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Opinion

Elevated

FIRST PERSON - Alex Magno - The Philippine Star

The Philippine Statistics Authority (PSA) reports June inflation at 6.1 percent. The last time the inflation rate was at this level was in 2018.

In 2018, rice supply issues drove the higher inflation number. That was addressed, before inflation became chronic, by importing the rice supply shortfall.

That inflationary episode cleared the way for the Rice Tariffication Law that liberalized rice trade and earmarked revenue from the tariffs for use to modernize our farm production. The measure was sitting in legislative shelves for 35 years since then agriculture secretary Carlos Dominguez suggested it.

With rice trading liberalized, rice prices have softened. The commodity ceased to be an inflation driver.

Much of our rice imports come from Vietnam and Thailand. With the large rivers of mainland Asia irrigating their fields, rice prices there are as low as P14 per kilo.

We can never match their low production costs. Irrigating our fields is costly. In many areas, it is energy intensive.

Our farmers are not happy with liberalized rice trade. But if we maintain the old protectionist arrangement, our consumers will be captive to high production costs brought about by the absence of economies of scale and mechanization. Rice will continue to be an inflation driver, to the detriment of everyone.

Our high farm gate prices persist even as government pours billions to subsidize our rice production. The subsidies come in the form of free fertilizers and seeds, free irrigation, free warehousing and milling. Otherwise the cost of local rice will be much higher.

Japan treats its rice as sacred and its farmers as saints. But in the social contract agreed upon by everybody, rice is four times what it costs here.

Many years ago, I tried to convince my sons to consume more bread than rice as an act of patriotism. Rice used up so much land to produce so little. That forces up land prices, making shelter a problem for many Filipinos. Also, rice production irrigated from deep wells dried up our aquifers, eventually killing off our forests.

I would not give the same advice today. Flour from wheat is wholly imported. The war in Ukraine produced a global shortage of the commodity. There could be famine in Africa and the Middle East because of this.

The elevated inflation rate we are currently experiencing is no longer driven by rice prices. Liberalization of rice trade kept prices nearly constant.

It is energy prices driving the current spike in inflation. Oil prices are determined by large global trends beyond our ability to control. High prices for fuel push up the cost of everything else. Food items need to be transported between islands and into the large cities.

Liberalizing rice imports proved to be the silver bullet the killed off the 2018 inflationary surge. We do not have an equivalent silver bullet to deal with an inflationary surge driven by energy costs.

High energy costs will likely persist for months and even years. The recent spike in oil prices may have been caused by the war in Ukraine. But there are also structural issues: the oil producers have not built up new production capacity to meet rising global demand. They have little incentive to do so, being able to earn more by selling less at the present price regime.

If energy will be costly into the foreseeable future, we cannot expect inflation to abate. We have no choice but to rely on monetary policy to mitigate the inflationary surge.

Monetary policy, unfortunately, is a blunt instrument. Its main weapon to fight inflation is raising interest rates. High interest rates have the effect of slowing down economic activity.

This is why NEDA Secretary Arsenio Balisacan indicated we would probably not meet the ambitious growth targets we have set for this year. The higher cost of money, which is what interest rate increases create, discourages new investments that might drive growth.

BSP Governor Felipe Medalla indicated there would be more interest rate hikes down the road. Coming from an otherwise pro-growth economist, this sounds dire.

If we fail to keep our growth rate above 6 percent, many other dominos will fall. We will not outgrow out debt. The present unemployment and poverty numbers would remain the same for a while longer. Our expected promotion to the ranks of high middle-income countries will be postponed.

As we can see, 6 percent is more than just a number. So much of the good times we thought might be coming will be delayed if we do not grow beyond this threshold.

For our growth to exceed 6 percent, we must somehow bring inflation to somewhere below 6 percent. “6” is the number that defines this year for us.

Our economic managers do not have too many tools in the toolbox. They are aware that aggressive interest rate hikes will kill loan growth and freeze the economy. But there are no other options. The most important thing is to avoid tipping into runaway inflation.

Because the current inflation surge is driven by push factors, slowing down economic activity might have only limited effect. It certainly will not stop the escalation of energy costs. Those costs are due to global factors.

Any possible cure, it seems, will entail pain for everybody. This could be the reason why President Bongbong Marcos’ first reaction to the PSA inflation number is disbelief.

Unfortunately, the PSA number is the official number. Even with 31 million votes under his belt, the President cannot reject it.

PSA

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