Darwin G. Amojelar and Maricel E. Burgonio
Manila Times

THE Asian Development Bank said an increase in the Bangko Sentral ng Pilipinas’ (BSP) interest rates is unlikely to temper rising inflation given the current trend of higher food and fuel prices.

The regional lender issued this warning even as the BSP said it would raise its policy rates if a possible transport fare hike and the recent wage increase further bid up prices.

In a study released Saturday titled, “Has Inflation Hurt the Poor? Regional Analysis in the Philippines,” Hyun Son, ADB economist said it is important to direct government policies toward stabilizing food prices. Son said that from last year to March this year, rice prices have increased at an annual rate of 22.9 percent from 3.4 percent between 2006 and 2007, thus resulting in a 14.2-percent increase of the severity of poverty.

Prices of fuel have surged to 52.6 percent from 3.3 percent; water, to 10 percent from 5.1 percent; education, to 13.5 percent from 6.7 percent; medical expenses, to 16 percent from 4.6 percent; and transport, to 13 percent from 0.6 percent.

“Given these current trends, monetary policy may not be an effective tool to combat rising inflation. Such policies may push the economy into recession, which will hurt the poor even more,” Son said.

Last month, the BSP kept its key policy interest rates at 5 percent and 7 percent for the overnight borrowing and lending windows. Its current overnight borrowing rate is at its lowest level since May 1992.

Son noted that the recent increase in rice prices is unprecedented, outpacing that of other basic commodities except fuel.

As of 2006, the government reported that the number of poor Filipinos numbered 27.6 million, 16 percent more from the 23.8 million recorded in 2003. The ADB study used monthly price data available from January 2000 to March this year. “This finding indicates that rising rice prices hit the ultra poor the hardest,” Son said.

The ADB said the poor allocate almost 60 percent of their expenditure on food while the same proportion of total expenditure is spent on nonfood among the nonpoor. While the poor allocate more than 18 percent of their total expenditure solely on purchasing rice, almost 14 percent of the total expenditure of the nonpoor is spent on rentals.

“Such consumption patterns indicate that rising food prices will have much greater adverse impact on the standard of living of the poor,” the ADB economist said.

For the first three months of 2008 for instance, the ADB said the Bicol region and the National Capital Region have experienced an average increase in the price of rice by 38.6 percent and 36.8 percent, respectively. The lender said the increase in the number of poor people will be highest in the Visayas and the Luzon, with the Bicol region forced into poverty from a 10 percent price increase in rice.

Overall, a 10 percent increase in food prices will create an additional 2.3 million poor people, while a 10 percent increase in nonfood prices will drive an additional 1.7 million people into poverty. A 10 percent increase in the price of rice will force 0.66 million people into poverty, while a 10 percent increase in fuel prices will push another 0.16 million into their ranks.

“The National Food Authority is selling subsidized rice to vulnerable groups in the Philippines at a much lower price than the market price. If the subsidies are removed, then rice will be sold at the market price,” Son said. Since last year, the increase in food prices contributed to a reduction in the average standard of living by 9.45 percent, the ADB said. “The decline in the standard of living due to food price increases was particularly greater for the poorest of the poor. At worst, these households struggling to meet the minimum standards of living might have no choice but to cut down their expenditures on health and children’s education,” Son said.

Inflation is clear-and-present danger

“Right now, we find ourselves in situation where growth can still be described as robust and the clear and present danger is inflation,” BSP Deputy Gov. Diwa C. Guinigundo however said.

As oil prices remain high, an increase in transport fares—unlike the recent wage hike—will unsettle the BSP’s inflation expectation, he told reporters. Monetary authorities have factored in a P25 a day wage increase this year or a 7 percent adjustment from the minimum wage of P362 per day. Anything beyond P25 would further increase inflation, they warned.

Last month, inflation rose to a three-year high of 8.3 percent driven primarily by high food and oil prices. Even with this record high, the BSP expects inflation to decline in the fourth quarter of the year.

Transport groups last week lobbied for more gasoline subsidies and the lifting of the 12-percent valued-added tax to help them cope with costlier fuel. Diesel prices at the pump already breached the psychological level of P40 to a liter. They are also pushing for a fare hike of P1.50 for the first four kilometers, and P0.50 for the succeeding four kilometers.

“Once there are second-round effects, or there are signs of disanchoring of inflation expectations then we should assess [our policy],” Guinigundo said. “At this point, neutral stance is still appropriate, but between now and the next advisory committee and Monetary Board meeting, you can see a different picture by that time. Things are moving very fast, very fluid,” he said.