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Cablegate: Price Controls As a Measure to Stop Food Inflation

VZCZCXYZ0019
RR RUEHWEB

DE RUEHQT #0897 2661312
ZNR UUUUU ZZH
R 221312Z SEP 08
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 9402
INFO RUEHBO/AMEMBASSY BOGOTA 7749
RUEHCV/AMEMBASSY CARACAS 3187
RUEHLP/AMEMBASSY LA PAZ SEP LIMA 2809
RUEHGL/AMCONSUL GUAYAQUIL 3808

UNCLAS QUITO 000897

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAGR EC
SUBJECT: PRICE CONTROLS AS A MEASURE TO STOP FOOD INFLATION

REFTEL: A) Quito 557, B) 07 Quito 2095, C) Quito 36, D) 07 Quito
2114,

1. (SBU) Summary: The Correa administration imposed mandatory
price controls on nine products on August 28, although it said that
all the controls are based on agreements with producers. The GOE
continues to intervene in the market to limit food price inflation,
but has shown some flexibility in its interventions. End Summary.


Expanded Price Controls
-----------------------

2. (U) On August 28, the GOE established price controls on nine
products: noodles, vegetable oil, wheat, sugar, canned tuna,
chicken parts, rice, milk and bread (the last three products were
already subject to varying forms of price controls). According to
Susana Cabeza de Vaca, Coordinating Minister of Production, the
price controls are based on agreements between the government and
the private sector.

3. (U) The extent, rigidity, and duration of the price controls vary
by product. Some of the products have already been subject to price
controls, notably milk. Some products are subject to price controls
until mid-October, others until the end of the year. The price
control on bread only applies to "pan popular," small buns that cost
10 cents. The highest quality milk is exempt from price controls.
The price control on chicken parts is not a fixed amount; instead,
producers have agreed prices will not rise above their levels in
July. Price controls for tuna are "variable," which presumably
allows different qualities to be priced separately.

4. (U) Media reporting shortly after the price controls were
unveiled showed mixed compliance with the controls. According to
one report, prices in large supermarkets were in some instances less
than the price ceilings, while prices in small corner grocery stores
often exceeded the limits.

Experimenting with Controls as Inflation Rises
--------------------------------------------- -

5. (SBU) Inflationary pressures began to rise in the second half of
2007, although the annual rate for the year was only 3.3% due to low
inflation in the first half of the year. Prices increased rapidly
in 2008, with an annual rate of 10.02% in August. The inflation is
due in large measure to increasing international prices for food and
petroleum derivatives (fuel prices are frozen in Ecuador), but also
to domestic pressures from natural disasters (flooding, volcanic
eruptions) and increased demand due to increased government spending
and transfers.

6. (U) Starting in mid-2007, the GOE has pursued a mixed bag of
market-intervention measures to fight inflation. These include tax
breaks and subsidies for farmers (ref a), a ban on rice exports
(ref. b), milk price controls (ref. c), and subsidies for flour used
in bread (ref d).

7. (SBU) As it has extended market interventions, the GOE has
experimented. For example, it first imposed milk price controls
with little consultation with the dairy industry. In renewing the
controls, it consulted with the industry and as a result marginally
increased the ceilings and exempted the highest-end product,
ultapasteurized milk in boxes, from controls. After food prices
began accelerating in the second quarter of 2008, the GOE tried a
package of tax incentives and subsidies for farmers, rather than
expanding the scope of price controls. As bread prices increased,
the GOE first offered subsidized flour to maintain prices, then
tried voluntary price controls on "pan popular," and finally imposed
firm price controls on the inexpensive bread. However, it has left
prices for other types of bread uncontrolled.

Comment
-------

8. Inflation is a political vulnerability for the GOE. In
attempting to limit inflation, it has responded with a mix of market
intervention measures. However, it also seems to realize the
limited effectiveness of price controls and their potential to
suppress supplies, so has been experimenting on how to proceed.
Looking forward, it is not clear whether the GOE will limit market
interventions to occasional, flexible controls or will impose
broader, tighter controls.

HODGES

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