One legislator warned that the incoming administration would be laboring under conditions of stagflation. That warning is dire.
Stagflation happens when inflation remains high and the rate of economic expansion is low. This is sort of an economic bog where purchasing power erodes and opportunities to earn remain limited.
All over the world, economies are facing higher inflation rates. The phenomenon is caused by cost-push factors such as higher energy prices and broken supply chains.
The most recent factor driving up energy prices is the Russian invasion of Ukraine and the economic sanctions imposed by most industrial economies to penalize Moscow. Russia is a major exporter of oil and gas. The sanctions threaten to widen the supply and demand gap in oil and gas.
Oil prices surged to unprecedented levels since the invasion of Ukraine. The surge was briefly moderated by the decision of the industrial economies to release supply from their strategic oil reserves. That can only be a short-term measure however.
Over the past few weeks, the imposition of strict mobility restrictions in several Chinese cities helped bring down global oil prices. These restrictions bring down China’s huge demand for oil. This too cannot be a permanent solution to the high oil prices regime that is driving up inflation everywhere and threatening the industrial economies with recession.
On the upside, moderating oil prices gave consumers some breathing space. This week, Filipino consumers were treated to a marginal rollback in fuel prices. That is at least a relief from weeks of sustained price increases.
The trend towards stagflation is unintentionally reinforced by monetary policies wielded to force back inflation. Higher interest rates might cool down inflation; but they discourage investments that help economic expansion.
In our case, we are expecting the Monetary Board to reverse its stimulus-oriented cheap money policy and finally raise policy rates. The move will also stall the peso’s decline.
We have seen from previous experience it is not easy to climb out of stagflation. This is because measures aimed at addressing one side of the phenomenon tend to aggravate the other side. Economies climb out of stagflation only by improving efficiencies at both the state and enterprise levels.
Cheaper energy
Power distributor Meralco illustrates how this might be done. While oil prices remained high and our economy posted a 4.9 percent inflation rate for April, the distribution utility announced a reduction of 12 centavos per kWh.
The reduction might not seem earthshaking. But against the backdrop of rising prices for everything, the reduction defies the trend.
Fuel prices play a major role in electricity pricing. Both, in turn, influence pricing for everything else: food, transport and manufacturing.
Also, while the consumer price index increased consistently over the last decade, Meralco’s power rates actually went down compared to ten years ago. This happens despite constant increases in generation charges.
So, how did Meralco buck the general inflationary trend?
Meralco spokesman Joe Zalderriaga says the latest reduction in electricity prices is attributable to the refund the power distributor started implementing this month. That refund was sufficient to offset the increase in the generation charge passed on to consumers. The generation charge, in Meralco’s case, accounts for 58 percent of the total bill.
It is important to note that Meralco’s generation charge is significantly lower than in adjacent areas. In April, for instance, Meralco’s generation charge was P5.87 per kWh. In the same month, electric cooperatives in Batangas were charging between P7and P8 per kWh. Cooperatives in Tarlac and Zambales charged over P7 per kWh.
Over the past decade, Meralco has successfully lowered the generation charge through a number of measures. Through the Competitive Selection Process (CSP), the distribution utility awarded supply contracts to the lowest bidder. In 2019, the CSP process resulted in savings amounting to P9 billion a year.
Supply continues to be an issue across the power sector. There are not enough investments in new generating plants. Should more power suppliers enter the market, the distribution utility is confident it could lower generation charges even more and pass the savings to its consumers.
More investments in power generation will pave the way for the entry of more efficient technologies, a more reliable power supply and a healthy power reserve. All these will help us build a more competitive economy.
Conversely, insufficient investments in power plants mean we rely on old and inefficient plants for our base load capacity. These plants not only create more harmful emissions, they saddle our consumers with more expensive power. When they break down, outages disrupt our productivity.
Should the new administration decide to activate the mothballed nuclear power plant, we could reduce power costs dramatically. It will also make possible an earlier transition away from coal-fired plants.
Over the next few years, we might expect a dramatic shift in our energy mix away from dirty and costly old plants to renewable energy producers. This will help us transition from having the second most expensive electricity in Asia. Expensive electricity is a major factor in making our manufacturing uncompetitive.
Meralco’s distribution charge remained nearly constant the past decade. This is the result of relentless improvement in its internal processes. The company kept its operating costs down, reduced waste and systems losses as well as kept a slim profit margin.
If we could duplicate Meralco’s achievement in bringing down costs and operating on a thinner margin across other vital sectors of the economy, we will have a better chance at fighting off stagflation and maintaining our growth momentum.