Ministers and governors face the pain

Emerging Markets, ADB annual meeting, May 2008

Asian ministers and bank governors have described some of the toughest challenges they have ever faced as they try to balance two opposing forces: threats to growth from a slowing US economy and high food and oil prices on one side; inflation on the other.

Shamshad Akhtar, governor of the State Bank of Pakistan, described today’s environment for monetary policy as “almost the most challenging task I have ever taken in my career.”

And Margarito Teves, finance secretary of the Philippines, said the food price crisis could undo much of the hard work the country has done in almost balancing its budget.

Ms Akhtar said the challenge of “striking an adequate balance between growth and inflation risks… keep central banks worried – up the whole night sometimes”, in particular the rise in oil and food prices.

“It has to be recognised the current trend in global commodity prices is not one of distortion, or a cyclical spike,” she said. “The global commodity price upswing reflects growing population stress and is likely to stabilise to a new and higher level.” On food prices, she said she hoped financial support could help rejuvenate food production, but added: “I believe it’s already late and the damage will leave some scars.”

Mr Teves said the tension between growth and inflation was “a dilemma, because we have a large number of people who are still below the poverty level, and inflation is a major factor in terms of their well-being and ability to cope. At the same time, we also need to make sure we retain a higher level of growth because we need to provide jobs for people.”

The Philippines faces what Mr Teves called “a double whammy” in that the country is not self-sufficient in food or oil. “We have not really pushed self-sufficiency [on food] as a policy because in the past the supply of rice internationally was available,” he said. The gradual removal of supply from the international markets, coupled with a failure to push through a planned irrigation program and increasing input costs such as fertiliser, has made self-sufficiency more of a priority. “We need to stress food security: 88 or 90% [self-sufficiency] is still a bit risky given the situation we are faced with today.” He said in three to five years the country aims to reach 95 to 100% sufficiency.

In the meantime, though, the country’s fiscal position will be under threat. In one of the most successful fiscal consolidation programs anywhere, the Philippines had reduced the budget deficit from over 30% of GDP four years ago to 0.2%, or P12.4 billion, in 2007. “We don’t know what will happen in the months to come… it’s going to be stressful,” he said. “The issue of balancing the budget is not a sacrosanct goal at this point in time. Some of these things are really beyond our control.”

Ms Akhtar argued that challenges in Asian economies “dispel any notion of a decoupling with the US economy. The size and scale of interaction between Asia and American brings immeasurable benefits when the going is good, but will bring a measure of misery when economies are in trouble.” She called upon Asia central banks and governments to work more closely together to mitigate risks for the future.