In a country where many people have rice for breakfast, lunch and dinner, Colombia’s protection of its rice farmers is miring many in poverty, according to former central bank co-director Leonardo Villar. It is also creating a headache for his successors at the bank.
Import barriers have enabled prices to soar to more than double world levels, helping push inflation to a six-year high and adding to pressure for steeper interest rates, said Villar, head of Fedesarrollo, a Bogota-based economics research group, who served on the central bank board from 1997 to 2009.
“If we persist with this excessive protectionism, and prices of rice and other foods aren’t allowed to correct downwards as they should, the price increases could become incorporated in expectations,” Villar said in a phone interview. “That could force an adjustment in the interest rate from the bank.”
Annual inflation reached its fastest pace since 2009 in March, led by a 37 percent jump in the cost of rice after farmers planted less last year amid forecasts of unfavorable weather. Central bank co-directors Ana Fernanda Maiguashca, Adolfo Meisel and Carlos Gustavo Cano have all signaled over the past month that they would consider raising interest rates if inflation expectations become “unanchored” from the 3 percent target.
With inflationary pressure mounting even as economic growth slows, Finance Minister Mauricio Cardenas says he is sympathetic to calls to ease import restrictions on rice.
“With the price increases we’ve seen in the last few months, the sentiment we’ve seen in Colombia is that we need more competition,” Cardenas said in an April 19 interview in Washington. “We need more flexibility in terms of making sure that whenever these pressures emerge, we are ready to import to prevent such fluctuations in prices.”
Rafael Hernandez, head of the National Federation of Rice Growers, or Fedearroz, described Fedesarrollo’s analysis as “economists’ tales, but not reality.” It is unrealistic to speak of free trade when producers such as the U.S., Thailand and Vietnam subsidize their rice growers, he said.
“For the country to become competitive, and for the farmer to become more competitive, they require protection and state policies to improve competitiveness,” Hernandez said in an April 9 interview in his Bogota office. “To speak of a free market, when products are coming here with massive subsidies, to compete with poor farmers who don’t have enough support, that doesn’t seem to me to be just.”
The U.S. is allowed to export a quota of about 90,000 metric tons of rice to Colombia this year, with this figure increasing by 4.5 percent annually. Above that amount, exports pay a duty of 80 percent.
Annual inflation accelerated to 4.56 percent in March, above the limit of the central bank’s target range of 2 percent to 4 percent. With its large weighting in the consumer basket, rice contributed more than any other product to the jump. Policy makers have repeatedly forecast that inflation will start to slow in the second half of the year.
The central bank left its policy rate unchanged at 4.5 percent at its board meeting April 24, as forecast by all of the 33 analysts surveyed by Bloomberg.
The pressure on inflation from rice prices may be about to ease. Cano, a former agriculture minister, said April 13 that a “monumental” harvest will cause rice prices to fall in July, August and September.
Still, inflation expectations for 2016 rose for a second straight month in April, to 3.2 percent, in the central bank’s monthly survey of economists. Policy makers try to keep expected price increases “anchored” close to the inflation target, since these play a role in price-setting decisions and wage negotiations.
Rice accounts for about 14 percent of the calories consumed by Colombians, according to Fedearroz.
In a 2013 study, Fedesarrollo estimated that eliminating the gap between Colombian and international prices would lift more than 1.2 million people out of poverty, and more than 450,000 out of extreme poverty.
The “poverty line,” calculated using the consumer price index for low-income families, is about $80 per month.
A ton of white rice cost about 2.78 million pesos ($1,130) in Colombia in March, compared with $485 for a ton of rice in the U.S., according to data collected by Fedearroz.
“If rice in Colombia were at international prices, the levels of poverty would fall significantly, basically because it has such an important role in the family consumption basket,” Villar said.
Villar is a leading candidate to be Colombia’s next central bank chief after Governor Jose Dario Uribe leaves office at the end of next year, according to Munir Jalil, head analyst at Citigroup Inc.’s Colombia unit.