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Red flags in rice tariffication

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Ramon L. Clarete

Introspective

Red flags in rice tariffication

The House of Representatives has passed its version of the rice tariffication law. Apparently, they did that to make good (finally after 23 years) the country’s obligation under the WTO’s agreement of agriculture to convert a quantity restriction or QR on rice imports into ordinary tariff protection.

Putting down the current inflation problem is the stronger motive. Inflation rate in September rose to 6.7%, higher by three tenths of a percent a month ago. Food price inflation, says PSA, was 9%. The rate is a five-year high.

Inflation is costing us high in terms of investments forgone, fewer jobs created, and higher economic growth missed.

But most of all, it imposes a very heavy burden on lower income households, which spend about 20% of their meager incomes on rice.

Significant reduction of the rice price cools down inflation. Yes, the problem has other factors, such as the spike of world petroleum prices and the tax reform law, which increased excise taxes. Holding them constant, we can fight inflation if we can just reduce rice prices.

In 2017, the Philippine Statistics Authority reported that the average price of well-milled rice was 39 pesos a kilo. The landed cost of Vietnamese rice, 25% broken, at the exchange rate of 54 pesos, plus the tariff rate of 35% and a 10% marketing cost could bring down local rice prices to only 31 pesos a kilo, or 25 percentage lower than its 2017 level. With its weight of nearly 10% in the CPI, inflation may go down by 2.5 percentage points, and about twice that of the poor’s CPI.




That can be realized if our lawmakers would craft the rice tariffication law right. Consider the following red flags:

• Both House and Senate versions affirm our commitment in ASEAN to import rice at 35% tariff. However, the House version continues to give licensing authority on rice imports to the NFA. This introduces potential quantity constraints to import restrictions depending on how the NFA exercises its licensing power. The antidote for it so we can fight rice price inflation effectively is to take it out.

• The import licensing that is allowed to continue is for protecting us from “bukbuks” and “hanips,” other pests, or pathogens, which imported rice may bring into the country. The Bureau of Plant Industry enforces this measure, called the sanitary and phyto-sanitary (SPS) import measure. However, this can be abused as Senator Villar, the Chairperson of the Committee on Agriculture, knows very well.

Recall the garlic cartel, where few BPI officials were accused of conniving with it to corner the volume of imported garlic and keep garlic prices high? Corrupt BPI officials in charge of SPS could do likewise in rice. When this problem happened, garlic prices increased by 300%.

The remedy is for the law to have a clear provision against abuse of SPS licensing authority to corner the supply of rice in the country benefitting the rice cartel, with penalties meted out for abuses. SPS measures are automatic licenses, i.e. if the importer proves that the imported rice meets the standards and technical regulations of BPI, it should issue the SPS license.

• The role of the public rice stock in food security is less appreciated in the Senate version of the law. The Senate Committee on Agriculture allows direct importation of rice by the NFA, when local supply is not sufficient to ensure rice security. This provision is unnecessary. With rice tariffication, commercial importers can decide on their own to bring in more rice if such a situation occurs in the future. There is no longer a quantity restriction on imported rice, just a tariff measure. So if commercial importers figure out they still can earn after tariffs, they would import rice, closing the deficiency in local rice supply.

rice

But there is another risk that we have to prepare for: what if rice prices in the world market are simply very high and the commercial importers would not import rice because they couldn’t find a supplier.

Remember 2008? Major exporters like India and Vietnam restricted their exports of rice, India to keep their rice only for the domestic market, while their wheat harvest was not good and Vietnam on the belief that its rice crop in the North was destroyed by frost. Both information turned out factually incorrect, but policies to restrict exports occurred and world prices started to surge.

The same contingency may occur if there are major harvest failures in China. China is hardly buying from the world market, but it will be compelled to do so if its rice harvest is below normal.

Without a buffer stock for such contingency, domestic prices have to go up.

We see this now in the case of petroleum markets. World prices go up and the following day domestic prices go up.

The difference between the two is that we don’t go hungry with petroleum, but if that happened with rice, many people would go hungry and would blame the government.

The rice tariffication law has to have provisions for information dissemination and for a contingency public buffer stock.

World market developments would have to be monitored closely by the PSA and information disseminated so private sector importers can adjust to the developing situation. However, holding a good size inventory for this contingency can be costly, and if they are in doubt, if they can pass on to rice consumers the added cost of holding a bigger inventory, they would likely settle for a private commercial rice stock that is less than desired. In other words there is a market failure: country’s rice stock is less than optimal.

This is where we need a contingency buffer rice stock of an appropriate size be maintained, besides that for emergency purposes. There has to be an entity that decides on this and contracts the services of a rice trading company to maintain the buffer stocks.

Currently the Senate Bill is assigning this policy and regulatory mandate to the NFA Council. But if we get to scrapping PD 4, this entity could be called the “National Rice Authority” a la RICOB in the 1960s or the Rice and Corn Board, before former Pres. Marcos created the National Grains Authority in 1972 with PD 4. The authority is not a player in the market, but a regulator created by law to, among other functions, decide on the appropriate size of the contingency buffer stock based on its assessment of the tightness in world rice markets. The commercial/proprietary function may be served by the stripped down NFA or a private commercial trader, contracted by the Authority to provide the service.

The rice tariffication bill articulates the State’s policy of ensuring food security. But what does it mean? Judging from the sentences which follow the Senate’s version of the bill, it means making rice farming viable, efficient, and competitive. We are all for that. But if this is the only meaning of food security then we lose the more important point of tariffying the rice QR to make sure rice, which is our country’s staple, is accessible and affordable to all of us, especially the poor.

 

Ramon L. Clarete is a professor at the University of the Philippines School of Economics.