lately that the conversion cannot be done due to the delay in amending the law.
Here again, we await the President’s decision. Hopefully, whispers we are hearing of a cordon sanitaire around the President and of economic managers being marginalized are nothing but political noise.
Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during Corazon Aquino and Fidel Ramos administrations
To read the PIDS Policy Note, “Quantitative restriction on rice imports: Issues and alternatives,” please visit the link http://bit.ly/PIDSQR or use a smartphone to scan the QR code.
This overdue reform measure will not only help stabilize prices, but also reduce poverty, wage uncompetitiveness, and relieve the public of wasteful government interventions.
In a column last Saturday, Dr. Mahar Mangahas observed that poverty indicators have bumped up notably recently, reversing a favorable trend. “Personally, I think the culprit is the rise in annual inflation to 3%, from only 1.5% the previous two years.”
He further noted that the simplest and quickest way to bring down the cost of food and hunger is to end the legal monopoly of the National Food Authority on foreign trade in rice and corn. We agree. Here is our April 12 brief.
“Many economic watchers have raised concerns about recent increases in consumer prices. From below 2% in the 16 months to August 2016, the headline inflation rate climbed past 3% in February and March 2017, with the BSP expecting the uptrend to continue through 3Q17 when inflation is forecast to be ‘very close’ to the upper end of the 2-4% target band. Despite what seems like a rapid rise, inflation outturns, traced in part to price pressures from rising international crude oil and a weaker peso, are in line with our own expectations of the inflation path... so far.
An emergent risk that could “shock” inflation forecasts is government’s rice policy.
Last week, the President curiously and unceremoniously fired the undersecretary of one of his most trusted aides, Cabinet Secretary and Chair of the NFA Council, Leoncio Evasco, for supposedly insisting on importing rice. Without it seems consulting Secretary Evasco, the President announced during a harvest festival the dismissal of the deputy, adding that the National Food Authority (NFA) should buy from local farmers rather than import rice to build up buffer stocks.
Under the law, the NFA, which has a mandate to stabilize food prices to benefit consumers while supporting farm prices to benefit rice farmers (effectively to “buy high and sell low”), is required to hold 15 days’ worth of rice stocks at any time and 30 days’ worth during the lean months of July to September. It also has the exclusive right to import rice and the prerogative to allocate import quotas to private traders. Rice continues to be protected by quantitative import restrictions (QRs) under a waiver secured from the World Trade Organization (WTO) in 2014, a special treatment that is set to expire in June 2017.
The President’s stance created a fair amount of confusion and news reports following the announcement revealed a brewing struggle within the NFA. Apparently, the dismissed undersecretary was merely trying to implement an order of the NFA Council, the inter-agency governing body of the NFA, to allow private traders to import rice, an order that the NFA administrator reportedly refused to carry out. Apparently too, the issue is not whether to import or not; the NFA’s rice stocks as of March were equivalent to about 12 days’ worth of consumption and it would need imported stocks to meet the higher required buffer for the lean season. Rather, the issue appears to be whether the importation should be done by the NFA, favored by the NFA administrator, or by private traders, favored by the NFA Council.
The struggle that led to the President insisting on the NFA buying local rice risks the country’s rice stocks falling further (especially if domestic farm outputs fall short of expectations) and thus, domestic rice prices spiking. Rice accounts for close to 9% of the CPI basket and given the projected inflation path, double-digit increases during the lean months would push the headline inflation rate well over the upper end of the BSP’s inflation target band.
Two recent episodes of surges in rice prices are instructive. The more dramatic crisis in 2008 saw rice prices, as captured in the CPI basket, rising from over 10% in March to over 50% by July causing headline inflation to surge past 10% from June to October, with rice contributing as much as 4.7ppt to the headline rate. A milder episode happened in 2013-2014 when rice price inflation increased from 10% in January to over 14% in June 2014, adding over 1ppt to headline inflation throughout most of the year. The former was associated with very low NFA buffer stocks sustained over most of the previous year through 1Q08. The latter saw NFA stocks markedly below required buffers for only 4 months in late 2013/early 2014.
Will the country see a repeat of either of these episodes? As strange as it sounds, the answer depends on the President. With rice prices starting to inch up recently and import lags of anywhere from one to four months, a decision to allow importation would help allay fears of impending shortages that could lead to higher price increases in anticipation of the demand/supply gap.
To avoid delays in light of the internal NFA disagreement and ensure that a decision to import is quickly carried out, the President might as well decide also whether NFA itself should import or allow private traders to do it.
But that is not the end of it.
By July this year, WTO rules require the current QR on rice to be converted into tariffs. Economists are one is supporting this transition to free up the rice market, expected to have significant beneficial knock-on effects on food prices, wage rates, overall inflation, public finances not to mention the country’s competitiveness.
With the tariff-equivalent of the QR estimated at 40%, the oft-cited tariff rate to be put in place is 35% which appears to be a compromise rate to balance the interests of consumers and local producers. Other economists are advocating lower rates ranging from 10% to 30%.
From what we gather, this will not happen; at least not by July, nor perhaps anytime this year. Domestic law affords rice permanent protection under a QR regime which means that in order to “tariffy” rice, the law has to be amended by Congress.
And in another struggle, the President’s economic managers, who favor a tariff regime, are at odds with his Agriculture secretary, who favor a continuation of the QR regime. The former sent word to the WTO last month that the country will not extend the waiver on the QR and will instead impose tariffs, while the latter is reported to have informed the WTO lately that the conversion cannot be done due to the delay in amending the law.
Here again, we await the President’s decision. Hopefully, whispers we are hearing of a cordon sanitaire around the President and of economic managers being marginalized are nothing but political noise.
Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during Corazon Aquino and Fidel Ramos administrations
http://www.bworldonline.com/content.php?section=Opinion&title=inflation-risk-from-rice-policy&id=144847
Paddy
shortage forces rice mills to shut
Workers
become unemployed in Nilphamari and Pabna, known for surplus rice output
Like a few hundred others of the kind, a rice mill on Station Road
in Nilphamari municipality and another at Joynagar in Ishwardi upazila under
Pabna district look deserted as the husking mills suspended production due to
unavailability of paddy. Photo: Star
Star Country Desk
Unusually low supply of paddy has led to
closure of most of the rice mills in Nilphamari and Pabna districts, well-known
for surplus rice production.
Prices of rice see rise in local markets while
thousands of mill labourers have become unemployed as most of the rice mills in
Nilphamari have stopped production due to scarcity of Aman paddy, reports our
correspondent.
There are 613 traditional husking rice mills
and 17 ultra-modern automatic rice mills in the district having capacity to
produce around 65 thousand tonnes of rice in a month, said Azizul Islam,
general secretary of district rice mill owners association.
“Aman paddy is not available in local markets
this year as a section of millers and hoarders from other districts purchased a
greater portion of paddy at cheaper prices during the harvest,” he said.
Visiting different paddy markets in the
district including Ramganj Haat, Dhelapeer Haat, and Boragari Haat, this
correspondent learnt that paddy prices have risen by Tk 200 to Tk 250 per sack
(each sack containing 75 kg) in a month.
At present, a sack of Guti Swarna variety of
Aman paddy is sold at Tk 1875-Tk 1900 which was Tk 1675-Tk 1650 two months ago.
And the paddy, like other varieties, including
Paizam, Swarna, Ranjit, and Mamun, is found only in small quantities.
Owner of Fakir Rice Husking Mill, Monjur Alam
Fakir of Gachhbari area in Sadar upazila said he shut down the mill one month
ago as paddy is not found as per requirement.
Due to the closure of a large number of rice
mills, around six thousand labourers have become unemployed and are passing
hard days with families, said Amzad Hossain, president of district unit of
Jatiya Sramik League.
District Controller of Food Kazi Saifuddin
Ahmed said Nilphamari is a food surplus district and the situation will
normalise as Boro paddy will be harvested and flood the market in a short time.
Like a few hundred others of the kind, a rice mill on Station Road
in Nilphamari municipality and another at Joynagar in Ishwardi upazila under
Pabna district look deserted as the husking mills suspended production due to
unavailability of paddy. Photo: Star
Our Pabna correspondent reports: Inadequate
supply of paddy coupled with rainy weather badly hampered rice production in
the district for last couple of weeks.
“We could not buy targeted paddy this year due
to the paddy price hike and so, most of the 715 rice mills in the district have
stopped production," said Idris Ali Bishwas, president of Pabna district
rice mill owners association.
Visiting Joynagar area of Ishwardi upazila last
week, this correspondent found most of the 400 rice mills in the area closed.
“Although this is the high time for rice
production, we can hardly buy paddy from the wholesale market as the supply is
poor. In last couple of weeks, price of paddy in the wholesale market rose by
Tk 100 to 200 per maund (40 kg), and it caused rise in rice production cost,”
said Khairul Islam, president of Ishwardi rice mill owners association.
A kg of rice is selling for Tk 38 to 48
although it was sold for Tk 32 to 40 early last month, rice traders said.
The recent loss of paddy in Chalanbeel and Haor
areas have badly affected the paddy market, said Sadek Ali Bishwas, a leading
rice trader of Ishwardi.
British think tank: Du30 policy to halt rice
imports misguided, risky
Philippine Daily Inquirer / 01:16 AM May 08, 2017
British research firm Economic Intelligence
Unit (EIU) has added its voice to a barrage of criticisms from various quarters
against the Duterte administration’s policy on rice, describing it as “another
misguided food self-sufficiency agenda.”
The EIU, which provides forecasting and
advisory services, was referring to the suspension of rice imports that
President Duterte had ordered last month.
The company noted that the harmful effects
of the suspension would not be felt immediately, considering expectations that
this year’s rice harvest would be much better than those of previous years
thanks to the end of the El Niño phenomenon as well as greater use of rice
varieties engineered for higher output.
“However,
the import stoppage confirms that Mr. Duterte’s administration is sticking to
the Philippines’ decades-old quest to achieve rice self-sufficiency, boding ill
for the promotion of crops that are far more viable economically,” the EIU
said.
“The government’s goal of rice
self-sufficiency runs counter to a recent OECD (Organization for Economic
Cooperation and Development) report on Philippine agriculture, released on
April 7, which recommends crop diversification rather than market-distorting
efforts for rice self-sufficiency,” it added.
Other groups, mainly think tanks and
experts from the academe, have long been criticizing the administration on the
matter. They include the Foundation for Economic Freedom, the state-run
Philippine Institute for Development Studies, New York-based GlobalSource
Partners, Ateneo de Manila professor Cielito Habito, University of the
Philippines professor Ramon L. Clarete, former UP professor Mahar Mangahas, and
University of Asia and the Pacific professor Rolando Dy.
The EIU noted the timing of the import halt
was “risky,” considering that the Philippines relies on at least two months of
secure supply from abroad. The lean domestic production period is expected to
begin in mid-June, thus could pressure available supplies.
“This means that the retail price of rice
during this period will probably spike,” the company added. “As such, the
Economist Intelligence Unit believes that inflation in 2017 will challenge the
upper bound of the 2 percent to 4 percent target band set by Bangko Sentral ng
Pilipinas for consumer price inflation.”
The EIU added that the expected benefits
trumpeted by the President’s advisers would not be felt in the end, given the
many layers of middlemen between farmers and consumers.
“The government’s plan to offset the
stoppage with purchases of local rice at a higher cost will no doubt also
result in market distortions at the expense of more appropriate crops and increase
the fiscal burden,” the EIU said.
“Thus, although the administration has
shown a desire to protect local farmers, the policy it has adopted so far is
not sustainable and will invariably be reversed,” it added.
https://business.inquirer.net/229046/british-think-tank-du30-policy-halt-rice-imports-misguided-risky
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