Pressure from higher global commodity prices

By Ma. Stella Arnaldo
KOROR, Palau (Marianas Business Journal, Aug. 1, 2011) – Higher global commodity prices are expected to increase inflationary pressures in Palau, with consumer prices seen averaging at 6 percent in fiscal 2011.

This was the latest assessment of the country in the July 2011 issue of the Pacific Economic Monitor, a quarterly publication of the Manila-based Asian Development Bank.

“Sharper-than-expected increases in international commodity prices in early 2011, along with the continuing risk of political upheaval in the Middle East and northern Africa, are projected to drive higher global inflation in the immediate term. Therefore, inflation projections for Palau have been adjusted upward to 6 percent in fiscal 2011 and 5 percent in fiscal 2012.”

The latest assessment on Palau’s inflation rate – computed as the general rise in the prices of consumer goods and services over a period of time – was much higher than the Pacific Economic Monitor assessment in February 2011, which had initially projected the rate at 4 percent.

The July 2011 Pacific Economic Monitor noted that the higher inflation outlook in Palau was basically reflected in other Pacific countries as well with “continued price volatility” expected specifically for petroleum, particularly in Fiji, Papua New Guinea, Timor-Leste, and Tonga.

“Inflation forecasts for 2011 are revised upward in some Pacific economies, due to international commodity price rises early in the year and broad depreciation of the U.S. dollar against most currencies. Inflation is expected to be high in heavily import-dependent island economies. For the region as a whole, the outlook is for inflation to rise to 8.4 percent in 2011, and then ease to 5.9 percent in 2012 as petroleum and commodity prices stabilize,” the July 2011 Pacific Economic Monitor said.

For the Federated States of Micronesia, the Pacific Economic Monitor also forecasts a 6 percent hike in consumer prices for fiscal 2011, higher than the 4 percent-rate projected in the February 2011 Pacific Economic Monitor. Inflation is seen “moderating slightly to 5.5 percent in fiscal 2012 as commodity prices stabilize,” the report added.

Fueling inflation in the Federated States of Micronesia (FSM) is the massive liquidity in the banking system which has not gone to productive use. “Liquidity in the banking system contributes little to economic growth, as only a small portion of deposits are lent to the private sector,” the July 2011 Pacific Economic Monitor observed.

The publication said plans for the FSM Development Bank to go into retail lending “may be reconsidered, to avoid direct competition with private commercial banks. This will facilitate further development of the financial sector and promote more productive lending and increased private investment.”

As for the Marshall Islands, the inflation outlook for fiscal 2011 remains relatively unchanged at 5 percent despite the higher costs of fuel prices, which are reflective of the global rise in the price of the commodity as well as its remote location.

“Despite a steady increase in the international price of crude oil over the second half of 2010, retail petrol prices in the Republic of the Marshall Islands fell from US$5.38 per gallon in the June quarter to US$4.49 in the December quarter. Even with such price cuts, pump prices are still higher in the Republic of the Marshall Islands (RMI) compared with other northern Pacific DMCs (developing member countries), reflecting its relative remoteness. A subsequent upturn in pump prices also appears likely due to the continued rise in the cost of crude oil, particularly in early 2011. However, recent trends remain broadly consistent with the original inflation outlook, where prices are projected to increase by 5.0 percent in fiscal 2011 and by 3.8 pecent in fiscal 2012,” the July 2011 Pacific Economic Monitor said.

The ADB recommended that governments in the Pacific remove price controls on commodities, as this requires subsidies that would impact on their fiscal accounts. Most of the Pacific countries monitored by the ADB are largely dependent on agricultural and fuel imports.

To mitigate the impact of possible price volatility, the ADB said in the July 2011 PEM, “policymakers should seek to generate growth in private incomes and employment. Creating an environment in which efficient use of resources is encouraged, transaction costs are minimized, and investment in appropriate infrastructure is promoted offer promising avenues for broadening the economic base. Minimizing government intervention in various commodity sectors, and avoiding subsidies and price controls will give local markets the flexibility to respond to international price movements, and safeguard fiscal sustainability.”

Because it is the poor which will be most affected by the price shocks, the ADB said Pacific governments “should offer targeted social safety nets that will ensure access to food when prices become unaffordable.” Among these measures include investing in transportation and storage to boost agricultural productivity, helping farmers diversify into more high-value agricultural commodities, exploring other export markets, encouraging energy conservation, and promoting the use of energy-efficient equipment and appliances.

The Pacific Economic Monitor also said simulations of long-term economic expansion among select Pacific nations show that these will likely attain an annual growth rate of only 1 percent – 3 pecent in per capita incomes in the next 20 years “assuming modest improvements in the efficiency of their resource use.” The simulations take into account historical growth rates of factor accumulation and improvements in technology to boost operational efficiency. “Results show economic growth rates in the Pacific will continue to fall below those achieved in other developing countries in Asia over the past two decades. If these simulations hold true, there will be a widening gap between the two regions.”

The Pacific Economic Monitor has recommended that the Palau government adopt more measures in the medium term to stimulate private sector activity as it undergoes fiscal consolidation. “Simplified licensing procedures, improved access to labor (particularly for foreign firms), and financial sector reforms to facilitate a greater availability of credit are all required to support the growth of foreign direct investment and the private sector in general,” the report said.

It noted that “some slowdown in tourism activity” is projected in the second half of fiscal 2011 due to an anticipated easing of Japanese travelers as a result of the earthquake and tsunami in Japan in March. But “the addition of Delta Airlines as a scheduled carrier to Palau expands the existing market access and may compensate for any adverse impacts.” Tourists to Palau jumped 20 pecent to 55,000 from October 2010 to April 2011, with Japan, at 21,788, still remaining the largest source of tourists and tourism receipts.

The Pacific Economic Monitor said a major upgrade of the Amata Kabua International Airport runway in Majuro, Marshall Islands is expected to boost economic activity in the country and lead to a modest acceleration of gross domestic product growth in the near term. Said runway is the “designated emergency-landing site for trans-Pacific flights…. The US$16-million project, aimed at achieving international safety standards, is among the largest construction projects ever in the Marshall Islands.”

Marianas Business Journal
Copyright © 2011 Glimpses of Guam Inc., All Rights Reserved

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