Governing during an oil crisis
Barely months after the flood corruption scandal broke out, the Marcos administration is facing yet another major test. This time from a global oil crisis as a result of the war in the Middle East. The current spike in fuel prices is already causing mounting economic pressure on Filipino families.
In March, inflation rose to 4.1 percent, above the upper end of the government’s target. This was mainly driven by a 9.9-percent rise in transport inflation as diesel and gasoline prices in local gas stations surged past P100 per liter.
Prices of key food commodities also remain elevated, including corn (12.4 percent), vegetables (6.9 percent), and fish (6.7 percent). Electricity inflation was also at 7.2 percent.
Persistent high inflation will raise the cost of living and weaken consumers’ purchasing power. In March, the purchasing power of the peso stood at 0.75, which means that P1 in 2018 is now worth only 0.75 centavos. This will slow down household consumption, which accounts for more than 70 percent of the economy. Worse, an estimated 1.34 million more Filipinos could fall into poverty if oil prices remain at $105 per barrel, according to a Philippine Institute for Development Studies (PIDS) study.
During an oil crisis, there is an urgent need to respond quickly to mitigate its impact. But given the volatility in the Middle East, the government has to strike the right balance of providing relief to Filipino families without sacrificing its fiscal capacity to fund growth-enhancing programs like health and education. Unfortunately, the Philippines’ fiscal room is already tight, as it is with a debt-to-gross-domestic-product (GDP) ratio at 63 percent and a deficit-to-GDP ratio at 5.6 percent.
We recommend the following short-term solutions:
• Continue the targeted cash transfer program, but fix the inefficient and inconvenient system of distribution. Utilize digital payment platforms to distribute cash assistance. Explore coursing the aid through transport companies and let them distribute it through their mobile applications.
• Consider expanding cash transfers to include truckers, who transport food and essential goods, as well as fishboat and tractor operators. As recommended in the PIDS report, include minimum wage workers and households under existing programs such as the 4Ps, indigent senior citizens, and low-income pensioners. Given the uncertainty of war, a one-time subsidy may not be enough.
• The 2026 national budget should be examined to identify items that can be rechanneled for these purposes. Possible sources include contingent funds (P13 billion), confidential funds (P11.6 billion), and a portion of quick response funds (P4 billion). Ayuda programs such as AICS (P63.9 billion) and Tupad (P 24.4 billion) should be tapped to address the impact of the oil crisis.
Beyond subsidies, it is imperative to lay the groundwork for building the country’s resilience to oil price shocks. Our medium- to long-term policy recommendations are:
• Fast-track the establishment of a strategic petroleum reserve program. Under the program, stockpiles of petroleum products will be stored locally and abroad and released during times of supply disruptions. Funds to build storage facilities can be sourced from excise tax and value-added tax on fuel products, or through public-private partnerships.
• Reduce exposure to the Middle East by diversifying sources of crude oil imports. Other potential sources include the United States, Canada, and Russia.
• Boost the productivity and resiliency of the local agriculture sector. Invest in farm and fishery equipment, farm-to-market roads, and postharvest facilities to lower transport costs and minimize supply chain inefficiencies. Consider investments in fuel-efficient and climate-smart production systems such as solar pumps.
• Incentivize the use of electric vehicles and bikes. Improve bike lanes and charging stations to ensure safety, reliability, and convenience for daily commuters. Consider making charging stations free to increase electric vehicle use and adoption, especially in public transport.
• Organize databases of vulnerable sectors and regularly update beneficiary lists, not only during crises. Accelerate the rollout of the national ID.
• Reject proposals to revive the Oil Price Stabilization Fund (OPSF). Previous experience showed that the OPSF suffered from fund mismanagement, leading to the swelling of public finances. The government would end up subsidizing the OPSF, diverting funds from other critical programs.
The country’s leaders have to show decisiveness and transparency in the crisis response. The Development Budget Coordination Committee and the Legislative-Executive Development Advisory Council should meet at least once every two weeks to monitor the oil crisis and fiscal situation.
The Middle East situation remains volatile. We must focus on what we can control. The priority is to protect vulnerable sectors from high oil prices while building long-term resilience against current and future crises.
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Gary B. Teves is a Filipino politician and public servant who served as secretary of the Department of Finance.
