Philippine-style inflation and a quandary

It must be embarrassing that while the Philippine economy recovered from the global pandemic in relatively good shape, with GDP growth rates among the fastest in the region and the world in both 2021 and 2022, its performance in inflation management was not quite par for the course.

Except for outlying Laos and Myanmar in the ASEAN region, both of which experienced double-digit inflation for the first two months of 2023, the other member economies managed their domestic prices rather well. For February 2023, Singapore’s inflation at 6.6% was the highest. Food producers Indonesia, Malaysia, Thailand, and Vietnam kept inflation at 5.5%, 3.7%, 3.8%, and 4.3%, respectively. Food importer Brunei’s inflation was steady at 3.3%.

Unfortunately, the Philippines was struggling tooth and nail against stubbornly high inflation for most of 2022 and the first two months of 2023. Since November 2022, inflation has been entrenched at 8% and higher. Three days ago, February inflation was reported at 8.6%, one of the highest in over 20 years, except during the height of the Global Financial Crisis in 2008.

This is not surprising, not necessarily because of global factors as everyone is subject to them, but because of three reasons.

One, the supply side remains severely handicapped. Our land reform law has failed to deliver meaningful agrarian reform and development of agriculture. Farm productivity has been low because investment is weak in agricultural research and development, farm infrastructure is at best patchy, and farm-to-market roads continue to be limited. Our farmers are aging, and many of their descendants choose to avoid farming, while the hectarage planted to commercial crops has dwindled in favor of gated villages, memorial gardens, and shopping centers. Whatever little is produced in agriculture is cornered by middlemen who turn around and make a killing. Food cartels also undermine food imports and prevent competitive pricing from helping mitigate inflation, not without the reported collusion of some public officials. Quotas remain popular against tariffication.

Of course, the uncertainties in the global economy add more sorrow to the supply bottleneck. They include, but are not limited to, volatile and increasing oil prices and rising shipment costs. Fertilizers, feeds and pesticides are priced beyond the reach of our farmers and other growers.

Only in the Philippines could we find rice and corn beyond the access of those who planted them. Onions, at one time priced more than an eye-watering P750 a kilo, were more expensive than beef, pork or chicken. Salt, garlic… name it and you will have it in short supply and at prices very few can afford.

Two, the Philippines, if we are to be charitable, is politically emasculated. As Boo Chanco of the Philippine Star wrote, citing Coconuts Manila, “you know your country’s screwed when P650 can get you this in a first world country,” showing a carton of eggs, banana, carrots, cucumbers, cabbage, a bag of calamansi, onions and a loaf of bread.

How this supply issue came about is something we agree with Boo: “The bare fact we have this problem is negligence and corruption from over half a century of electing corrupt politicians who have no sense of public interest. As if stealing from National Treasury is not enough, they also neglected our problems in agriculture and energy until these problems now look unsolvable.”

How does one approach this difficult issue of untangling fundamental problems that have been entrenched for years since the Commonwealth yielded to the Republic of the Philippines?

Perhaps only in the Philippines could you find a major anti-inflation measure in the form of a permanent Inter-Agency Committee on Inflation and Market Outlook. Touted as an “early warning system” on supply conditions, “its job is to come up with the demand-and-supply situation, and …will report to the President on a monthly basis on what is the situation.” As the finance secretary explained further, that would be the basis for importation.

With all due respect to the proponents of this proposal, the President, who looks older than he did eight months ago when he assumed the presidency, can make better use of his time and energy on more basic issues of governance than to decide on the appropriate time to import. That is the job of the agriculture department, in coordination with those who monitor the weather and climate change, our planning authorities, farmers groups and other concerned sectors. What we need is a full-time agriculture secretary with competent undersecretaries and research staff.

Making it permanent adds another layer, a redundancy, to existing bureaucracies and institutions.

We need to remind those in authority that it is the independent Bangko Sentral ng Pilipinas (BSP) that has been mandated by the Constitution and the law to control inflation. For this reason, it is represented in the National Food Authority as well as in the National Economic and Development Authority (NEDA) Board and various committees including on tariff and related matters, the economic development cluster together with all the members of the proposed committee on inflation. The BSP also sits as a resource institution in the Development Budget Coordination Committee to coordinate monetary and fiscal policies for budget purposes. There is a reason for this broad representation.

Having served the BSP in charge of monetary policy for nearly 15 years, we should know that BSP’s exposure and engagement with these institutions have served it well. In the meetings of the Monetary Board on monetary policy every six weeks, a document consisting of some 200 pages with nearly 160 charts and tables reviewing the BSP’s monetary policy is submitted as basis for deciding on the stance of monetary policy. Its engagements with these bodies have helped the staff produce detailed analysis of the price conditions, demand and supply conditions, developments in oil prices, utilities, financial markets, domestic liquidity and credit, public finance, external payments, early warning systems, and inflation expectations as they impact the outlook on inflation.

If the economic managers are looking for some science-based guidance on when to import to avoid the harvest season, they don’t have to create a permanent committee with the President as approving authority. The BSP itself is closely monitoring both supply and demand conditions of key food commodities including the weather. In the same document, there is always an assessment of weather conditions, particularly whether El Niño or La Niña is about to affect the planting and harvest season, or whether a transition to a more neutral condition is about to happen, complete with probabilities. Even rainfall forecasts and their periods of occurrence are also covered in the monetary policy paper.

In short, intelligence is available. Our economic managers do not have to constitute themselves into another committee and reinvent the wheel. There are just too many committees and task forces already to attend, there is very little time for reflection and thought.

And finally, monetary policy last year was tardy. While denying the Philippines did not have to mimic the US Fed’s direction of monetary policy, monetary authorities unfortunately bought US Fed Chairman Powell and European Central Bank President Lagarde’s initial view that inflation being cost-push was transitory. Even as red flags abounded in the first quarter 2022 in terms of demand for higher wages, utilities and transport charges — clearly a sign of second-round effects and increasing inflation expectations — we prolonged an accommodative monetary policy. With the peso sinking to one of its lowest levels in many years, the new BSP governor opted for a 75-basis points increase in its policy rate. Monetary policy had to catch up with higher rate increases in shorter duration. By that time, and we should validate this with some formal empirical proof, inflation expectations had been upset, and ultimately, de-anchored.

Only in the Philippines could one find a government that seeks to appropriate future dividends of the monetary authorities that are meant by law to recapitalize it for greater ability to promote price stability. We refer to the proposed Maharlika Investment Fund which would rather invest appropriated funds for the budget than use them for immediately stimulating production and help mitigate sharp inflation.

One of the latest thinking in the academic and central banking community is that monetary dominance and central bank independence can be secured if central banks are well capitalized.* The Maharlika concept swings to the other extreme by postponing the BSP’s recapitalization. By that token, the BSP would appear undercapitalized, weak, and far from being independent. Its credibility as an inflation buster is compromised and the market would know its balance sheet might bloat again when a more decisive monetary intervention is called for.

It puzzles us therefore why irrational policy exuberance still holds sway when the great moderation has already disappeared in the horizon.

* For instance, Princeton University’s Markus Brunnermeier, “Rethinking Monetary Policy in a Changing World,” March 2023.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.