Weslene Uy, Resident Economist of the Stratbase ADR Institute
During President Rodrigo Duterte’s “tete-a-tete” with his Chief Presidential Legal Counsel last Tuesday, he conceded that inflation is high but that his economic managers are “working on it”.
After his televised interview, he convened his top bureaucrats, presumably to ask them some questions about this urgent concern. This meeting ended with an agreement that his economic team would submit a draft executive order meant to address the relentless ascent of commodity prices.
The EO would reportedly include measures that would ease the prices of some food items, such as simplifying importation procedures.
Indeed, elevated prices have worried consumers and businesses alike in the last few months. The results of last month’s inflation rate, which came in higher than expected, only added fuel to the fire.
In August, prices registered an increase of 6.4 percent, exceeding the central bank’s upper bound target of 6.2 percent. This brings inflation average for the first eight months of 2018 to 4.8 percent, the highest rate in years.
The Philippines also has the highest inflation rate compared to its peers in the region.
When asked to explain the dismal inflation figures during congressional hearings, our economic managers repeatedly argue that inflation is losing its momentum, as month-on-month inflation has tapered off. However, prices rose by 0.9 percent from July to August, from 0.5 percent in the previous month.
During these hearings, various implementing agencies have also reported delays in rolling out social mitigating measures under the TRAIN law. Should the government fail to effectively implement its proposed measures in the next few months, inflation would undoubtedly overshoot its 4.9 percent target for 2018.
With only a year into his term, Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. already has the unenviable balancing act.
The central bank has been forced to curb inflation by raising interest rates, which it has done thrice since May. Market watchers are expecting a fourth rate hike when the Monetary Board meets in September.
However, rather than forcing the BSP to dig deeper into its monetary toolkit, non-monetary measures should be pursued since the government itself attributes inflation to a mix of cost-push factors. This means that prices are mostly influenced by shortfalls in supply, rather than an increase in domestic demand.
Sadly, the top inflation culprits in August are the very same commodities which regularly make it to the list, indicating that our officials have fallen short of introducing effective reforms in the sector.
Electricity, gas and other fuels, the operation of personal transport equipment, as well as various food items are among usual inflation drivers. The first two items are sensitive to global oil price fluctuations and to exchange rate movements, since the Philippines heavily imports oil.
With the US sanctions on Iran effective in November, we can expect oil prices to increase further. The TRAIN law also introduces a fresh round of increase in petroleum taxes in 2019 and in 2020, further squeezing consumers’ pockets. The law, however, provides for a suspension on petroleum excise taxes if it reaches US$ 80 per barrel.
Food products such as fish, rice, vegetables and meat led the list of top inflation drivers. The spike in food prices only unmasked the structural inefficiencies in the agriculture sector, aggravated by political infighting within and among government agencies.
Forced to explain the debacle in rice supply, for example, the National Food Authority and the interagency NFA council have only pointed their fingers at each other for the delay in rice imports.
Our economic managers have repeatedly called for the passage of the rice tariffication bill, which they expect will lower rice prices by P2 to P7 per kilo. The bill has passed the lower house on third and final reading in August and will be up for deliberations in the Senate.
The executive department may have outlined a list of short-term reforms intended to reduce food prices. Unfortunately, these measures are merely a reactive approach; these should have been introduced much earlier.
Missing in all this is Duterte’s trademark decisiveness and political will. The president has repeatedly declared that he prefers to stay out of economic issues, however, these concerns are at the gut of every Filipino.
The noise surrounding inflation should serve as a wakeup call for our country’s managers. After all, Filipinos deserve much better.
Image Source: philstar.com