Economist says this may drag down economic growth
THE SURPRISING 6.9-percent economic growth in the first quarter, which officials said was a proof the Philippines was no longer a laggard in Asia, is unlikely to be sustained if the Philippine bank would stick to its tight monetary policy.
Victor Abola, economist from the University of Asia & the Pacific, said that the current policy stance of the Bangko Sentral ng Pilipinas (BSP) was not conducive to boosting the growth of the economy.
In a study presented to the media last week, Abola said the slowdown of the inflation to below-target levels might drag down economic growth and lead to loss of jobs in the short to medium term.
Instead of keeping its key policy rate at 6 percent, Abola said the BSP should slash this to 4 percent to create more room for growth. He said there was no reason for keeping a tight monetary policy when inflation has already gone down way below the target.
The economist said that while low inflation was normally desirable, as it was expected to encourage consumption and influence higher growth, consciously bringing it down to very low levels would result in lower economic output and higher incidence of unemployment.
Abola said the central bank’s tight monetary policy had already pulled down the inflation rate to only 2.6 percent in the first half, lower than the official target of 4 to 5 percent for the entire year.
In his study, Abola said that by average, a one-percentage-point drop in inflation rate would lead to a decline in the gross domestic product by 0.64 percent to 2.41 percent. A 0.64-percent drop in the GDP results in the loss of 89,000 to 159,000 jobs. Taking the high end, he added, a 2.41-percent drop in GDP would trim down the number of jobs by 329,000 to 600,000.
He further explained that inflation and economic growth had a direct relationship, meaning lower growth was normally associated with lower inflation. “This is because inflation is directly affected by demand for goods and services, and that slowdown in aggregate demand drags down overall economic growth.”
Abola said there should, therefore, be a right policy mix that would keep inflation within tolerable levels while achieving a desirable level of economic growth.
“It seems like the BSP is putting too much weight on lowering inflation and zero weight on boosting output. Keeping inflation low is a good thing but it is not the only important thing,” Abola said.
As stated under the Arroyo administration’s economic targets for the year, inflation is targeted to stay within 4 to 5 percent while GDP growth is targeted to reach between 6.1 and 6.7 percent.
Abola said monetary policy should loosen up if the government wanted the 6.9-percent growth sustained.
The BSP has refrained from easing its policy stance especially since growth in money supply had been reaching uncomfortable levels. The year-on-year growth in money supply was recorded at more than 20 percent in May. The rate eased to 19.4 percent in June.
According to the BSP, money supply growth of beyond 20 percent put the government’s inflation targets at risk of being breached.