Thai Govt's Diesel Subsidies Only A Temporary Solution

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ANALYSIS

Subsidies only a temporary solution

By Achara Deboonme

The Nation

The Abhisit government's desperate move to keep the retail price of diesel below Bt30 per litre makes sense, especially when the storm of inflation is hitting Thailand real hard this year.

Yet, it is wrong to keep believing that the lower-than-market price of diesel would keep costs of goods and services unchanged. Also, the government needs to take into consideration the side-effects of such subsidies.

Thailand is not alone in Asia to be battling the upward trend of inflationary pressure, following a year of robust economic activities, which pushed up gross domestic product by 8 per cent.

An HSBC Research covering five Asean countries - Indonesia, Malaysia, the Philippines, Thailand, and Vietnam - showed that there has not yet been a corresponding sharp uptick in inflationary pressures, partly reflecting that the advanced economies are still saddled with large output gaps. This has helped contain the upward price pressures on globally "shared" commodities such as oil, until now. But it noted that inflation pressures are undeniably on the rise.

"Looking ahead, rising demand-led pressures will become more prominent as growth is expected to remain strong in 2011. Moreover, elevated food prices risk spilling over into inflation expectations and becoming a more broad-based inflation problem. This is a particular risk in Asean-5 countries given the large share of food in the consumption basket. Finally, rising international commodity prices and continued capital inflows add to inflation pressures and the challenges faced by Asean-5 policy-makers," the bank said.

Table: Consumption basket

- Big share of energy and food in consumption basket shows why these five Asean countries need to beware of inflation

Country/Energy (%) /Food (%)

Indonesia /5.9 /32.7

Malaysia /3.5 /31.4

Philippines/ 6.1 /48.8

Thailand /9.9/ 33.0

Vietnam /7.0 /39.9

Average /6.4/ 37.2

Source: CEIC, HSBC

According to the bank's data, energy accounts for 9.9 per cent of Thailand's consumption basket and food prices 33 per cent.

The Bank of Thailand has forecast inflation to be in the 3-5 per cent range this year, due mainly to higher domestic consumption. Driving up the consumption was the buoyant economy last year, which encouraged consumers to spend. Meanwhile, minimum wages have also gone up, along with the hikes in the salaries of civil servants. The central bank also warned that demand-pull inflation would eventually lead to a scramble for supplies, which would push up costs. Pressure could rise once the Commerce Ministry has to bow to requests from goods manufacturers for price hikes, when the price-freezing scheme ends this month.

To tame the inflation, aside from hikes in policy rate - 25 percentage points in January - Thailand has mainly resorted to maintaining the price of diesel. Prime Minister Abhisit Vejjajiva has repetitively said that come what may, diesel must retail below Bt30 per litre or the higher level would spark an increase in the costs of goods and services. He does not mind burning more of the Oil Fund reserves, apart from the Bt5-billion budget expected to be used up this week.

"The Oil Fund's accumulated reserves are over Bt20 billion and there is no chance for it to fall into negative territory. [if this is not used], there is a question why should we accumulate the reserves," he said on Tuesday. His message was "use the Oil Fund until February and then we will consider what to do next".

Thailand now consumes 70 million litres of fuel a day, of which 50 million is diesel. Much of it is consumed by the transport sector.

Experts have warned that subsidies, which are now Bt3 per litre for standard diesel containing 3 per cent of pure biodiesel, would create short-term benefits. But in the long term, it will not teach anybody how to efficiently consume fuel. It must be remembered that Thailand imports 90 per cent of the fuel consumed domestically.

The country has learned a painful lesson from the subsidy, when it comes to liquefied petroleum gas, which has been maintained at $330 per tonne though the global level is beyond $700. The maintenance has encouraged a large number of motorists and industrial plants to switch from fuels to gas. In March, industrial plants will be subjected to higher prices, as they consume 43 per cent of total LPG consumed.

In 2012, the Energy Ministry plans to float the price for transport use. Again, this depends largely on political will. As we have seen, the government has tended to succumb to protests from users, mostly taxi drivers.

Inefficient fuel consumption due to the fixed price benefits nobody in the long term. Such consumption would lead to spending on other items, which would later drive inflation and higher interest rates. Moreover, it would be best if the subsidies are invested in other activities that benefit the country's infrastructure as a whole.

Countries faced with high inflationary pressure are now resorting to a mix of fiscal and monetary measures. In some cases, exchange-rate appreciation is used to help curb demand. The Thai government can provide further subsidies, but the timeframe, as well as the total amount of money involved, must be clear.

-- The Nation 2011-02-10