‘Sana’ in SONA: Controlled inflation
OF SUBSTANCE AND SPIRIT
To be sure, and we heard them from NewsWatch Plus, there were many “sanas” during the 3rd SONA (State of the Nation Address) of President Ferdinand Marcos Jr. Sana bumaba ang presyo ng bilihin. Sana dumami ang trabaho. Sana ipagtanggol ang West Philippine Sea. Sana ipatigil na ang POGO (Philippine Offshore Gaming Operators). The civil society demands a good scorecard from this government.
With a fine-tooth comb, NEDA as the planning authority should do the monitoring having been mandated to prepare the Philippine Development Plan (PDP) 2023-2028. It’s an excellent Plan because it formalizes a comprehensive roadmap complete with actionable policies and programs and sets for Congress an appropriate set of legislative priorities to address both short-term and medium-term issues. A good scorecard and monitoring system should lead to a good execution of public policy. Otherwise, the vision for this nation could just ossify on paper.
We focus on controlling inflation because it remains the most urgent concern of the Filipinos based on the latest Pulse Asia Survey for June 17-24 and Octa Survey for June 26-July 1. Around two-thirds of Pulse Asia and Octa respondents rated inflation control as the most urgent national concern.
Inflation is closely related to the other concerns like increasing workers’ pay, because higher prices weaken their purchasing power. Reducing poverty is also critical because prices are already high. Creating more jobs is a direct means of empowering people to mitigate their poor condition and weaker spending capacity. Finally, fighting graft and corruption is considered one big impediment to appropriate public policy to provide infrastructure and social services.
Table 1.1 of the PDP 2023-2028 provides us with the baseline of food and headline inflation at 5.7 percent and 5.6 percent for the period January-November 2022. For both indicators, the target was set at two to four percent for 2024 and 2025.
We consider three components behind the inflation management in the Philippines. One is appropriate monetary policy; two, is a set of strong non-monetary measures to manage the supply side; and three, responsible fiscal policy.
On monetary policy, we give high credit to the Bangko Sentral ng Pilipinas. In the last six months of the previous administration, the BSP was so behind the curve before it decided to tighten monetary policy. This was rather too late and too little. For as early as March 2022 onwards, actual inflation had already reached the 4.0 percent upper end of the target, with inflation forecasts also subsequently breaching their targets for both 2022 and 2023.
When the Marcos government took over on July 1, 2022 the new BSP leadership jacked up the policy rate by 75 basis points (bps) from 2.5 percent to 3.25 percent in an off-cycle meeting. That and more adjustments came, running a total of 450 basis points to address the surging inflation for both 2022 and 2023.
By December last year, the year-on-year monthly inflation fell within the target at 3.9 percent. For the first six months of this year, inflation averaged 3.5 percent. The new BSP leadership should also be commended for keeping its focus on price stability even as various quarters called for a monetary policy reversal in order to stimulate the credit market and stimulate economic activities.
It is not correct to suggest that today, the BSP should have eased monetary policy because one, it is using lagging indicators; two, monetary policy has lagged effects of about 18 months; and three, inflation data masks cumulative effects of previous price movements.
In reality, the BSP sets its monetary stance not by looking at the past, but by looking into the future based on its forecasts for the next two years. Whatever monetary steps taken today would not be felt tomorrow or the following week, but over a period of about 18 months. Previous inflation rates are monitored because they are useful in discerning how the previous decisions fanned out. Finally, because inflation eats into the purchasing power especially among the daily wage earners among us, the BSP has to be stubbornly committed to win the war against inflation. Due to dominant upward risks, the BSP was correct in keeping its tight monetary policy until today.
After all, the impact on growth has been quite manageable. High inflation discourages personal consumption which accounts for around three quarters of GDP.
Well, what the BSP could have avoided was its press statement on a possible early easing ahead of the US Fed that rattled the FX market and sent the peso past the ₱58 to a dollar exchange rate. Given the exchange rate pass through, and if prolonged, that could have some inflationary consequences. At the time, the BSP’s risk-adjusted forecasts exceeded the target.
On non-monetary measures, high mark is impossible. Food, especially rice, production is not sufficient, farmers’ productivity remains low. The ax should fall squarely on the Department of Agriculture, National Irrigation Authority, DTI and other relevant government agencies. We have yet to see a coherent food security program. No wonder for June alone, food inflation continued to be high at 6.5 percent, no farther away from the previous year’s 6.7 percent. Rice inflation remained double digit at 22.5 percent.
There is an Interagency Committee on Inflation and Market Outlook. Its mandate is clear: address supply and logistics issues including measures to combat immoral and illegal profiteering. They have yet to deliver. For instance, it took eternity to get the tariff duties on imported rice reduced from 35 percent to 15 percent.
A few words about public finance. There was so much in the 2023 and 2024 national budgets that could have funded priority infrastructure in agriculture and industry as well as in research and development, education and skills retraining programs that could have easily translated into higher economic growth and perhaps better supply outcome, something good for inflation management. Fiscal consolidation is also crucial because the fiscal space is slim; excessive spending could reignite higher demand pressure. This could compromise price stability. For this metric, fair score is fair.
Sana…