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Date Posted: Wed, Sep 17 2008, 06:12:06pm
I would like to respond to this very interesting topic in following manner. Larsen you mentioned in your earlier statement that, Monetary polic has to respond to high liquidity in the banking system. I agree with you on this one, but, when you look at private sector credit, it is also on the increase. When private sector credit growth is pumped into an economy that is already existing at full capacity, then, the economy is said to be over-heating. In the case of PNG, yes, you are right, economy is over-heating and the Bank of PNG has done its bit by increasing the indicator lending rate to cool down the economy.
I am also of the view, that the students from unitech have a point in regard to fiscal measure to absorb external shocks, like fuel and food prices increases. In economics, monetary policy is not seen to be an effective tool in curbing inflationary pressure that is caused by supply side shocks, i.e, international price shocks. Fiscal policy is needed to curb inflationary pressures in the economy. On the other hand, monetary policy is the right policy tool to adjust given, demand push inflationary pressures. Hence, the overheating of the economy is driven by high demand, as indicated by high credit growth in the private sector.
International prices shocks can only be curbed by fiscal policy, as such, the government should have done something when crude oil prices hit US$149/barrel early this year. The government should subsidise fuel, in order to absorb shocks from this external shocks. On the other hand government was enjoying lucrative collection of tax from the mineral sector from this high prices, which the people suffered paying for the governments failed policy response to fuel price increases. The real impact of the fuel price increases havent been felt yet. Inflation in the September and December quarters will show this impact, because of price stickiness. The pass through to consumers of the increases in prices of fuel to other sectors of the economy hasnt been felt yet.
The government failed to absorb the shock through fiscal policy at the first place, hence allowing the full impact of the shock to hit the economy. As a consequence, the price increase have been felt, and the people are suffering. As pointed out by the UNitech students, real wages of people have come down, due to inflation and the employees federations should fight for wage adjustments.
The second round effect of the price shocks are not felt yet. Unitech students raised this issue, but, i dont think they were clear about the sources of inflation, and what policy tool is responsible to curb this inflatonary pressure. If they had addressed the issue properly, i think they would have got a good response. From their petition, they were beating around the bush, and they did not know what they were talking about, and that is a failure.
I think, this is an industrial issue and it should be left to the PEA and other employees associations to fight it out with their employers. As for the students, i salute them for raising the issue and they should liase with the unions to push this matter forward.
I can say that, the government through its fiscal policy failed to address the issue, when the country was hit by the international price shocks. Now it is too late, the impact of the price increase have already filtered through to the economy.
Bank of PNG has done its part, it is the government of the day that should be blamed, for pumping the economy with lots of cash into the system, and then again, did not respond to the external shocks affecting the economy.
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