Gloomy

Tomorrow, the inflation rate for the month of September is due for release. The consensus in the market is that the numbers will not be good.

In the face of currency depreciation, an elevated inflation rate and efforts of the monetary authorities to fight both by raising interest rates, the Philippine Stock Exchange has moved into bear market territory. From a high of about 9,000 points, the market is now struggling to keep its head above the 7,000-point mark. It has been adjudged the worst performing stock market in the world.

The peso, for its part, continues to struggle. It has depreciated to well over P54 to the dollar. Analysts expect it to deteriorate further to P55 to the dollar by the end of year.

Elevated inflation and a weak currency are locked in a vicious cycle. One fuels the other. The weaker the peso, the higher the inflation rate since we import many inputs to the goods we produce. The higher the inflation rate, the weaker the currency becomes since its value is determined by what basket of goods it could buy.

We were told, months ago, that the inflation rate would abate toward the end of the year. That has not happened. The rest of the universe, it seems, conspires to frustrate all our efforts to temper in inflationary storm.

The biggest factor driving inflation in our economy is the price of fossil fuels. This past few weeks saw oil prices rising to their highest levels in four years. The looming US embargo on Iran, troubles in Libya and an effective effort by the oil-exporting countries to curtail supply in order to force up prices combine to push crude oil prices to dizzying levels.

We import nearly all our oil. Any movement in global oil prices reflects instantly at our pumps.

The spike in oil prices is magnified by all the inefficiencies afflicting our domestic economy. Our agriculture remains among the most backward in the world. Productivity remains stagnant. This is surprising for an economy that demonstrated strong capacity for growth.

Our domestic logistics system is astoundingly inefficient. This, in turn, magnifies the inefficiency of our agriculture. The result is a high food price regime that reproduces poverty.

History shows that the only effective solution to a high oil price regime is a good round of global recession. That might be forthcoming, although there is no expert consensus on where the cracks will begin to show.

At any rate, recession is as painful a cure as any. Short of a crushing recessionary cycle, the world might be in for a long period of restrained growth. Our great ambition to set the pace for economic expansion might have to be shelved.

Goose

Because there is consensus about their being health hazards, nothing restrains government from imposing heavy excise taxes on such things as tobacco and alcohol. To great effect, they are called “sin taxes” to dissuade opposition to them.

“Sin taxes” open a dilemma for government, however. While they produce substantial revenues for the public account, the goal of heavy taxation is to penalize consumption of these products.

Government cannot have its cake and eat it too, however. If we succeed in dissuading people from consuming tobacco and alcohol, government will earn less even if it might raise excise taxes ad infinitum. In the end, it will have to kill the goose that lays the golden egg.

Must the same view that allows government to act heavy-handedly on “sin products” also be the same one that governs revenue policy regarding the mining industry?

The Philippines is among the most gifted in terms of mineral resources. We have trillions in confirmed mineral deposits. These precious minerals do not just benefit us as a source of government revenue. Minerals are an important source of export revenues. The mining industry creates jobs in the remotest communities. The industry is also an important magnet for investment inflows to our economy.

It is easy to vilify the mining industry by showing gashes on the land or by attributing to mining the ghastly landslides that happen. A noisy cadre of anti-mining activists would rather have us turn a blind eye to the economic gains and focus exclusively on the ecological damage caused by irresponsible reckless extraction.

Mining is a complex question, no doubt. Things are aggravated by countless small mining activities that carry on basically unregulated by the otherwise competent Mining Law.

Recently, a bill was introduced at the House of Representatives that imposes excise taxes that are truly punitive on mining and proposes to include small mining activities, an unenforceable provision. This will be on top of the doubling of excise tax rates already in force after the passage of the first tranche of tax reforms.

The Chamber of Mines of the Philippines (COMP) worries that the unrealistic measures proposed in House Bill No. 7994 could drive away potential investments in the mining sector and make present investments unsustainable. It will make our regulatory environment more severe than any other country hosting mining activities.

The COMP has submitted to the House a substitute bill that proposes a margin-based royalty at a rate of 1% to 5% of net income applicable to all metallic operations. They also propose a margin-based “windfall profits” tax of as much as 10% as a substitute for the top-up provision of 50% of income in the existing bill. In addition, the COMP proposes an accelerate depreciation schedule as an incentive for investments.

The proposals hope to ensure the survival of the goose laying golden eggs.