Crosscurrents

Saudi Arabia, reeling under the controversy ignited by the grisly murder of Jamal Khashoggi, has mounted a public relations effort to help maintain its standing in the community of nations. The most important element of that effort is the assurance of abundant oil supplies in the market to hold back prices.

The kingdom pumps out about 10 million barrels of crude oil per day. It has about two million more in spare capacity. The spare capacity will not be enough to offset the loss of Iranian oil from the market should US-sponsored trade sanction take full effect. But for the moment, Saudi signals of more oil being made available pushed back crude prices.

The substantial rollback in pump prices enjoyed by our consumers earlier this week reflects the softening of crude prices in the global market.

It is too early to declare the start of a trend. There are too many factors influencing the movement of oil prices. Supplies from Nigeria, Libya and Venezuela remain unreliable.

The thin margin between global supply and global demand for oil makes pricing for this commodity difficult to predict. For many importing countries, ours included, any movement in oil prices have repercussions on the inflation rate and eventually on growth prospects.

While oil prices relaxed the past few days, stock markets dropped across the board in the first few days of this week. The retreat in stock prices is attributed to a wide range of concerns ranging from the populist spending plans of the new ruling coalition in Italy, the uptick in tensions between the US and Russia, the looming trade war between the US and China, the increase in US interest rates and, of course, the geopolitical repercussions of the Khashoggi affair.

Dropping stock prices will reflect in slower private investments. That works into the general forecast for slower global economic growth. 

There is, fortunately, no clear indication the global economy could slip into a recessionary trend. But, as the slowdown in China’s growth indicates, we are in for an episode of weak global economic expansion.

Clearly, the crosscurrent of recent developments will bring mixed effects for our own economic prospects. The rollback in fuel prices could help greatly in pushing back the inflationary trend, although much still has to be done to address the supply issues that push up prices.

It is probably time to discuss countercyclical measures we could undertake to fight off the global slowdown and maintain the current pace of economic growth. Countercyclical measures were what spared us from the recessionary fallout of the 2008 financial meltdown.

There can be no harm in taking a more proactive stance on the growth/inflation picture than that maintained in the early months of this year.

Oversimplified

Unfortunately, we have entered the electoral season. Over the next few months expect politicians to say the dumbest things to win votes.

For instance, a number of senatorial aspirants have oversimplified what should be a complex matter about reining in the inflation rate. With an eye to winning popularity among voters, they have politicized the excise taxes on fuel and called for its suspension.

Some have gone further, calling for a possible repeal of the tax reform package passed last year. They conveniently forget to tell our voters that this package includes a reduction of personal income tax rates, itself a boost on the demand side contributing to inflationary pressures.

The most recent calculations of BSP economists say that the suspension of the P2 additional excise tax for fuel will push back the inflation rate by only 0.2 percent next year. The counter-inflationary effect is almost negligible, yet the politicians make it sound like this is the silver bullet to end our inflation woes.

In exchange for that negligible effect on reducing the inflation rate, government will lose about P40 billion in revenue opportunities. The additional revenues would go a long way in helping fund the amazing things populist politicians want: free tertiary education in government schools, a bill implementing universal health care and another bill guaranteeing zero-hunger.

At the very least, the potential revenues from excise taxes will allow us to go full-steam ahead with the infrastructure modernization program without incurring too much debt. This program is the best countercyclical measure to fight off the expected global slowdown and ensure our domestic growth rate remains robust.

To be sure, the elevated inflation rate we now endure inflicts pain on our people. Being fueled principally by sharp increases in food prices, the elevated inflation rate hurts the poor more than the rich. We need a more comprehensive discussion on how our poor logistics system and poor management of the agricultural sector aggravate inflation.

But the election-related political rhetoric is not conducive to a well-rounded discussion about what we can do to improve our economy, make it less prone to food supply crises and transform it to be more inclusive. Instead, opportunist politicians have politicized the elevated inflation rate and blamed a more modern taxation system as the culprit.

All the noise the opportunist politicians make now make the suspension of the excise taxes on fuel an inevitability – even if the counter-inflationary effect of doing this is negligible and the costs on our fiscal stability high.

All countries impose excise taxes in fossil fuels. Most countries imposed higher rates than we do simply because the pollution use of these fuels produce cause harm on the environment and on people. Fuel taxes are in fact “sin taxes” – although the populist politicians would not want to call it that.