Closing remarks at the ADB-IMF-RBI Seminar: "Managing Inflation in an Era of Commodity Price Volatility"

Closing remarks by ADB President Takehiko Nakao on 3 May 2013 at the ADB-IMF-RBI Seminar: “Managing Inflation in an Era of Commodity Price Volatility” 

Your Excellencies, distinguished guests, ladies and gentlemen:

In closing this seminar, I would first like to thank all the speakers and participants for their participation. I would also like to say a few words on this topic.

It goes without saying that sound macroeconomic management is important as a precondition for sustained growth. It is therefore truly valuable to discuss the important issue of inflation today in collaboration with IMF and the Reserve Bank of India.

The topic is timely, as the risks for inflation pressures are building up in Asia, and many regional economies return to their production potential in the midst of rising global liquidity from the advanced economies.

For the region as a whole, inflation is expected to pick up from 3.7% in 2012 to 4.0% in 2013 and 4.2% in 2014. In some countries where inflation is high, such as India and Viet Nam, stabilization policies should be prioritized.

The large weight of food and energy prices in the aggregate consumer price index makes inflation more than simply a macroeconomic issue for developing Asia. It is a development and a social issue in many countries. While rising food prices affect everyone, the impact is disproportionately larger among the poor, who spend a greater proportion of their budget on food. Developing Asia, home to two thirds of the world’s poor, is particularly vulnerable to food and energy price shocks.

Many Asian countries rely heavily on energy and food subsidies to address this issue. The amount is not small and often a major source of fiscal burden. For instance, fuel subsidies alone amounted to 2% of GDP in India, Indonesia, and Viet Nam, and 4% of GDP in Bangladesh and Pakistan. The majority of beneficiaries, however, are often not the poor. Asian countries need to reduce these subsidies in light of harmful distortion and lack of rationale. Although the correct thing to do, reform of these subsidy schemes will increase domestic price pressures, which needs to be carefully monitored.

When we discuss macroeconomic stability of our region, some may question the impact from accommodative monetary policy in advanced economies. Unconventional monetary easing has contributed to preventing a deeper decline of advanced economies and to the sharp rebound of capital flows into Asia after the global financial crisis. On the other hand, monetary easing in advanced economies can affect Asian economies through either currency appreciation or asset price hikes, although  they may also benefit from growth in advanced economies. Asian economies need to take these into account in macroeconomic management including monetary policymaking.

In closing, please allow me to thank the IMF and Reserve Bank of India for jointly sponsoring this seminar. I look forward to our continued collaboration.