* Central bank chairman calls for scrapping of rice subsidies
* No takers for Thai rice in amply supplied world market
* FinMin defends policy, says boost farmers' incomes (Recasts, adds more details on rice trade, quotes)
By Alan Raybould
BANGKOK, Oct 3 (Reuters) - The chairman of the Thai central bank urged the government to scrap a politically sensitive and hugely expensive scheme to subsidise rice farmers, saying it was a threat to stability in a country which has faced repeated unrest in recent years.
Traders said the intervention scheme, which helped Prime Minister Yingluck Shinawatra win power in 2011, jeopardised Thailand's position as the world's top rice exporter, warning that the government would eventually be forced to sell its mounting stockpiles of rice at a steep loss.
"The country will be doomed if the government proceeds with the rice-pledging scheme," Bank of Thailand Chairman Virabongsa Ramangkura was quoted on Wednesday as telling the Nation daily, a day after the cabinet endorsed the scheme, with restrictions.
The scheme is estimated to cost as much as 3.5 percent of annual economic output.
It is also likely to continue hurting exports well into 2013, with the government forced to stockpile record amounts of rice in already overflowing warehouses.
Thailand is now stuck with 12 million tonnes, or around one third of the global rice trade, priced so far above what other countries sell the grain for that its exporters have been shut out of the global market.
Virabongsa, an economist parachuted into his job in June by Yingluck despite opposition from central bank officials, has in the past sided with the government.
"This government demonstrates stability. But if there's anything to rock the stability, it's this scheme," he told the newspaper, adding that it would require huge deficit-financed budgets and would open the door to corruption.
CRACKS APPEARING?
Finance Minister Kittirat Na Ranong defended the rice policy but cracks are appearing inside the administration because of the rising cost of the scheme, designed to raise the living standards of millions of poor farmers.
"I am still confident that the rice intervention scheme is a good policy because it has helped increase farmers' income and purchasing power, which will also help boost the economy," he told reporters.
The Commerce Ministry wants 405 billion baht (${esc.dollar}13.20 billion) to fund the scheme from October, the start of both the main crop and the fiscal year. That is about 3.5 percent of projected 2012 GDP.
The proposal was knocked back twice by the cabinet in September, according to officials who were present. On Tuesday ministers agreed to renew the scheme, but with limits.
It approved an initial budget of only 240 billion baht and set a cap of 15 million tonnes in potential purchases. The main crop is normally 23 to 25 million tonnes and last year, honouring its election promise, the government said it would buy every single grain of rice if necessary.
According to officials, the Finance Ministry had rejected the initial funding proposal and demanded the Commerce Ministry, which oversees the scheme, sell its stocks to help pay for the new intervention.
The funding agreed on Tuesday is equivalent to 80 percent of the projected government budget deficit for fiscal 2012/13.
Thailand's budget is opaque and it is unclear how that deficit would be covered. The government is already under fire for keeping billions of dollars of funding for infrastructure and flood defences off-budget.
The International Monetary Fund estimated in June the rice programme could cost about 1 percent of GDP annually, even before storage and management costs.
MOUNTING UNSOLD STOCKS
The Commerce Ministry is cagey about the level of stocks but infrequently updated data from its website suggests it is holding a record high of 12 million tonnes of milled rice.
"By the end of this year Thailand will have 20 million tonnes of rice and if this scheme continues into 2013, it will end up with 30 million tonnes," said one Singapore-based rice trader.
Thailand's rice scheme comes as the world's top importers are reducing purchases and there are additional supplies from India and Pakistan.
Nigeria, the world's biggest buyer, has six months of rice supplies, while top Asian importers Indonesia and the Philippines have announced plans to reduce purchases.
"Ultimately, they will have to reduce prices and sell because we don't see any supply constraints until the end of 2013," said a trading manager at an international company in Singapore. He said the government could hold out for one year at most.
The state-owned Bank for Agriculture and Agricultural Cooperatives is funding the programme and will be left in deficit if the rice is left unsold or offloaded at a loss.
In a normal year Thailand exports 8 to 10 million tonnes. As of the end of September it had shipped 4.9 million in 2012, down 44 percent from that period in 2011.
Last month, Commerce Minister Boonsong Teriyapirom said up to 7.3 million tonnes had been sold to foreign governments including China, Indonesia and the Philippines, an assertion that attracted widespread ridicule.
Both the Philippines and Indonesia denied any such deal and shippers said there was no port activity to back it up. There was no word from China.
Ivory Coast has bought 240,000 tonnes and a senior official has said other small lots have been sold, but there has been no official confirmation. A tender to sell 586,000 tonnes was opened on Sept. 14 but no results have been announced.
The government has refused to reveal the price it has got for any of the rice it has sold.
Traders say a farmgate price of 15,000 baht a tonne implies an export price of ${esc.dollar}700. Thai exporters, if they can get their hands on rice, are quoting ${esc.dollar}574 to ${esc.dollar}580 for the 5 percent broken grade. Vietnam and India quote ${esc.dollar}450 and ${esc.dollar}390 respectively.
"If you are in Bangkok and show an intention to buy even 40,000 to 50,000 tonnes of rice, you will be treated like a king," the Singapore trader said, highlighting the desperate situation. (${esc.dollar}1 = 30.6850 Thai baht) (Additional reporting by Apornrath Phoonphongphiphat in BANGKOK and Naveen Thukral in SINGAPORE, Editing by Jonathan Thatcher)
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