What is wrong with the projected inflation and tariffication?

By: Fernando Fajardo October 25,2018 - 09:21 PM

Monetary authorities conceded to missing their 2-4 percent target band for inflation this year and next.

They see prices averaging 5.2 percent in 2018 and 4.3 percent in 2019.

To combat surging prices, the government plans to suspend an increase in oil taxes scheduled to be levied in January next year.

This is in addition to another measure liberalizing the importation of rice, to lower food prices.

BSP Assistant Governor Francisco Dakila Jr. said that lifting import caps on rice and deferring the new round of excise tax hike on fuel in 2019 could reduce annual inflation by 0.7 and 0.2 percentage points, respectively, next year.

Accordingly, this means that inflation will likely ease by 0.9 percentage points, bringing the 2019 inflation forecast to 3.4 percent from 4.3 percent
previously.

What is wrong here is that the excise tax on fuel scheduled for implementation in 2019 has nothing to do yet with the current inflation.

Assuming other factors constant, deferring the 2019 excise tax on fuel would only prevent the inflation rate from rising, if the BSP estimates were correct, by 0.9 percent, not to bring it down by that rate.

So much for fighting inflation, which even the President already conceded that “wala na tayong magawa” despite, according to him, the presence of bright people in his economic team.

Why does the government now also talk of liberalizing the importation of rice, to lower food prices, along with tariffication to replace the quota system?

What was wrong with the previous quota system of importing rice?

As administered by the NFA, the quota system was wrong because of the squabble on who should import rice to meet the quota.

Should it be by direct government importation or by some lucky private individuals or group given the quota to import?

Lucky because the huge gap between the import and domestic price of sugar assures them of huge profit.

In trade, liberalization is the removal or reduction of restrictions or barriers on the free exchange of goods between nations.

This includes the removal or reduction of tariff obstacles, such as duties and surcharges, and nontariff obstacles, such as licensing rules, quotas and other requirements.

Look!

When we freely import rice without tariff, domestic price of rice will fall in line with the international price of rice.

This means that domestic production being expensive will also fall while demand will increase, with the gap being meet by importation.

When we imposed a tariff on imported rice, the domestic price of rice will increase by the extent of the tariff being set.

In such a case, local rice production will increase while demand will decrease.

If the tariff is set very high to protect local producers, then the importation of rice becomes prohibitive and the domestic price of rice will rise and become prohibitive to many poor people.

Such are the nuances of tariffication, which is just another barrier to trade.

Tariffication will unnecessarily push the price higher than intended.

So why go on with tariffication then?

I suspect it is again to raise revenue for the cash-strapped government.

Indeed, under the previous quota system of importing rice, the government would not earn anything if the quota to import were given freely to some favored individuals or groups.

Under this system, all the profits from the import of rice would go only to the lucky people who were given the quota to import.

Yet by simply requiring the private sector to bid the right to import, the government can collect a good amount of revenue like in tariffication.

This was not done.

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TAGS: inflation, projected, tariffication, wrong

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