LAST MONTH, Cabinet Secretary Leoncio Evasco Jr. proposed the abolition of the National Food Authority (NFA), the state-run agency tasked with the often-conflicting objectives of maintaining food security and stabilizing the price of rice. It is an idea that doesn’t sit well with farmers and many consumer advocates. Yet it is an idea that makes a lot of sense.
Evasco pointed out that, among other things, the NFA has no money; it has an accumulated debt of P167 billion, although NFA managers clarified—during a protest against Evasco’s proposal on Wednesday—that they had actually trimmed the debt to P159 billion as of August. Either way, that is not a good financial situation for a government-owned and –controlled corporation which, while not necessarily expected to be a profit-generating venture, should be as reasonably close to self-sustaining as possible.
That can never happen with the NFA, because it is completely out of place as a GOCC, due to its contradictory mandate. To stabilize rice prices, it purchases rice from farmers at near-market prices. To help ensure food security, it then sells a part of it at lower than average price to consumers, while using the rest as buffer stock and emergency supplies for disaster-stricken areas.
In effect, the NFA is simply a subsidy agency; a mechanism by which the enormous amount of money the government budgets for rice subsidies is distributed. If it is not simply abolished outright, as Evasco first suggested, its organization should be significantly changed to better reflect its true nature.
Whether the government should be subsidizing rice prices at all is also subject to debate. Rice is a critical commodity; it constitutes about 40 percent of the average Filipino’s diet, and accounts for about 30 percent of the price basket that determines inflation. “Buy high, sell low” is an effective social strategy; it helps many small farmers maintain at least a subsistence level of income, and eases the food price burden on poor consumers. But it is an obviously terrible business model, and a detrimental economic model as well, because it is likely artificially lowering the inflation rate.
The reason is, the rice component of the price basket is the rice consumers buy, not the palay purchased from farmers by millers and the NFA. If it were the latter, then NFA’s activities would have little to no impact on inflation. However, because the average price of rice is artificially lowered by NFA pricing, however, that has the effect of artificially lowering the inflation rate.
That should not be permitted to happen for a couple reasons. First, monetary policy and inflation control falls within the purview of the central bank. So, unless NFA pricing policy is coordinated with BSP monetary policy (there is no evidence that it is), the NFA is introducing an uncontrolled variable into the inflation equation.
Second, it in a sense masks the true inflation rate; the artificially manipulated price factor of 30 percent of the price basket gives all the other components a little more room to expand, which means that the inflation rate of 70 percent of what Filipino consumers buy is higher than advertised.
If the government wishes to subsidize rice prices – and again, it is debatable whether or not that is a good idea – it would be far simpler and probably less costly to do so directly, and to limit the subsidy to either the supply side or the demand side. To avoid the inflation effect, it would be better to do so through price support to farmers; the inflation effect would still occur, but it would be more diffused and have a negligible impact. The more complicated alternative would be to excluded subsidized rice from the consumer price basket, which is possible but would make inflation monitoring unwieldy, perhaps prohibitively so.
Thus, the role of the NFA in any of those options would be greatly reduced at best, and perhaps rendered entirely irrelevant; the agency’s price monitoring and rice stockpiling functions could be absorbed into the Department of Agriculture relatively easily. Doing away with the NFA as it is now would free up government resources and allow more efficient management of rice policy, whatever the government decides that policy should be.