In this Oct. 9, 2018 photo, a man passes by an advertisement of common holiday commodities at a mall in Pasig City. Malacañang assured the public that the government is doing its best to address the rising inflation. Amid the rising cost of basic commodities, the administration urged the public to be more understanding as the economic managers are working double time to address inflation.
The STAR/Michael Varcas
Commentary: Focusing on long-term solutions to inflation
Weslene Uy (philstar.com) - October 12, 2018 - 11:18am

After almost two years of uninterrupted economic expansion above 6.5 percent, the economy produced a disappointing 6 percent growth during the second quarter. 

Hinged on the opportunities resulting from the government’s infrastructure drive and its comprehensive tax reform program, the country’s economy was initially expected to grow at an even faster pace in 2018. 

Yet, multilateral agencies and several credit rating firms have downgraded their forecasts after growth was not up to expectations for the first half of the year. 

In September, the Asian Development Bank trimmed its 2018 growth outlook for the country to 6.4 percent from 6.8 percent. The continued underperformance of agriculture, weak exports and inflationary pressures were pinpointed as the main reasons behind the more muted outlook. 

The ADB also raised its inflation forecast from 4 percent to 5 percent. A week later, the World Bank followed suit, and knocked off 0.2 percentage points from its initial projection of 6.7 percent. 

Even local economic managers have conceded that the Philippines will miss the ambitious growth target of 7 percent for 2018. The high inflation rate is the common thread running through these different outlooks. 

In what had unfortunately become the norm this year, the spiraling commodity prices, which have reached decade-high levels, have alarmed consumers and producers alike. 

Last month, it hit 6.7 percent, barely missing the private sector’s consensus of 6.8 percent, and falling within the Bangko Sentral ng Pilipinas’ expected range of 6.3 percent to 7.1 percent. 

For the first three quarters of the year, inflation already reached 5 percent, exceeding the upper bound target of 4 percent for 2018. Petroleum, rice and other agricultural commodities, exacerbated by Typhoon Ompong, as well as the weaker peso, stoked prices in September. 

Food and non-alcoholic beverage prices rose by 9.7 percent last month. Food items contributed 5.5 percentage points of the 6.7 percent inflation figure. 

The rising commodity prices cast a spotlight on the inefficiencies in the agriculture sector. As September was drawing to a close, Typhoon Ompong ravaged parts of Luzon, decimating hundreds of lives and properties. The stormy weather added another blow to the already beleaguered sector, and consequently, to consumers’ pockets.

The agriculture department estimates the typhoon’s damage at around P26.7 billion, the highest since Typhoon Yolanda struck in 2013 and cost us P35 billion. Damages in rice crops, the country’s staple food, amounted to P14.5 billion. 

Unsurprisingly, rice was the top contributor to inflation in September, adding 1 percentage point to the headline figure, from only 0.1 percentage point at the start of the year. Fish followed next, adding 0.8 percentage point, while vegetables and meat each added 0.5 percentage point. 

The rising global oil prices will also strain consumers further. The roll back in electricity prices tempered the contribution of electricity, gas and other fuels to inflation. 

However, commuters, especially car owners, have been coping with consecutive weekly increases in fuel prices. Dubai crude oil prices already averaged at US$77 per barrel in September, only US$3 short of the US$80 threshold that suspends additional excise taxes on crude under the TRAIN law. 

Around 90 percent of crude oil imports are from the Middle East, with over a third sourced from Saudi Arabia. As US sanctions on Iran take effect in November, Saudi Arabia might struggle to fill the vacuum left by its regional rival. This will further tighten the oil supply in the world market and drive up oil prices even more. 

The BSP projects inflation to average 5.2 percent in 2018, before falling to 3 percent in 2019. The BSP’s inflation forecast is already the third revision for the year. It raised its projection from 3.4 percent to 4.3 percent, and then to 5.2 percent, as commodity prices increased at a faster pace than it initially expected. 

The central bank has been forced to dig deeper into its monetary toolkit to help curb inflation. Already, it has successively raised interest rates by 1.5 percentage points in a span of just five months. 

Meanwhile, officials in the executive branch have crafted measures mostly aimed at checking food prices. For rice, the National Food Authority has already approved the importation of an additional 750,000 metric tons this year and 1 million metric tons next year. 

In September, President Rodrigo Duterte signed Administrative Order 13, which aims to streamline the importation of agriculture commodities such as rice and fish products. Of course, the measures provided under the TRAIN law, such as the distribution of the unconditional cash transfers and the fuel cash cards, will help mitigate the impact of higher prices. 

Yet, these are only band-aid solutions that will temporarily assuage an increasingly disgruntled population. Of course, commodity prices are highly political as much as they are an economic concern. 

Politicians and political aspirants, who are filing their candidacies, are well aware of this. However, people hope those at the forefront of policy decisions focus on long-term reforms and look beyond the short-term election cycles. 

 

Weslene Uy is the deputy executive director for research of think tank Stratbase ADR Institute, a partner of Philstar.com.

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