Drought

This will not be a happy year for our farmers.

As of March 31, government statistics show that the “weak” El Niño we are experiencing produced agricultural damage amounting to P4.35 billion. Of this total, production losses for rice are estimated at P2.69 billion.

And we are just at the beginning of the dry season.

In addition to the drought, our rice farmers will have to adjust to the effects of the new tariff regime for rice trading. In place of quantitative restrictions on rice imports, traders are now free to import rice provided they pay the 30% tariff on the commodity.

The tariff barrier, while high, is not enough to fully protect local production. Our farmers spend about P12 to produce a kilo of rice. They will be competing with farmers from Thailand and Vietnam who produce rice at P8 and P6 per kilo respectively. The most profitable source of rice imports is Vietnam, where the cost of production is only half ours.

Although the shift to a tariff regime will benefit consumers and suppress inflation through lower rice prices, it will also put pressure on farm gate prices for the commodity. This will lead to even lower incomes for rice farming communities.

Rice farming is already unattractive. The crop may be described as a poverty trap, producing the lowest possible income per unit of land devoted to it. This explains the high rates of migration out of the rice producing areas and the rapid aging of the farmer population.

Our cost of producing rice cannot be sustainable in a free trading regime. But if we return to the old regime of quantitative restrictions (inconsistent with our commitments to the WTO), we will continue penalizing our consumers with a very high food price regime.

Also, rice is the most water intensive crop to produce. This will add to the strain on our fresh water supplies.

Being an archipelago of small islands, we do not have the impressive river systems we see in mainland Asia. Many of our small rivers dry up during the dry season. Much of the water we use for irrigation require the use of pumps, adding to the cost of production.

Over so many years, our agricultural authorities saw subsidies for irrigation as the “solution” to thin crop revenues. But this does not eliminate the costs. It merely reassigns them.

The previous administration pursued the worst possible agricultural strategy given our situation. It sought to achieve rice self-sufficiency, advocating free water to achieve this. This is not a sustainable strategy.

The better strategy is to abet diversification of our agriculture, encourage the use of new crop varieties that are less dependent on water and adopt market-driven solutions. By allowing itself to be drawn into the false utopia of rice self-sufficiency, the previous administration set us up to the rice shortages we experienced last year.

Theirs was a political strategy to win the support of rice farming communities. It was not a sustainable economic strategy.

Downsides

Yesterday, the World Bank lowered its growth forecast for the country from 6.5% to 6.4%. This might seem marginal. But it does signal some deterioration in confidence in our ability to sustain rapid economic expansion into the medium term.

WB senior economist Rong Qian identified two factors explaining the lower growth prospects: the El Niño phenomenon and the delay in the passage of this year’s budget. The former is an unavoidable weather cycle; the latter is self-inflicted by our toxic politics.

Because of these two downsides, we could expect growth forecasts to be lowered further if: a) the drought becomes more severe than expected; and, b) there is further delay in enacting our budget. We could be testing the 6% growth rate we have come to expect as the norm for this moment in our economy’s emergence.

The proposed 2019 budget is now in the hands of President Duterte. Unable to resolve its row with the House of Representatives, the Senate passed to the Chief Executive the task of accepting or vetoing about P75 billion in allocations the senators consider to be last-minute insertions by the congressmen.

President Duterte must now make a judgment on the constitutionality of the congressional insertions. The congressmen prefer to refer to them as “itemization” of sums already approved by the bicameral conference. 

Should the President choose to use his line-item veto power and remove the questioned items, this will produce a national budget smaller than originally planned. But this is preferable to a reenacted budget.

Already the delay is costing our domestic economy dearly. It has held up strategic infrastructure projects necessary to stimulate our domestic economic expansion. The delay caused us to lose some of the heady growth momentum built up over the past two years.

Should the executive branch fail to win Comelec approval to exempt its strategic projects from the usual election ban on public works, the cost of the delay will be more serious. The lost time, as the Finance Secretary put it, could never be recovered.

But it is possible to do other things to help recover the momentum undermined by our toxic politics and a weather event.

Our economic managers could work double-time to catch up on the construction schedules in the remaining three quarters of this year. Our monetary authorities could help spark investments by lowering policy rates as the market seems to expect.

Still, the drought could still get worse and our politicians could insist on their unproductive games.