Fighting Inflation: Non-monetary Measures

IN A FEB. 20 news article in BusinessWorld, Finance Secretary Benjamin Diokno was quoted as saying, “The monetary authorities have done their part; the Executive department, including LGUs, have to do more, be more aggressive and focused. In the fight against inflation, monetary policy is not the only game in town.”

We agree that there is basis for the statement of our finance secretary. The 14-year record January inflation rate of 8.7% is due to food (10.7%) and to transport (10.9%). Such a high inflation rate is not demand driven, meaning there was no sudden increase in demand for food or gasoline. The inflation is supply driven, meaning the supply of food (Department of Agriculture) and oil (OPEC+) has been restricted and so prices have risen.

The way to fight this type of inflation is not by raising the interest rate which seeks to lower demand, but to increase the supply or, even better, to buy or obtain the supply at a much lower price. Thus, if we follow the example of India and buy Russian oil at a discount, we could lower our price of gasoline by 30%. By the way, we are now allowed to import Russian oil so long as the price is at $60 per barrel or lower.

With respect to food, we could, as suggested by the finance secretary, import the food that is priced lower in the world market. For example, the local price of sugar is P95 compared to the world price of P25.93.

Presented in the table below are the local and world prices of selected food commodities with assumed tariff rate of 35%.

Moreover, we have already used this approach in fighting inflation. In 2018, during the Duterte Administration, due to the miscalculation of National Food Authority (NFA), the price of rice rose from P40 to as high as P50. Faced with his declining popularity, the Duterte Administration passed the Rice Tariffication Law.

This enabled the private sector to import rice by paying a 35% excise tax. The result of this law is that the price of rice is still stable at P40 while the rice farmers have received at least P10,000 each in direct cash subsidy as well as other benefits from the excise tax. (“Rice farmers receive P8.2 billion from DBP and LandBank since 2019,” BusinessWorld, June 13, 2022)

Our monetary authorities have issued a call for help from our non-monetary government agencies. Hopefully they will answer the call.

Dr. Victor S. Limlingan, who has PhD in Business from Harvard University, is a former professor at the Asian Institute of Management.