The signs of economic trouble have been brewing since the first quarter of this year, with the nation hit by the rising prices of commodities. Socioeconomic Planning Secretary Ernesto Pernia has admitted that inflation was the growth “spoiler” in the first three months of the year. The economy grew by 6.3 percent in the first semester, short by the government’s target and pulled down by the dismal performance of the agricultural sector.
Local and international economic experts have noted the domestic risks faced by a “fast-growing economy” like the Philippines, such as agricultural policies that affect food prices. In April, the World Bank, through its Philippine Economic Update, warned of several risks facing the country — among them, higher inflation, an overheating of the economy and high fiscal deficits.
Fitch Solutions cited in one of its research notes in August that elevated inflation due to higher excise taxes, rising global oil prices and sustained credit growth poses a slight risk to consumption. Inflationary pressure does present a downside risk over 2018 and beyond.
Some local economists are apprehensive that the government failed to address the higher inflation rate, as well as the widening current account, balance of trade and balance of payment deficits, which are signs of the structural weaknesses of the economy. On the other hand, there is also concern about the lack of coordination among the government agencies; despite the continuous “pressure” of the economic managers for the Department of Agriculture to act quickly and decisively on the agricultural sector’s problem, there was little improvement in the past months.
Obviously, the accelerating inflation did not happen overnight. It was already a disaster in the making. Last March, a Pulse Asia survey reported that 98 percent of Filipinos already noted the rise in the prices of basic commodities since January, and 86 percent reported they were strongly affected by such price hikes.
With the inflation rate reaching 6.4 percent in August, the Duterte administration has blamed external factors such as higher world oil prices, increasing US interest rates, and the depreciation of the peso. Although Malacañang downplayed the contribution of the Tax Reform for Acceleration and Inclusion (TRAIN) law to inflation, the timing of its passage cannot be ignored as an aggravating factor.
The main culprit now is food inflation, which has surged by 8.5 percent. For the poor (the lowest 30 percent of the population), inflation is estimated at 7.4 percent.
It may be true that international factors are the major drivers of the current inflation, but our Asean neighbors seem to be handling the situation better, as shown by their current indicators. Vietnam’s inflation rate in July was only 4.5 percent; Indonesia, 3.2 percent; Thailand, 1.5 percent; Malaysia, 0.9 percent; and Singapore, 0.6 percent.
The Department of Finance noted that food-abundant and agriculturally productive Central Luzon and Cordillera Administrative Region have the lowest inflation rates at 3.6 and 4.1 percent, respectively. This strongly suggests that reforming agriculture is key to bringing down prices.
Unfortunately, since the poorest 30 percent of Filipinos spend at least 60 percent of their earnings on food, they are suffering more than the higher-income population.
The destabilizing effect of the surge in inflation, especially when it comes to food prices, utilities and transportation, cannot be underestimated. To prevent the government from losing its political capital and credibility, it has to show that it is on top of the crisis.
The blame game among the government agencies will not help resolve the food price mess. The public expects more accountability and decisive actions from our leaders, to prevent a reversal of the gains in poverty reduction and hunger mitigation made in the last few years.
The bigger challenge now is to implement mechanisms that would mitigate the inflationary effects of such converging factors as the TRAIN law, higher global oil prices and the continuing drop in the exchange rate. Moving forward, the administration should balance its need for increased revenue with ensuring that its reforms will not inadvertently burden Filipino consumers.
This moment presents a test of leadership and governance. The entire Duterte administration needs to act as one to curb the effects of the inflation monster before it destabilizes the country’s economic growth, and further aggravates the plight of poor Filipinos.
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Dindo Manhit is founder and managing director of Stratbase Group.