Thai inflation pressure grows as government cuts oil subsidy

  • Thai inflation is swelling as the end of a diesel subsidy has caused logistics costs to rise, adding more pressure to the cost of living that is weighing on the economy.
  • Producers of several products, ranging from instant noodles to sanitary products and construction materials, are boosting retail prices due to growing logistic costs after a government measure to cap the price of diesel at THB30 per litre ended on 1 May 22.
  • According to local media reports, instant noodle maker Thai President Foods is planning to raise retail prices from THB6 to as high as THB7 due to global price hikes.
  • “If oil prices continue to rise, inflation will rise in the same direction, and that will definitely hurt the Thai economy,” said Kriangkrai Tiannukul, chairman of the Federation of Thai Industries.
  • Thailand’s inflation jumped to a 13-year-high of 5.73% Mar 22 and stayed at 4.71% in Apr 22, prompting the Commerce Ministry to increase the 2022 inflation target to 4% to 5% – well above the forecast of 0.7% to 2.4%.
  • The private sector and analysts blamed the Russia-Ukraine war for the rise in oil prices that pushed the costs of items higher and added to pressure on Thailand’s fragile economy.
  • As a net importer of oil, the depreciation of the THB is pushing energy prices even higher in Thailand, leading to a further rise in the cost of living. The currency hit a five-year low against the USD in May 22.
  • While energy prices continue to soar, businesses asked for an extension of subsidies on diesel to keep prices below THB35 per litre – the level that many companies see as unacceptable.
  • Set up nearly half a century ago, the country’s State Oil Fund has been used by the government to bring retail prices down for petroleum products. The fund currently racked up a THB66bn deficit as of May 22 due to the diesel subsidies amid surging global oil prices, making price caps more difficult for the government to sustain.
  • But analysts say that would eventually force the government to rely on state-owned banks to lend more money to allocate a portion of the annual budget for diesel subsidies.
  • The government previously cut the excise tax on diesel by THB3 per litre, a move that is due to expire on May 20. But Prime Minister Prayuth Chan-o-cha told a news conference on Tuesday that it will be extended by a cut of THB5 per litre for two months.
  • The Thai Chamber of Commerce, the largest business lobby in Thailand, had asked for the extension. The government is deciding weekly on whether to increase the cap on diesel fuel to raise gradually by THB1 until the consumer price reaches the ceiling of THB35 per litre, after which the Energy Ministry will consider what to do.
  • With spiralling oil prices and high inflation, the country’s National Economic and Social Development Council cut its economic growth target to between 2.5% to 3.5%, down from the 3.5% to 4.5% that it forecast in Feb 22.

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