Singapore: Asian authorities are stepping up fiscal measures to tackle inflation, although monetary policy could also be tightened in some countries to prevent a surge in food prices spreading to the broad economy.
Caution is the watchword for Asian central banks as they fear that raising interest rates could hit economic growth just as the US, a huge export market, slips into recession.
Building blocks: The Bank of Korea building in Seoul. Central banks in Asia are stepping up fiscal measures to tackle inflation.
Most governments have the funds to finance tariff cuts and direct handouts to the poor as tax revenue has risen around Asia in recent years due to robust economic growth.
“The fiscal position has been improving in most Asian economies. If they want to subsidize (food), they probably have some room to do it,” said Yiping Huang, chief Asia economist at Citigroup in Hong Kong. “I think monetary policy is useful to contain inflation expectations, but it’s very difficult for monetary tightening to bring down food prices.”
Governments in South Korea, Singapore and Hong Kong have budget surpluses, while deficits in China and Indonesia have fallen to less than 2% of gross domestic product (GDP). Furthermore, the rise in revenue has helped public debt in Asia drop to the lowest level since 2000, according to the International Monetary Fund (IMF).
Rajat Nag, managing director general at the Asian Development Bank (ADB), said on Tuesday that Asian countries should use fiscal measures to help the poor. “You have got to get support to the poor immediately. We’d rather that be done through direct fiscal stimulus than monetary policy,” he said.
Indian finance minister P. Chidambaram said on Tuesday the government was contemplating more fiscal steps to tackle inflation. In March it scrapped import duties on most edible oils and banned exports of non-basmati rice to bolster domestic supplies and quell inflationary pressures.
Many countries, particularly China and Singapore, are letting their currencies rise to curb import costs, but the risk of higher interest rates still exists in countries such as China, India and Indonesia. If inflation spreads and real interest rates turn negative, that could set off asset price inflation, adding to the problem.
But higher rates would widen yield differentials with the US, attracting money inflows, which would also add to price pressures, analysts say.
And higher rates could dampen domestic demand at a time when economies are facing a slowdown in exports.
“Asia’s monetary policy is in a very awkward situation at the moment,” said Huw McKay, an economist at Westpac.
Nicholas Bibby, an economist at Barclays Capital, summed up the dangers: “The thing to note is whether the supply shock will lead to a general rise in inflation expectations and inflation, and whether wage growth starts to accelerate and central banks go down the road of using interest rates to nip this in the bud.”
Philippine central bank chief Amando Tetangco told reporters on Wednesday that the monetary authorities were monitoring calls for wage increases and that interest rates could be raised if such inflationary pressures were to spread. “Let’s say there’s a second-round effect. Then we will have to review our monetary policy stance and see if there’s a need to tighten,” he said ahead of a policy review on Thursday at which the central bank is widely expected to keep rates steady.
Some economists caution that a blanket tightening of monetary conditions will do little to boost food supply and that the poor could be hit the hardest.
“Fighting food price inflation with monetary tightening can result in unemployment, resulting in riots and greater political instability,” Guillermo Mondino, an economist at Lehman Brothers, said in a research report.
Rice from Thailand, the world’s number one exporter, has more than doubled in price this year due to supply fears after India’s move to restrict exports of what is a staple in much of Asia.
The export curbs imposed by countries such as India and Vietnam to tame prices at home have drawn fire from UN and ADB.
Many Asian authorities are buying grain from farmers or importers at market prices and then selling them at subsidized prices to consumers.
Indonesia has raised its planned food subsidy spending in a revised 2008 state budget.
Credit Suisse reckons the Philippine government could lose up to $1.3 billion (Rs5,200 crore)—0.7% of GDP—by importing up to 2.6 million tonnes of rice at world prices and selling it at subsidized rates. ADB has recommended targeted cash handouts but some analysts say handouts and other fiscal measures could distort price signals and stoke price rises.
“I suppose it may make political sense,” said Robert Prior-Wandesforde, an economist at HSBC in Singapore. “But I don’t think it will have a disinflationary impact. It will have an inflationary impact,” he added.