Strong Peso Fails to Benefit Consumers

A strong peso is supposed to benefit consumers through lower prices of goods and services. Why is this not the case at this point?


In the first quarter of this year, President Gloria Macapagal-Arroyo stressed that the people can benefit from a strong peso through lower prices of goods and services. She even thanked last March 18 the government’s economic team and the private sector “for working together to let the ordinary consumers feel the benefits of a strong peso.”

Analyzing the yearly average of the peso-dollar exchange rate from 2001 to the first semester of 2006, there was a devaluation of the peso until 2004. From then on, the peso strengthened to a level slightly above the 2001 peso-dollar exchange rate. (See Table)

Theoretically, a strong currency can affect domestic prices since the cost of importing raw materials and even finished goods becomes lower. A strong peso, after all, means that fewer pesos are needed in exchange for dollars, the universal currency used in trading. For an import-dependent economy like the Philippines, the current peso-dollar exchange rate should be a welcome development for consumers.

Data from the National Statistics Office (NSO), however, show that inflation has not substantially gone down from 2002 to 2005 as a result of the strengthening of the peso. From 6.8 percent, the average inflation rate decreased to 3.0 percent in the following year. However, the succeeding years saw the average inflation rate rising to 3.4 percent (2003), 6.0 percent (2004) and 7.6 percent (2005). The first six months of 2006 saw the inflation rate slightly decreasing to 7.1 percent (January to June 2006).

This simply means that despite the strengthening of the peso since 2004, prices of goods and services in the Philippines still increased. Indeed, official data on inflation rates show that there is no quantifiable basis for the President’s claim that Filipinos are now benefiting from a strong peso.

For the month of June 2006, no less than the NSO admitted, “Tuition…hikes in many regions including (the National Capital Region) along with the upward price adjustments of school supplies, gasoline, diesel, medicines and selected medical and health goods mainly contributed to the 0.7 percent growth in the month-on-month inflation rate in June. Add-ons in the prices of LPG and kerosene were also noted during the month.”

Why has there been no substantial reduction in prices of goods and services in the past five years?

As early as January 2006, Sen. Manuel Roxas, a former trade secretary, stressed, “The government must be more assertive in both its policy and approach to (make the) strong peso (result in) lower prices of basic commodities and services.”

Untenable strong peso

More than political will, however, is the reality that in an export-oriented economy like the Philippines, a strong peso is untenable. Filipino exporters, after all, end up with reduced profits in a situation of a strong peso as the dollars they earn in their trading activities are exchanged for fewer pesos. In order to earn more, exporters definitely want a devalued local currency.

Not surprisingly, the government acknowledged that exporters “have been complaining that they are losing competitiveness due to the continuing appreciation of the peso.” As a result, Macapagal-Arroyo as early as last March 18 asked Finance Secretary Margarito Teves whom she described as an exponent of market forces “to find ways to help ease the burden of exporters due to the further strengthening of the peso.”

Since the government’s major thrust is to strengthen the country’s export sector, one could expect intervention from the Bangko Sentral ng Pilipinas (BSP) to devalue the peso in the near future.

On the part of local industrialists, they are apparently aware that the strong peso is only temporary, hence their wariness in substantially reducing prices of their goods and services, only to increase them once the peso is devalued. Of course, their inherent profit greed must also be taken into account in analyzing the current price levels of goods and services nationwide.

The government’s outward-looking development strategy requires a devalued peso to encourage more industrialists to go into export. Given this, the interest of consumers in availing of lower prices definitely takes a backseat to the need to provide exporters with more opportunities to earn. Bulatlat

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