By many measures the Philippines has rarely had it this good. The country’s economy expanded by 7.3 percent last year, the fastest rate in 30 years, as fiscal discipline reduced the government deficit and encouraged a surge of private and foreign investment. But the recent surge in rice prices could eat away at those gains, the country’s Finance minister acknowledges.
“There is a question of whether our growth is sustainable,” Finance Secretary Margarito Teves said in a recent interview with Institutional Investor. The government needs to adjust its long-term strategy of relying on remittances from Filipino workers abroad for growth and ramp up agricultural investment at home to feed its people, he adds.
The wholesale price of rice has nearly tripled since March, to reach a peak of $1,000 a ton, as rising living standards in developing countries push up demand, droughts reduce supply, and such major producers as India and Vietnam respond by restricting exports. The crisis is wreaking havoc in the Philippines, the world’s biggest importer of the staple grain, provoking fisticuffs on the streets as Filipinos jostle in lines to secure meager supplies. With a population of 90.5 million that’s growing by 2 percent a year, the country imported 2.2 million tons of rice in 2007. That’s roughly 10 percent of its consumption and 7 percent of the entire global trade in rice. Retail rice prices have surged to as high as 18 Philippine pesos (42 cents) a pound, an exorbitant level in a country where the average income is $1,300 a year.
President Gloria Macapagal-Arroyo moved to address the situation by ordering the arrest of dozens of traders who were hoarding rice. She also pledged last month to boost agricultural investment sixfold, to a record P50 billion a year over the next five years. The money will be used to build irrigation systems and apply new cultivation techniques.
“This is an attempt to make up for years of underinvestment,” said Arjun Thapan, the director general of the Asian Development Bank’s Southeast Asian department.
Although the government has strengthened its finances in recent years, the new investment will stretch resources. The government ran a balanced budget last year and reduced its outstanding debt to 62 percent of gross domestic product from a little more than 100 percent in 2003, according to data from the International Monetary Fund. That level is still well above the median of 41 percent for major emerging-markets countries, however, and the government spends more than a quarter of its revenues on debt service.
Teves, who spoke with II at the ADB’s annual meeting in Madrid last month, is adamant that he won’t touch any of the nation’s $36.7 billion in foreign exchange reserves for fear of destabilizing the Philippine peso. Instead he promises to finance the new agricultural spending by going after tax cheats, especially smugglers and entrepreneurs who run small and medium-size businesses. “We’re currently collecting only under 50 percent of taxes owed the government,” he notes.
The country faces tougher economic times, though, even as it seeks to expand its farm sector. “To be honest, the difficulties we’re facing in high oil and food prices are very challenging,” Teves says. “These might stall our effort to really strengthen our economy.”
By underscoring the longtime neglect of the country’s farming sector, the rice crisis has also sparked fresh criticism of the Philippines’ reliance on remittances from overseas workers rather than on domestic development.
The country is the world’s largest exporter of foreign contract labor. For decades, Filipinos have moved out of rural areas in search of higher-paying jobs in the cities and overseas. Currently, some 7.5 million people are working abroad in jobs ranging from housekeepers to manicurists to nurses. Those workers sent $14.7 billion back to their homeland last year, an amount equivalent to 10.3 percent of GDP, according to figures from the Philippine central bank. Remittances hit a record of $1.4 billion in March, up 9.4 percent from a year earlier.
“To a certain extent it’s true that we’ve relied too much on remittances from contract laborers as a pillar of growth,” Teves admits.
