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Deja vu in Thailand: rising prices and high inflation

Rising prices and high inflation is the hot topic in Thailand these days.



Despite the fact that Thailand's consumer price inflation slowed to 2.5 per cent year-on-year in April from 3.5 per cent in March, upward risk has been building due to last month's increase in the minimum wage and high global oil prices. Moreover, inflation slowed in April, partly because of the high base of the previous year and the reduction of certain fresh food prices back to their normal levels. From the perspective of the government, Deputy Prime Minister and Finance Minister Kittiratt Na-Ranong said that the cost of living has increased due to high oil prices and floods that hit Thailand late last year.

To manage inflation, the government recently ordered caps on energy prices and transportation fares in the latest effort to battle inflation that threatens to impede Thailand's growth in 2012. Thailand's Energy Policy Committee agreed to delay planned increases in the price of compressed natural gas and liquefied petroleum gas for the transportation sector for another three months. Based on the latest news from the Ministry of Finance, there is also no plan to raise the diesel excise tax this year, indicating the government will continue to extend the tax cut implemented by the previous government. The cut, which has been extended several times, is scheduled to expire this month. The curbs on fuel prices and levies follow steps to cap subway fares as the government seeks to prevent a pickup in inflation later this year. The Cabinet also authorises the Transport Ministry to call on underground train operator Bangkok Metro to delay fare increases scheduled to take effect on July 3.

Thailand is not alone in battling higher prices, as it is now a global phenomenon affecting most countries, where food and energy inflation remain a worry due to sluggish growth in Western export markets and the debt crisis in Europe. However, oil price-driven inflation, a major headache for policy-makers, as it boosts inflation while hurting growth for importing countries, may be set to fade. Benchmark Brent crude surged 18 per cent in the first quarter of 2012, hitting US$126.22 a barrel in mid-March. But the price has since pulled back, dropping 6 per cent so far this month to just over $112 a barrel, or 3 per cent below earlier levels. So we will have to wait and see the direction of energy prices for the rest of the year.

However, I think oil prices may not increase as much now given the uncertain situations in the euro zone after the election results in various European countries. The Bank of Thailand has left its policy interest rate at 3 per cent, even as it warned of continued inflationary pressure and forecast stronger economic growth. I expect our central bank to stay on hold in the coming months before resuming rate increases. Given the inflationary issue now, I also do not think the government will increase tax rates, especially VAT from 7 to 10 per cent, scheduled to take effect in October, nor increase cooking gas prices.

So we will have to see how the government will deal with inflation in the months to come - certainly uncontrollable price rises will affect people, especially low income earners and the poor, since what little assets they may have are mostly in cash holding - and that value is eroding by the day.

Furthermore, rural areas tend to have higher inflation than the urban areas, in both general inflation and food inflation. Since almost 90 per cent of poor people live in rural areas, rising food prices therefore pose a threat to the overall situation of poverty and vulnerability in Thailand. To this end, the impact could be both positive and negative, depending on whether rural people are net buyers or net sellers of food, whose price increases.

For rice, there are both rice-surplus farmers and rice-deficit farmers among poor households. When the rice price increases, there are thus gainers and losers among the poor, making the impact on poverty somewhat difficult to gauge.

Anyway, people adjust when prices rise. Available data from household surveys reveals that poor households lower their food consumption, but have to maintain their spending on food in monetary terms. Since poverty lines are derived with minimum food intake sufficient for normal daily functions, cutting food consumption by the poor (defined poor by poverty lines) means their nutrition intake might be insufficient, which could cause both short-term and long-term negative impacts.

Unfortunately, policies to help the poor in Thailand often suffer from serious targeting problems. One of the most well known inflation-fighting programmes introduced by the government is the "six measures for six months" policy, which was mainly consumption subsidies on goods and services mostly used by the lower-income population (with one exception of the excise tax subsidy on fuel, used mainly by the non-poor and which accounted for the largest chunk of the total subsidy of this package).

The targeting problems reflect a fundamental flaw in poverty policy: Thailand has never had a mechanism to target its policies toward the poor in a systematic fashion. There are steps that need to be done to overcome this problem and lay down foundations to enhance the country's capability in mitigating current and future economic shocks.

First the country must invest in information systems on vulnerable families and individuals. One possible way to collect complete income information is to require all working-age people to file tax returns on an annual basis, regardless of their employment status - an approach adopted in many developed countries. The government should enforce the extension of the Social Security scheme to all private employees by addressing the incentive problem that prevents employers and employees from joining the scheme.

Second, the government should strengthen its outreach capability. This can be done by improving area-based budget allocation, coordinating with local administrative authorities at all levels in delivering help to the needy, delegating some tasks to selected non-government organisations that are specialised in assisting particular target groups, and training officials from the central government in locating the poor and vulnerable on a case-by-case basis.

Other long-term measures are the promotion of market-based risk management such as an agricultural futures market and weather risk insurance, supplemented by farmer institution strengthening. These are some of the many policies Thailand will need to survive the era of price volatility and high inflation.


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