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THE unabated rise in the price of oil requires that
the Philippines seriously reconsider its current demand for
the imported commodity.
Up to this point, the country has
been acting as if it had deep pockets to finance its present buying
levels. Witness here the robust domestic sales of gas-guzzlers like
sports utility vehicles (SUVs) and the surfeit of near-empty public
utility vehicles plying—more like clogging—Metro Manila’s
streets.
Until now, a worsening balance of
payments (BOP) deficit was but a ghost of the past. The recent fall
in the country’s BOP surplus however points to the possible
reversal of our external payments position, which has dire
consequences at a time when the Philippines’ export sector is
slowing and the government is ramping up its expenditures.
The BOP measures the country’s
economic transactions with the rest of the world to include trade,
income and other transfers. A narrowing surplus means that our
cushion is deflating, risking a hard landing once our dollar
requirements outstrip our source of foreign exchange.
That hard landing would involve a
further spike in domestic inflation, which is already at a nine-year
high of 9.6 percent, as unchecked import demand and weak export
sales erode the country’s gross international reserves. Rising
inflation would push the government to further expand its subsidy
program, straining already scarce revenues and possibly forcing it
to raise its borrowing levels.
With domestic interest rates on
the rise, the government may be forced to contract fresh foreign
obligations, reversing the recent tack of prepaying debt. If
interest rates worldwide likewise rise in response to spreading
inflation, then the Philippines’ cost of borrowing would surge,
its fiscal position would weaken, further eroding our BOP position.
The last time we suffered from
external payments difficulties, the International Monetary Fund had
to bail out the Philippines as its BOP deficit widened. Inflation
back then was at double-digits, the economy barely moving, and a
nascent Communist insurgency knocking on the doors of the capital.
The Bangko Sentral ng Pilipinas’
(BSP) report last week that the country’s BOP surplus fell sharply
in May to $42 million from April’s $427 million indicates that
while our demand for imported goods like oil keep rising, our
sources of foreign exchange—exports, overseas Filipino workers’
remittances, foreign investments—are easing.
As a result of the May decline,
the BSP has recast its BOP surplus forecast this year to a lower
$2.5 billion from $3.4 billion earlier. The new forecast is nearly
three times lower than the $8.6-billion surplus last year.
Inching to an economic
disaster
True, we are far from crisis
proportions. But if the present trend of a narrowing BOP surplus
coupled with a worsening fiscal position continues, then we are
inching closer to an economic disaster.
As we have said repeatedly in
this column, the imported inflation caused by rising international
oil prices is largely beyond our control, as the Philippines is but
a minor player in the world market for the commodity. But we can
limit the damage from increasingly expensive oil by reworking our
demand for the scarce resource.
The government should resist the
clamor for a cut in the value-added tax (VAT) on oil products.
Moreover, it should reverse the reduction in the excise tax on fuel
products. Such forms of indiscriminate subsidies only heighten
demand for those commodities, bidding up their prices in turn.
With pundits seeing $200 a barrel
oil on the horizon, it is high time that the government entertain
proposals for curtailing domestic demand. Doing so would risk public
ire, but the alternative—as history shows—would throw us back
several years, wasting our recent economic gains.
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