More steam ahead

ON February 26 we were invited to serve as resource persons for the Senate Committee on Economic Affairs. Chaired by Sen. Sherwin T. Gatchalian, the main purpose of the hearing was to give an update of the current economic assessment by the National Economic and Development Authority and, at the same time, review the initial impacts of the Tax Reform for Acceleration and Inclusion law. Gatchalian explained that the inflationary effects of the TRAIN law need to be carefully analyzed in order for the government to make a proper response if it overshoot original estimates. This is particularly of concern for the poor who are not in any way benefiting from the personal income-tax cuts but will be directly affected by the pass-through effects of additional taxes on oil, electricity and sugar-sweetened beverages.

The Department of Finance, Bangko Sentral ng Pilipinas and other government agencies were also in the briefing. The main conclusion of the meeting was that the TRAIN has not yet affected prices substantially. It is possible that the increase in global oil prices and the depreciation of the peso had more to do with the higher than expected inflation. Furthermore, it is possible that the additional inflation was caused by perceptions and expectations.

In our column two weeks ago, we explained that our base estimate for inflation with the initial impact of the TRAIN is 3.4 percent for January. As the actual had reached 4 percent, it is plausible that the increase was due to expectations causing businesses to increase prices even before they get the new stocks. This has led to a domino effect affecting other goods and services. What has actually happened is that people were caught unaware of the actual benefits they could get and costs of the TRAIN through inflation. The rise in prices is largely a communication and coordination failure. We have warned that the news of lack of National Food Authority (NFA) rice in the market could lead to further high prices simply because of delayed local and imported procurement. It is not that the NFA is not aware of the need for buffer, but the timing is critical, as rice contributes to about 10 percent to inflation. All the good intentions of the TRAIN law are being challenge by these failures. We were not surprised that the February inflation rate breached 4 percent even with relatively lower oil prices, as the lowest rice prices increased by about P5, or about 16 percent. We accurately forecasted it to hit 4.5 percent using 2006 base year.

Dr. Dennis Mapa, Dean of the University of the Philippines School of Statistics, presented the impact of the January inflation to the poor, or bottom 30 percent. He noted the inflation of the poor is higher than the headline inflation of 4 percent. He cited past data showing impact of inflation on the poor, it is seen to slow down poverty reduction. Considering that 2018 is a survey year of the Family Income and Expenditure Survey, in which we draw and estimate poverty rates as well, a high inflation for the poor may impact negatively the efforts to lower poverty to below 20 percent. His estimates also showed that the unconditional cash transfer for 10 million poor families of P200 per family per month may not be enough to cushion faster price increases.

With these information, it is critical for government not to allow more steam ahead from the TRAIN. It should work to ensure that the price of rice becomes affordable through stable and available supply. It was common agreement that tariffication of rice is a better measure than quantitative restrictions and that it should be done soonest. Also, it must utilize its communication and coordination mechanism well. A clearer and more basic explanation of the TRAIN must continue to the public utilizing all forms of media. The full effect of the TRAIN will take some time, possibly hitting the most from May to August when summer vacation is about to end and school opens. The government should not wait till then to respond. It must start now.

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Turning Points 2018