Battling inflation on the supply side

Inflation in the Philippines continued its upward trend to 7.7 percent in October 2022, a rate not seen since the 2008 financial crisis. This level of inflation means that a peso in 2018 is now only worth 87 centavos.

Many factors affecting inflation are outside of our control. For example, the ongoing Russia-Ukraine war continues to disrupt the supply of goods like fertilizer and fuel, making them more expensive.

Basic economics suggests that both supply and demand influence prices. The Bangko Sentral ng Pilipinas (BSP) has been increasing interest rates to counter inflation. However, this will increase the cost of borrowing, which will affect the cost of producing goods and services.

In this column, we shall discuss factors that are relatively within the control of the government and the private sector to increase the supply of basic goods and services, and in the process, help contain inflation.

A first step to reducing inflationary pressure is for the President to extend Executive Order No. 171, which lowered the tariffs on pork, corn, and rice, preferably up to the end of 2023. Food accounts for about 45 percent of total inflation. The Foundation for Economic Freedom estimated that “continuing the lower tariffs on pork would result in roughly P156 billion in consumer savings until 2023.”

Second, amending the warehouse receipts law is also timely. Farmers will have the flexibility to sell their crops at a time when they can maximize their profits. And banks will be more confident to lend to farmers because of the credibility and enhanced transparency for the online registry.

Third, amending the Comprehensive Agrarian Reform Law to allow land and farm consolidation by increasing the five-hectare limit to 24 hectares. This will result in bigger, more efficient, productive, viable, and competitive farms.

Another is passing the bill condoning the unpaid amortization and interests on the loans of agrarian reform beneficiaries. This, together with the sustained executive action of accelerating the conversion of certificates of land ownership awards into individual titles, will give farmers access to lending programs and assistance that can make their farms more productive.

Fourth, we agree with President Marcos Jr. that increasing the budget for farm-to-market roads is a priority to decrease the costs of distributing food. The 2023 National Expenditure Program assigns P13.15 billion, equivalent to 1,000 kilometers of said roads.

However, the Department of Agriculture (DA) noted that because of the rising cost of construction-related materials, a kilometer of a farm-to-market road now costs around P15 million compared to the initial estimate of P12 million. The Duterte administration completed around 3,000 kilometers of farm-to-market roads.

Fifth, the DA should refocus its funds. The DA has been spending more on subsidies and less on research and training. Subsidizing inputs is only helpful for one cropping season, making them inefficient in raising productivity. In the proposed 2023 national government budget, the DA’s budget for research and development decreased from an average P2.1 billion in 2017-2022 to P1.7 billion, and the budget for training and extension decreased from an average P1.7 billion in 2017-2022 to P1.5 billion in 2023.

Sixth, the Philippines should develop its aquaculture industry. The annual growth rate of aquaculture is only at 0.1 percent from 2017-2021. By modernizing the industry’s methods, productivity will improve at a lower cost of production. Hence, lower prices of fish in the market.

Seventh, local government units can also help mitigate the food crisis by using some of their funds (especially with their increase in budget and devolved programs as a result of the Mandanas ruling) for food-related projects.

Eighth, the government should also collaborate with the private sector to make common warehouses and cold storage facilities accessible to rural farms and linked to digital ledgers, giving farmers access to multiple markets while reducing marketing costs. Transportation is a continuous daily struggle for Filipinos in terms of convenience and rising costs. However, the government has been moving toward less fuel-reliant transportation, such as investing in electric-powered railways. Another way of relying less on fuel is to use electric vehicles for public transport. With the recent passage of the Electric Vehicle Industry Development Act, the Department of Transportation supports infrastructure for electric vehicles, such as charging stations. The Department of Trade and Industry is looking at providing incentives for private sector participation in the electric vehicle industry.

The recent decision of Mr. Marcos to temporarily remove the tariff on imported electric vehicles and lower the tax rate on their parts and components is a step in the right direction.

As the world continues to battle inflation, the government should continue supporting initiatives that will help lower prices of basic goods and services to ease the burden of inflation for Filipinos, especially in food and in transportation.

Rigorous supervision and monitoring by the President, the Cabinet, and the Legislative-Executive Development Advisory Council should be continued to sustain these initiatives. The BSP is trying to mitigate inflation on the demand side through monetary policies and tools, such as raising interest rates. But mitigation measures by both national and local governments working together and the active participation of the private sector in public-private partnerships or joint venture infrastructure projects should also be pursued to ease the burden of inflation further.

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Gary B. Teves served as finance secretary under the Arroyo administration.