High inflation, dollar drain, peso decline all part of ‘growing pains’, says BSP official

The economic difficulties being experienced by the Philippines at present — high inflation, large dollar outflows and a weakening peso — is due to “growing pains” that are necessary for the country to develop further, according to a central bank official.

At the same time, Bangko Sentral ng Pilipinas (BSP) assistant governor Restituto Cruz praised the government’s policy of investing in infrastructure which, “while not a panacea, is expected to pave way for a more inclusive, durable and sustainable economic growth path.”

Speaking before a group of businessmen and investors at the 13th Philippine Forum of The Asset magazine, the official reiterated that the nine-year-high inflation rate of 6.4 percent in August was driven largely by supply-side factors particularly the significantly higher global oil prices, food supply disruptions, and higher excise taxes imposed under the TRAIN law.

The central bank official — who was delivering the keynote address on behalf of BSP Governor Nestor Espenilla Jr., who is one medical leave — defended the timing of the monetary authority’s response to rising inflation amid criticism that it raised interest rates too late.

“Prescribing the wrong medication is almost or at times worse than not taking any medicine to cure an illness,” he said. “Implementing timely, well-thought out, and coordinated policy response is key in addressing recent inflation upticks.”

Meanwhile, the steady drain of dollars from the local economy, he said, is “largely reflective of the economy’s strength” despite concern being raised by analysts and economists about the widening current account deficit posted in the past two years.

“Running a current account deficit is not necessarily a cause for concern as suggested by underlying trends,” Cruz said. “The significant rise in imports registered in the past three years was driven mainly by increased demand for capital goods as the economy continued to accelerate.”

Finally the BSP official noted that the central bank continues to adhere to a freely floating exchange rate system.

“Thus, the depreciation of the peso in the past two years has been largely and in the long run driven by fundamentals,” he said. “This mainly reflects rising demand for foreign exchange traceable to the surge in imports in support of the growing economy; as well as to dollar debt repayments and prepayments and outward investments.”

“These three major developments can be seen as “growing pains” or the adjustments that the domestic economy has to endure as it moves to a higher plane of growth,” Cruz noted, adding that policy makers have “ample policy space” to respond should potential risks emanating from these outcomes materialize. /kga