More reforms urged to protect vulnerable sectors
While targeted subsidies to sectors worst hit by expensive fuel would be an effective stop-gap measure in the near term, the World Bank urged the Philippines and its neighbors to introduce more agricultural reforms to keep food prices stable in the long-run.
World Bank country director for the Philippines Ndiamé Diop told a webinar on Thursday that core inflation, which does not take into account volatile items like food and oil prices, remained in the 2 to 3 percent level in the Philippines, Malaysia and Thailand —the three countries he oversees for the Washington-based multilateral lender. “[It meant] that domestic demand is still subdued and second-round inflation pressures are so far manageable,” Diop said.
But as the Philippines and Thailand were both net importers of gas and oil, Diop acknowledged rising headline inflation in the two countries, mainly driven by the sharp rise in international prices spilling over to domestic electricity and transport costs. In the case of Malaysia, which produces oil, Diop said it was benefitting from the higher global prices wrought by the ongoing war between Ukraine and Russia while keeping inflation manageable.
“Given these drivers of inflation, monetary tightening is unlikely to really reduce headline inflation today, but it will hurt economic growth [as] outputs in all the three countries are still below their 2019 levels, and the economic recovery remains quite fragile. [Their] central banks have rightly maintained an accommodative stance. However, there are some global pressures, and it is important to remain alert and balance external pressures with domestic needs,” Diop said.
For Diop, rising inflation could be best addressed by well-targeted cash transfers to vulnerable households and groups. “It’s the least fiscally costly way to mitigate the impact of inflation, and it is much better than universal and untargeted subsidies, which are really not sustainable, especially in a period where fiscal space is very limited.”
Diop cited the Philippines where the current main tool to address the impact of high inflation was cash assistance to the poor as well as the agriculture and transport sectors.
The government would give away a total of P47.5 billion in financial assistance to those most vulnerable to costly oil, including the bottom 50 percent of households.
