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April 6, 2008

World Bank cautions against excessive subsidies

Asean Finance Meet

The World Bank has warned the 10-nation Asean of the challenge posed by rising inflation across the region although it may be able to weather the downturn, thanks to sound economic management, strong growth and accumulated reserves over the past decade.

At the annual Asean Finance Ministers meeting Friday in Danang, Vietnam, Juan Jose Daboub, a World Bank managing director and one of three deputies to its president, Robert Zoellick, urged the Asean governments to take short-term steps to protect the poor, and ensure that long-term solutions were found as well to relieve shortages.

He noted that the growing inflation is contributing to significant reductions in the incomes of the poor, who have to spend between one-third and two-thirds of their income on food.

He also cautioned against adopting excessive state subsidies to deal with food inflation, saying that could seriously strain fiscal positions and distort markets.

His warning came on the same day when the Philippine government announced an annual inflation which rose to a 21-month high of 6.4 percent in March due to a surge in the price of rice, the national staple.

According to the Philippine National Statistics Office, inflation in March was driven by an 8.4 percent spike in food prices from a year before, after a rise of 7.0 percent in February. The price of rice rose 10.9 percent.

The finance ministry, which announced a budget shortfall of 32.9 billion pesos ($789 million) in the first two months of the year, said it still expected to see a balanced budget.

However, higher government spending on boosting rice production and price subsidies would be a drag on finances, and as a result, the government might miss the target of a balanced budget this year, analysts said.

The Philippines President Gloria Arroyo at the National Food Summit a week ago announced that the government would spend more than 40 billion pesos on the agriculture-sector development programs called FIELDS to respond positively to the demands and recommendations of farm groups, technical experts and economists.

Global rice prices have been rising since October when India banned exports of non-basmati rice and other major exporters China, Egypt and Vietnam followed.

Thailand, the world's biggest rice exporter, however, has said it has no plans to cut exports.

Thai Finance Minister Surapong Suebwonglee, speaking to reporters on the sidelines of the conference, said: “We will follow the demand and supply. We don't want to abuse the market or make it artificial.”

Rice is the staple food of about 3 billion people, about half the world's population of 6.6 billion. The curtailed exports threaten to drive prices even higher and heighten food security fears.

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