Firefighting inflation

One of the latest executive orders coming out of Malacanang Palace extends the tariff cuts on rice, pork, and chicken until the end of the year, as well as introduces new ones for corn and coal. If things go well, this should put a damper on the higher inflation rates expected in the coming months.

The government is fighting inflationary fires using all the possible weapons available at its disposal. The signs of distress include crude oil jumping to over $120 per barrel, food prices continuing to inch up, and a weaker peso flirting the P53-to-a-dollar mark.

A response to the effect of high oil prices includes providing fuel subsidies to the most vulnerable sectors of society, and while this helps affected individuals to cushion the impact on their daily lives with a few pesos discount at the pump, this still affects almost all commodities that use fuels.

The most worrisome inflationary effect of high oil prices is on food, and negating this with other measures has become almost an obsession by the National Economic Development Authority (NEDA) and the economic team. Issuing Executive Order (EO) 171 is one response.

Released just a few days before the 17th Congress resumed sessions, the presidential directive provides an insurance to any possible disruption in global rice supply shortage and subsequent price shock, but a foil for struggling production of local pork and chicken.

Growers expectedly are decrying the threat that lower-priced pork and chicken imports would mean to them, while importers are lauding the move that would allow them to manage prices of processed foods that Filipinos have grown a fondness for.

Corn in the food chain

A new weapon in the government’s inflation firefighting arsenal is the reduction of corn tariffs, something that the biggest feedmillers in the country have been asking for almost a decade now.

Claiming that corn comprises from 40 to 60 percent of feeds produced, a dearth of locally available good corn from our farms has kept feedmillers reliant on imports to meet the growing feeds requirements of hog raisers and poultry growers.

While corn produced in ASEAN countries carries only a five percent tariff, there is almost none available, especially when China goes on buying binge. This forces our importers to source further away, but at a much higher tariff of 35 percent under the minimum access volume (MAV) and 50 for over MAV.

The high duties on imported corn compound the inflationary effects on pork and chicken prices, more so when there are supply disruptions, such as what is currently happening from Ukraine’s inability to ship out its corn and other grains through the Black Sea.

In a study commissioned by NEDA with the Senate in 2021, the average P7 increase in corn prices in 2020 translated to a 15 percent increase in the cost of producing feeds, and an 11 percent increase in the cost of bringing pork, poultry, and eggs to the market.

The issuance of EO 171, which brings corn tariffs to five percent within MAV and 15 percent outside of MAV until the end of the year, provides some breathing space for local feeds manufacturers to keep their prices lower for livestock growers, and consequently, becoming more competitive with imported meats.

Local feedmillers, who are also competing against imported brands, are hoping the incoming economic team will see the value of corn in the food chain, and give it a more strategic role in stabilizing the country’s food productivity and cost.

Lower tariffs on corn, they argue, should not be anti-farmer. Such is the case for countries within the ASEAN that are able to export corn because their governments had put in the proper programs to support corn farming while keeping it integrated with livestock growing.

Not only have these countries grown corn in excess of their needs, but they have also managed to keep their pork and chicken prices low. With even more than enough for local consumption, they likewise are able to export them to other countries.

Keeping electricity rates lower

Another firefighting measure against inflation is the temporary removal of the seven percent tariff on coal, which accounts for close to 60 percent of the country’s power generating fuel source.

The move is intended to partially mitigate the effect of high oil prices on the electricity generation sector and to foil any prolonged uptick in coal prices. It also encourages local power producers to raise their stockpile levels and give the country added fuel supply security.

The household budget for electricity and liquefied petroleum gas used for cooking carries a substantial weight on inflation metrics, which is why reducing imported coal levies can be critical in keeping electricity rates a few centavos lower.

Depressing power generation costs will also help defray some of the costs for industries that rely heavily on electricity in their production processes. Even before the pandemic, electricity rates in the Philippines were second to highest in Asia, next only to Japan.

A little late

Last month, inflation rates may likely have gone over five percent, according to Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno, who is also poised to take over the lead role of the incoming administration’s economic team.

The recent release of EO 171, which had been recommended as early as March, should help tame inflation within the next few months as cheaper imported food and corn makes their way through the system before reaching consumers.

Hopefully, the tariff reductions do not come too late.

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