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