Winning the fight
Beating inflation and cost-of-living pressures in Asia and the Pacific
DINNER habits have changed for Fononga Pulu at his home in Tonga’s capital. Where he used to eat ‘ume — his favourite fish — he now buys chicken.
Yam was once a staple, but now rice is the better option for his stretched food budget.
“We used to buy fish from the fish market. We love eating seafood. But now fish is really expensive,” he says.
“I stopped eating fish … that’s how we survive.”
Sela Latailakepa, another resident of Nuku’alofa, says rising prices are forcing her family to cut back on some foods, such as mutton flaps and salted beef.
They also bought their own chickens after egg prices increased.
“We’re having to find alternatives for store-bought food, or we just need to save up a bit more so we can afford the stuff that we really need to buy from the shops,” she says.
“You have to be really, really smart to spend the little pennies that you’re able to gather from your weekly salary.”
Their struggles are common in Tonga, where inflation reached 8 per cent last year, and more than 10 per cent in 2022.
The country’s not alone in the region’s cost-of-living crisis, a new World Bank report shows.
Other Pacific Island countries — especially those dependent on tourism and earnings sent home by overseas workers — are still grappling with high inflation.
In Samoa and Vanuatu, it was about 8 per cent in 2023.
“Elevated inflation poses a significant threat to the livelihoods of Pacific Islanders,” the report says.
A ‘sticky’ problem Pacific Island nations import food and fuel, exposing them to global inflation, World Bank senior economist Ekaterine Vashakmadze says.
“High inflation in major partners is very important because they are importing that high inflation right from elsewhere,” Ms Vashakmadze says.
But there are unique causes for high inflation levels in each country, too.
Samoa is dealing with high commodity prices, increased freight costs, and a depreciating currency.
Tonga’s volcanic and tsunami disaster in 2022 hit agricultural crop production, a problem worsened by higher global commodity prices.
Vanuatu is recovering from three cyclones in 2023 that hit food supplies.
Another problem is labour shortages.
“You have now high demand on labour. You have tourists flowing in, you have demand for services, and then you have a lot of construction in the countries going on,” Ms Vashakmadze explains.
“On the other hand, you have labour moving countries for seasonal work, and so that creates this imbalance, which puts pressure on labour markets.”
This will keep pressure on core inflation — which excludes costs of imported food and energy.
“Core inflation is still being sticky.”
How are Pacific nations
responding?
Overall, inflation is falling across the region.
Pacific Island nations have been trying to blunt the impact of inflation through tax exemptions and spending measures.
Tuvalu used cash payouts to help people with cost-of-living pressures.
Fiji and Solomon Islands waived import duties and gave tax exemptions for some staple foods.
And last year, Vanuatu’s government reduced import duties on fuel, rice, and chicken wings.
In Fiji, the government also subsidised fuel, reduced its value-added tax on essential goods and controlled food prices.
Fiji’s measures have gained mixed reviews from the World Bank.
In its Pacific economic update this year, it found they gave short-term relief but could have been better targeted at those in need and on tight budgets.
But Ms Vashakmadze says Fiji’s price controls worked well in blunting inflation.
“And the good news is that they are unwinding them already,” she says.
How have Asian economies
fared?
Inflation is also declining across economies in Asia. And throughout most of the region, it didn’t reach the heights seen elsewhere.
A recent IMF economic update found inflation on average fell from 3.8 per cent in 2022 to 2.6 per cent in 2023.
By comparison, annual inflation in Australia reached 7.8 per cent in late 2022.
Inflation has declined especially fast for emerging Asian economies.
There are a few outliers — Laos and Myanmar have had huge inflation, stemming from high depreciation of their currencies.
And an abundance of crops and weaker demand have contributed to low inflation in China.
But elsewhere in the region, the IMF predicts central banks are on course to reach their inflation targets in 2024.
Senior economist at the ASEAN +3 Macroeconomic Research Office (AMRO) Catharine Kho says governments in the region have used price controls to shield their countries from inflation.
“This is quite widely practised throughout the region, either on essential goods or on energy prices, or other goods and services that are most important for that particular economy,” she says.
Indonesia capped retail prices for packaged and bulk cooking oil, increased compulsory domestic sales of palm oil and raised export levies for the product.
In Malaysia, authorities subsidised bottled cooking oil, capped retail prices for chicken and eggs, and abolished permits for some food imports.
The Philippines cut tariffs on some food imports, while Thailand
increased import quotas and cut tariffs on corn.
Singapore and Indonesia have given cash to people struggling with higher prices.
Relief needs to be targeted Governments also subsidised energy (Indonesia, Malaysia and Japan) and cut duties and taxes on fuels (Korea, the Philippines, Thailand and Vietnam).
Ms Kho says subsidies were targeted at lower-quality products, such as lower-grade meats and fuel, to relieve financial pressure on more vulnerable households.
“That’s also how you can ensure that fiscal resources are used more strategically,” she says.
When it comes to support for people struggling with cost-ofliving pressure, both Ms Kho and Ms Vashakmadze agree on one feature: It should be targeted at people who really need it.
Ms Vashakmadze says policies such as transferring cash to vulnerable people are more effective than blanket subsidies, which can be costly.
“If you have an identified group of people, communities, households, vulnerable groups, providing them with cash subsidies, or other types of transfers … those are policies, which we highly support,” she says.
What can Asia-Pacific
countries do now?
As inflation declines, countries across Asia are trying to rebuild their finances and will look at removing cost-of-living support.
“Our advice to them is to withdraw this very carefully and … very strategically,” Ms Kho says.
“So, for example, it can’t be an overnight withdrawal, it needs to be communicated early and it needs to be communicated well.”
She says easing inflation levels can change course.
“Coming to this last mile, it’s a bit difficult to declare the war over yet. There are still a lot of risks for inflation this year,” she says.
Ms Vashakmadze says if there are no unexpected shocks, inflation will continue to drop in Pacific Island countries this year.
“It doesn’t mean that prices will not still bite the consumers because we have seen years of high inflation,” she says.
“But at least we will see that the governments will be in a better position to calmly handle the situation and support those who are really still in need.” ■ DOUG DINGWALL is a digital journalist reporting on the Pacific in the ABC’s Asia Pacific Newsroom and MARIAN KUPU is ABC’s reporter in Tonga as part of the Pacific Local Journalism Network. The views expressed in this article belong to the authors and do not reflect the views of this newspaper.