As the world reels under global inflationary pressures?annual inflation rates are above benchmark interest rates in China, Thailand, Vietnam, Hong Kong, India, Indonesia, Japan, Pakistan, The Philippines, Sri Lanka and Taiwan.
Asia has so far withstood the US sub-prime crisis well. However, the year 2008 looks bleak. Oil at more than $135 a barrel and record level of food prices has lead to restrained growth and worsened inflation. Singapore, Thailand, India, The Philippines and Indonesia are looking at inflations rates of between 7.5% and 11%.
Some countries in Asia, like Pakistan and Vietnam are more under inflationary pressure. Pakistan has registered a 360-month high at 19.3% and Vietnam has recorded a 192-month high at 25.2%. Vietnam may have excuses as the country has recently begun opening its economy and is in the initial period of transition. In the week ended June 7, this year the price inflation trend measured on the basis of the point to point movement in the whole price index registered a 156-month high when it peaked to 11.05%.
Says a Bloomberg analyst, ?Interest rates need to go higher in many economies. With household expenses rising, Asia may very well overheat unless central bankers do their jobs. The longer they delay, the bigger the costs to long-term prosperity and the bigger the risks of disappointing investors.?
In many countries in Asia, inflation is eating up growth gains. Indonesia like India is a place where about 600 million people exist on less than $1 per day, therefore, that country is caught between controlling prices and supporting growth.
In China, the populous economy comparable to India, the price inflation rate, is however, contained in the single-digit level at 7.7%. But this is a 140-month high. Though the price inflation in Indonesia is 10.4%, it is only 20-month high. Japan recorded a 120-month high with price inflation rising to 1.20%.
Thailand recorded a 144-month high with price inflation rate peaking to 7.60%. In US, the price inflation rate is within 4.2% and in the Eurozone it is 3.6%, though recording a 144-month high.
Meanwhile, Asia has travelled a long way since its last crises, for example, living standards, including consumption is up, governments are no longer debt-burdened, corporate or industry governance has improved, currency reserves have gone up and central banks function more independently. Policy makers therefore have to deal with the situation prudently.
The Asia experience is not a linear experience in terms of dealing with growth and inflation. A rich nation like Japan is not as vulnerable to surging food costs as, say, India or Indonesia, where many families live below the poverty line.
China has some 600 million people in agriculture yet to move into more productive employment in urban areas, according to. the recently released, The Growth Report: Strategies for Sustained Growth and Inclusive Development released recently by the Commission on Growth and Development, supported by DFID, UK. That is India?s scourge too, that it needs to look into. The SAARC region will benefit more if countries in the region set aside their rivalry to focus on exploring increasing trade between each other for overall benefit of its people.
According to Arif Zaman advisor, Commonwealth Business Council and SAARC Chamber, ?One reason that South Asia is among the least integrated of all regions is that tariffs, though lower now, remain high relative to other regions meaning that South Asian exporters are at a disadvantage. Developing countries impose higher tariffs on imports from other developing countries than industrial countries do on their imports. South Asian tariffs on developing imports are frequently five times as high as the rates imposed by industrial countries.?
As credit markets through out Asia are in disarray, there is need to be cautious. Therefore, central banks throughout need to take firm steps to deal with the inflation problem. Meanwhile, according to the International Monetary Fund (IMF), lead by sky-high oil prices, inflation is far higher in faster-growing regions?many of which are in Asia?than in the US and western Europe. In fact, globalisation of trade, has made inflationary trends a worldwide phenomenon.
According IMF, the average rates of inflation in the developing world were about three times those of developed economies, last year and that was expected to widen this year. Interestingly, IMF figures published last year expected the inflation rate to nearly doubling to just short of 12% in the developing economies, as opposed to a rise of 2.2 to 2.6 in the developed economies.
In India?s case, it will be a balancing act between inflation and growth. Says Amit Mitra, secretary general, FICCI, talking to FE, ?What we also saw during the course of the year 2007 was the increase in the commodity prices worldwide that led to higher input costs for industries across the board. Indian companies were also facing difficulties on account of shortage of skilled manpower and this was pushing wages northwards. The cost build up on account of rising interest rates, rising raw material prices and rising wages led industry to revise its prices upwards. In other words, there was a spread of inflation from the primary articles to the manufactured products.? With crude oil virtually at $ 133 to $134 a barrel, the finance minister P Chidambaram has pointed to ?difficult times? ahead.
Meanwhile, Asian Development Bank (ADB) recently called on governments to tighten monetary policies to deal with escalating inflation. The bank is reviewing its growth forecast of 7.6% this year for Asia, excluding Japan, amid concerns that inflation will widen income inequality and cause more people to plunge into poverty, managing director general Rajat M Nag said, while adding that the ADB in April forecast inflation to hit 5.1% this year?however, there inflation has shot through the roof. The Asian growth story is in danger due to inflationary pressures. A number of Asian countries including Malaysia, Indonesia and India recently cut fuel subsidies amid rising global fuel prices. Still, inflation hits the poor the most and in the Asian continent, about a billion people will suffer due to fuel and food price hikes.
On the India story, Mitra, says, ?The Indian economy has had a dream run over the last five years with the average annual growth being a robust 8.8%. Such high growth has put India into the league of the world?s fastest growing economies. While this is certainly a reason for us to celebrate, we must not overlook the pressure points that have been developing in the economy alongside this high growth phase. One clear manifestation of economic stress is the rise in inflation.?
Meanwhile, inflation is impacting small and medium enterprises in Asia. Firstly, there is a direct impact of inflation as rise in prices of essential goods leaves little money in hands of consumers. It constricts spending and reduces demand for products and services. Says Anil Bhardwaj, secretary general, Federation of Indian Micro and Small & Medium Enterprises, ?Finally, the inflationary pressures have led to massive increase in salaries and manpower cost which is resulting in erosion of competitiveness and profitability. In export sectors such as garments, handicrafts and leather. Indian exporters fear losing edge over other competing nations such as China.?
