April 27, 2021
Senate President Vicente Sotto III; Minority Leader Franklin Drilon; Senator Joel Villanueva; Senator Panfilo Lacson; Senator Ronald dela Rosa; Senator Imee Marcos; Senator Cynthia Villar; colleagues in government: Good morning.
Please allow me to attempt to put in context the recommendation of the Economic Development Cluster, which I chair, to reduce the tariffs and increase the minimum access volume on pork imports.
Imagine our national economy as a house. We have spent many decades strengthening this house to withstand any storm. Our fiscal and monetary policies, which serve as the house’s foundations, are quite strong.
The Executive Branch and the Congress worked closely together to strengthen these foundations. They are solid because of the forward-looking reforms passed by Congress starting many years ago. Among these are the VAT Reform Law of 2005, the Sin Tax Law of 2012, and the TIMTA or Tax Incentives Management and Transparency Act of 2015.
The Duterte administration built on these successes. Our tax reforms passed by this Congress and the previous one are a logical continuation of the decades of reforms pursued by previous administrations. All these game-changing measures gave us a good fiscal setting. They assured reliable revenue flows that helped fund our investments in infrastructure and human capital development.
On the monetary side, we learned much from the Asian financial crisis of 1997 and the global financial meltdown of 2008. The Bangko Sentral ng Pilipinas worked to establish a strong banking and financial system. We saw the impressive resilience of our banking and financial systems through the past year as we battled the pandemic.
Additionally, the peace and order thrust of the President has protected the country. It revolves around reducing crimes, eradicating illegal drugs, and making peace with the former separatists in the Islamic community in the Philippines.
You can imagine that these reforms and thrust have kept the walls and roof above our heads — prices, jobs, and incomes — very secure.
If COVID-19 were a typhoon, it is a once-in-a-century storm, and it is testing the strength of our house today. As with any typhoon, the most vulnerable part of the house is the roof.
The pandemic is hitting us very hard and is endangering our roof. We have had to impose lockdowns to control the contagion. Because of the movement restrictions, jobs were temporarily lost and our people’s incomes have gone down. According to NEDA, quarantine restrictions and the fall in consumption translate to a total household income loss of around 1.04 trillion pesos in 2020 or an average of 2.8 billion pesos a day.
We had to increase public spending to reinforce the health system and provide relief to our most vulnerable countrymen. We had to borrow money to support unplanned spending for the COVID-19 response. Included here are the loans we contracted to purchase the COVID-19 vaccines. The fiscal challenge is magnified by the drop in revenue collection that is the natural outcome of an economic contraction due to the lockdowns.
We are trying to keep our roof strong by maintaining fiscal responsibility in both the subsidy programs we gave out as well as the stimulus packages we introduced. We will not allow the public health crisis to destroy our house or drag us down to a crippling debt crisis. That will make our recovery a lot more difficult.
At the same time that we are facing the pandemic, we also have to deal with inflation. Inflation is the rise in prices, and if it becomes uncontrollable, it can be like a flood that will eventually erode our fiscal and monetary foundations. It will wash away all that we have put together in the past years.
However, the increase in prices may not necessarily be bad and may even have some beneficial impact.
An example of good inflation is when the prices of cigarettes and alcohol products go up. It is good because it discourages people from buying and consuming items that harm their health.
Bad inflation is when food prices increase due to a shortage of supply. These are brought about by external and artificial factors. In 2018, for instance, the inflation soared, reaching 6.7 percent in the month of September due to the low supply of rice.
Rice contributed one full percentage point to the 2018 peak inflation rate, and Congress acted quickly to pass the Rice Tariffication Law in 2019. The law opened up the Philippine rice market and, in turn, lowered the price of rice for more than 100 million Filipinos.
Today, the Filipino consumer enjoys an average reduction of 8 pesos per kilo compared to the peak of rice prices in 2018. Consumers also have a wider variety of rice choices now. As a result, rice is no longer the main contributor to our overall inflation rate.
In fact, almost immediately after the enactment of the Rice Tariffication Law, rice inflation turned negative. Two years after the law was enacted, sustained low rice prices contributed only 0.1 percentage point to the inflation in March of 2021.
This was a bold and truly revolutionary piece of legislation, and took many attempts over three decades to finally enact into law. While reducing rice prices, the tariffs collected from the rice importation were earmarked to fund the modernization of our farm systems, enabling our rice farmers to be more competitive.
Shortages in the supply of fish and vegetables also contributed to the rise in inflation. The fish supply shortage is due possibly to the decline in our fishery production. This can probably be traced to the harmful fishing practices in the past such as dynamite and muro-ami fishing, which destroy the natural habitat of our fish and other marine life.
The destructive typhoons that struck our country, on the other hand, have affected vegetable supply.
Right now, we are trying to prevent pork prices from spiking further the inflation rate. I was a former Secretary of Agriculture in the mid- to late 1980’s. Outside of government service, I was in different segments of the private sector, including agriculture. I have seen various food supply issues, but I have never seen the price of pork driving up the inflation rate like it does now. From 1995 to 2020, meat contributed only about 5 percent of the overall inflation. In the first three months of 2021, it contributed more than one fourth of the overall inflation. The recent inflation of meat prices is unprecedented.
Over the past two years, the outbreak of the ASF or African Swine Fever took a toll on domestic hog production. In 2020, the ASF contributed to the much higher deaths of 1.6 million hogs, according to the Philippine Statistics Authority. It is up by a third from the 1.2 million hogs lost in 2019.
To compound the supply situation, hog live births declined by 16 percent in 2020. As a result, the head count of hogs dropped by 24 percent from 12.8 million in 2019 to 9.7 million last year.
Meanwhile, the number of hogs slaughtered for food in 2020 declined by 6.7 percent or 25.2 million compared with the 2019 figure of 27.2 million hogs.
In the first quarter of 2021, the total volume of hog production plunged by 26 percent to 420,985 metric tons from 568,672 metric tons in the same period of last year.
When hog production went down, the price of pork went up. The inflation rate for pork rose to double digits starting in October 2020, hitting 51.8 percent in March 2021.
Last month, Philippine pork prices averaged 288 pesos per kilo, and reached as high as 327 pesos per kilo in the NCR. Before the supply shocks, pork prices were relatively stable at 224 pesos per kilo.
The spike in pork prices pushed up meat inflation from 3.5 percent and 4.3 percent in 2019 and 2020, respectively, to 19 percent in the first quarter of 2021. Due to the relatively high share of meat in the consumption basket of the typical Filipino family, the rise in meat prices, particularly pork, is driving up the inflation rate.
As meat inflation soared to double-digits in the first quarter of 2021, it became the top contributor to the overall inflation of 1.3 percentage points. This is even higher than the 1 percentage point contribution to inflation rate of rice at the height of the 2018 rice crisis.
If meat price inflation were the same as the rice’s current contribution to inflation at 0.1 percentage point, then the overall inflation in the first quarter of this year would have been just 3.2 percent and not the 4.5 percent we are seeing now. Our inflation rate would have been just within the target range of 2 to 4 percent.
Pork is a significant component of our diet, and it is a rich source of protein. When pork prices go up, the household budget for 100 million Filipinos suffers. We need immediate solutions to address the price increase.
Our temporary solution to this is to bring in more supply. As I have pointed out, pork prices are rising because of supply shortfalls. It is not a question of smuggling or anything. It is because of shortage and bringing in more supply would stabilize and bring down the price of pork and, therefore, the inflation rate.
There are, to be sure, long-term solutions to improving the domestic hog production. The Department of Agriculture is working hard in investing in long-term solutions to the problems of the swine industry. For instance, the Department is repopulating the swine herd and compensating producers for losses of pigs due to ASF.
Since 2019, the Department has been implementing strengthened surveillance and quarantine, which has now evolved as the Bantay ASF sa Barangay. At the same time, Land Bank will double its support from 15 billion pesos to 30 billion pesos, for the domestic hog raisers and animal feed producers by providing them soft loans for repopulating their stock and for increasing animal feed production.
But those are long-term solutions. We have to act fast, but with balance. Because of the pandemic, our economy has to bear tremendous expenses simultaneous with a drop in revenues. These could affect our strong macroeconomic foundations so we have to be very careful with what we do.
As I have mentioned, the lockdowns inevitably caused much strain on the people’s economic welfare as incomes are reduced or lost. NEDA found that quarantine restrictions led to an average annual income loss of 23,000 pesos per worker.
You also have to note that this is just the average loss, and some workers are hit much harder, especially those who lost their jobs. The food inflation exacerbates the situation and leads to increased hunger. This is the reason why people line up at community pantries at dawn.
According to an SWS survey as of November 2020, 16 percent or an estimated 4 million families experienced involuntary hunger. While this is about half of the record-high of 30.7 percent reported two months prior, the latest data is still double the pre-pandemic level of 8.8 percent in December of 2019.
The short-term and only practicable strategy for the current problem is contained in Executive Order 128. This temporarily cuts the tariff rate on pork imports within the MAV or minimum access volume to 5 percent for the first three months upon effectivity of the order, and to 10 percent for the next nine months from the current rate of 30 percent.
Pork imports outside the MAV are also reduced with a lower tariff of 15 percent for the first three months, and 20 percent for the succeeding nine months from the current rate of 40 percent.
EO 128 also increases the MAV quota for pork from 54,210 metric tons to 404,210 metric tons. The current quota was set all the way back in 1998, as part of the implementation of the Agricultural Tariffication Act of 1996. This was more than 20 years ago, when our consuming population was only 71 million people.
The increase in MAV quota factors in the estimated supply deficit for 2021 at up to 477,000 metric tons according to NEDA. The temporary increase in pork imports will not “kill” the local hog industry, as imports would potentially account for only up to 22.8 percent of total consumption.
The adjustment of tariffs on pork was not done haphazardly. This emergency measure underwent extensive deliberation and consultation among concerned agencies and the public, with all the tradeoffs considered in the cost-benefit analysis.
I know that EO 128 appears to be a painful solution. Our revenues will drop by 13.68 billion pesos. However, lowering the price of pork will save our consumers 67.38 billion pesos. These gains of consumers dwarf the foregone revenues by 53.7 billion pesos. Clearly, this is a tradeoff beneficial to the entire country.
Pork importation has two kinds. The one we prefer to eat is pork kasim, liempo or other pork cuts. We do not consider offal, fat, rind, as viand or ulam. These are used by our meat processors as fillers for their processed meat products.
If the current tariff rates are maintained, prices of pork kasim, liempo and other pork cuts will keep on rising due to their shortage in the local market and the inability of importers to bring them in because of high tariffs.
In 2020, data from the Bureau of Animal Industry showed that the country imported 256,017 metric tons of pork meat. Of this amount, about 163,500 metric tons were in the form of offals, fats and pork skin. The kinds of pork that we want to bring in are mainly the ones that people eat.
The worse we could do in a situation like the one we are facing today is to let supply issues force food prices up even more. If food prices rise, the inflation rate also increases. If the inflation rate rises, interest rate increases will follow. This unhealthy chain of events will make economic recovery even more difficult for all.
Everyone will suffer from high interest rates–from those struggling to pay the amortization dues on their home loans, to those making monthly payments on their cars or motorcycles. High inflation erodes people’s confidence and their desire to save.
I reiterate that EO 128 is a temporary measure. It addresses the single factor that threatens food shortages and a spike in inflation. While short-term, it will prevent a chain of events that could bring long-term damage.
We are not giving up on the domestic pork industry. The interventions of the Department of Agriculture to help the industry are aggressive. They expect them to yield even greater benefits once a permanent solution to the ASF outbreak becomes available.
Again, more than the economics of it, EO 128 is a response to protect our people from shortages and price spikes during this difficult time. We need to do it now for the sake of our countrymen.
Thank you.
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