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THE Bangko Sentral ng Pilipinas’ (BSP) warning that inflation is
nearing the double-digit territory is cause for worry. This means
the government can no longer rely on monetary authorities to help it
prop up the economy at a time when the Philippines’ biggest export
market, the US, is slowing down.
Up until a few months ago, the BSP had been
cutting its interest rates in a bid to support domestic economic
expansion, providing a cushion to any adverse impact from a possible
US contraction. Lower rates would encourage businesses and
households to borrow more money, driving up capital investment and
consumer spending, two key pillars of Philippine growth. They would
offset the dampening effect of weak shipments to the US.
The BSP’s bias for bringing down rates also
helped it put a check on another source of inflation—huge foreign
exchange inflows courtesy of overseas Filipino worker (OFW)
remittances and foreign investments in emerging markets like the
Philippines. While a loose monetary policy has no direct impact on
OFW money sent home, a cut in the BSP’s policy rates at a time
when its US counterpart, the Federal Reserve, was likewise trimming
its funds rate, kept steady the difference between local and US
rates.
Had the BSP not kept pace with the US Fed’s
monetary loosening, foreign investments would have flooded the
domestic market, thus bidding up the money supply, and with it,
inflation. Maintaning the differential insured that inflows would be
more manageable and the peso appreciated against the dollar in a
more orderly manner.
Unfortunately for us, the peso’s weakness
comes at a time when prices of key imports—oil and rice—were
hitting fresh records in the world market. A weak local currency
plus skyrocketing commodity prices resulted in the surge in domestic
inflation. In April alone, price increases accelerated to a
three-year high of 8.3 percent. The official figures for last month
will be released this week. But this early, the BSP had warned that
double-digit inflation was within striking distance.
Now double-digit inflation is alien to the
majority of Filipinos who have just come of age. The last time price
increases hit the double-digit territory was in the early 1990s,
particularly during the Gulf War, when Iraq’s invasion of Kuwait
created geopolitical tensions that reverberated across the world.
Both countries after all were in the heart of the world’s biggest
oil reserves, so any supply disruption caused by the conflict would
send oil prices sky-high—as what transpired at that time.
Current inflation rate double of 2007
To be sure, current inflation rates have more
than doubled from a year ago. To recall, we ended last year with an
average inflation rate of less than 3 percent, which we last enjoyed
more than two decades ago.
What makes matters worse this time around is
that the surge in fuel and rice prices was not triggered by a random
event like the Gulf War. As many analysts have pointed out, the
record rise in prices of oil, rice and other commodities is
supported by fundamentals, which is another way of saying that
demand is outstripping supply.
China, India, and other emerging economies are
the faces of this unprecedented surge in demand for commodities that
has fueled the rise in their prices. China alone has clocked in
double-digit growth rates in recent years, and pundits claim that
this economic expansion is unlikely to taper off in the near term.
The Philippines has been blamed for the recent
spike in rice prices because of its publicized imports of huge
volumes of the commodity. While there is truth to that, demand from
China, India and other emerging economies are likely to sustain this
uptrend in prices. As a growing number of economists have said, we
are entering a new era of high commodity prices.
Keep off the panic button
So what is a country like the Philippines to do?
Obviously, hitting the panic button, which is what the government
has done, only makes matters worse. What it shouldn’t have done is
to fan the fire by having the President announce that we’re amid a
crisis, and rationing rice using military trucks in full view of
international TV.
The country’s susceptibility to the present
commodity price dynamic stems from its unresolved problems on the
supply side. As the International Rice Research Institute said, the
government has long shortchanged farm infrastructure as policymakers
relied on the promise of free trade to make up for our poor
agriculture output.
What policymakers failed to realize is that not
all of our trading partners are gung-ho about their commitments to
freeing up international trade. So when something like the present
price dynamic came upon us, we were left holding an empty bag.
Unfortunately, building up the country’s
rice-production capacity is going to take time, so we have to be
more creative in the external trade front even as we rebuild our
competencies in the farm sector.
On the matter of oil, we have long pushed for
demand-side measures in this column. The Department of Energy’s
warning that only a few investors have pushed through with their
commitments to build biofuel-processing plants is a grim reminder
that we cannot rely on outsiders to build our capacities. Of course,
the widening risk aversion didn’t help either, as investors held
on closer to their cash.
It is therefore ironic that while our neighbors
have been risking their citizens’ ire by cutting subsidies on oil,
our government has been quick to trim taxes on fuel to appease the
people. We should remind our government that our foreign-exchange
cache pales in comparison to those of our neighbors. And at a time
when exports are slowing, we should be more cautious about how we
spend our hard-earned dollars.
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