Tackling runaway inflation with alacrity

Conspicuously seen nowadays in the circle of the country’s economic policy making is House Speaker Gloria Macapagal-Arroyo. Barely a week after her successful coup at the Lower House, she called for a meeting with top government economic managers to tackle the issue of inflation.

This shouldn’t really come as surprise, this predilection of Arroyo for economic issues. She continues to be regarded as a top-rate bureaucrat whose biggest achievement during her nine-year term as president was steering the Philippine economy to progressive growth from 2001 to 2010.

For Arroyo, the recent ballooning of inflation figures is something that needs to be dealt with swiftly, not just to cushion Filipino households from rising prices of food products, but also to arrest any threats to sustaining economic growth.

As has been reported, average inflation during the first six months of the year exceeded the two percent to four percent target set by the administration’s economic team for 2017 to 2020. In July, it was at its highest in five years, at 5.7 percent.

This August, inflation is seen to breach July levels, going up to about 5.9 percent. The recent damage to agricultural fields due to two typhoons is exacerbating a string of other causes, starting with the implementation of the new tax hikes at the beginning of the year and followed by sharply rising crude prices.

Anti-inflationary measures

A number of anti-inflationary measures were presented by Arroyo for the President’s approval, but only after going through the rounds of consultations with the President’s economic and concerned executive team members and affected private sector stakeholders.

The suggested moves would curtail a further rise in inflation until the end of the year, and hopefully, would even bring it closer to the original inflation levels that the government had announced for this year.

First on the list would be the temporary lowering of tariffs on imported fish, other food products, and livestock feed. This has been the most discussed since critics have always been concerned that the proposed zero tariffs on food imports are detrimental to the livelihood of farmers, fishermen, and livestock producers.

Reducing food prices

In the latest discussions, the President’s economic team favored a five percent tariff instead of zero. This was somehow acceptable also to the private sector, supposedly to mitigate any “annihilating” effects on the agricultural sector.

Zero percent and five percent would likely make a difference in how long inflation levels will decline closer to the four percent, but whether it would be within the year or early next year, a five percent rate should be enough to dampen the accelerated rate that we are now experiencing.

Tariff for fish products is currently at 15 percent, meat at 20 percent, corn at 35 percent, feed wheat at seven percent, and vegetables at 40 percent. A reduction to five percent should definitely have an impact on current food prices.

Together with the suggestion for the National Food Authority to purchase up to 800,000 metric tons of well-milled rice that would be delivered on a staggered basis over a five- to six-months period, this should stabilize food supply especially with the –ber months just around the corner.

The recent depletion of low-priced rice in the market has added pressure on inflation, and the proposed shift to a regular tariff scheme for rice from the current import quota system now being decided in Congress is seen to bring down retail prices of rice by P7 per kilogram, and further tame inflation.

Other measures

Other suggestions lined up by Arroyo and her team include the Bangko Sentral ng Pilipinas and its Monetary Board to implement more interest rate hikes to control inflation, and for concerned government agencies to defer rate hikes that would just add more upward pressure on the consumer price index.

The BSP has remained vigilant during the year in curbing inflation by introducing successive rate hikes – three times, first in May, then June, and the latest in August for an accumulated 100 basis points, its biggest move in a decade. It has not ruled out fresh hikes in future.

The aggressive stance of the BSP on interest rates takes into consideration controllable risks to inflation, including possible wage hikes, higher transport fares, and rate hikes in electricity and water. The tightening of interest rates in many developed economies is another risk, but that’s something out of our control.

Successfully curbing wage hikes, transport fares, and utility rates is expected to amplify the positive benefits of lower food prices and stable rice supply, and temper inflation.

Averting a crisis

The President is expected to sign an executive order within the week that will temporarily reduce import tariffs on food, as proposed by the expanded economic team that now includes Arroyo. When inflation returns to normal, tariffs will revert to previous levels.

Such action would allow the government to avert another crisis that could easily negate all the economic gains that have been accomplished over the last three decades.

An economic crisis would put to waste the current administration’s efforts to ramp up infrastructure spending to build roads, bridges, and ports that would make the Philippines a viable option for much-needed foreign investments –and so much more.

Runaway inflation should always be taken seriously. While raising interest rates – as the BSP has done – is needed, this is sometimes not enough to control potentially far-reaching damage to the economy.

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