Price pressures remain the biggest worry for Asia, where high inflation is threatening to spoil the gains against poverty achieved over the last two decades, the Asian Development Bank said on Sunday.
"We are concerned that the rising food and fuel prices will make dent in the fight against poverty," Rajat M. Nag, managing director general of the ADB, told Reuters in an interview on the sidelines of the World Economic Forum on East Asia meeting in Malaysia's capital.
The ADB has forecast Asian inflation at 5.1 percent for 2008, but Nag said it would probably be higher. "Our forecast for 2008 is 5.1 percent and that will be the highest in a decade. This was done in April and we are updating, and I am sure the numbers will be probably higher," he said.
Asian currencies are weakening and asset markets are being strained on worries that rising inflation will soon hurt growth, investment and corporate earnings, and destabilise governments.
Asian policymakers are facing their toughest test since the 1997 financial crisis. Across the region, central banks are under pressure to tighten monetary policy to prevent $130-plus oil and soaring commodity prices from seeping into wages and other costs.
But governments fear politically-unpopular interest rate hikes could also curb growth, which is already under pressure as the US economy sputters. The ADB forecast 7.6 percent growth for the region in 2008, down from 8.7 percent last year, which was the highest in two decades.
"Growth this year will be lower than last year but still fairly attractive, with a slight uptick in 2009," said Nag. But he repeated that inflation remained the region's biggest challenge. "All of this could be endangered if the inflation issue is not handled. Inflation is the greatest worry."
He said Asian countries will have to think not only of food and fuel prices, but overall inflation levels.
"Basically you have got to look at headline inflation, and there it is important that both monetary and fiscal policies come down very hard on inflation," said Nag. But he refused to say whether he thought Asian governments and central banks have been too slow to tackle price pressures. "Asia is certainly recognising the seriousness of the situation," he said, referring to recent steps by a number of central banks including a rate hike last week by the Reserve Bank of India.
"I think that stance has to be maintained and aggressively pursued." James W. Adams, the World Bank's vice president for East Asia and Pacific, agreed that inflation was the biggest worry.
"It complicates policy making. When you have price stability you actually have more flexibility in terms of what instruments you can use and how aggressively you have to use them," Adams told reporters. "The other concern is that inflation is a tax on the poor," he said. "The risk is because they are so heavily dependent particularly on the food budget, that this will reduce the prosperity and wealth of a significant percentage of the population."
FISCAL MEASURES:
ADB's Nag stressed the need for monetary policy to be supported by fiscal measures to dampen inflationary expectations, calling for a more organised way of helping the poor cope with rising prices.
"Governments have to look at providing directed cash or income support to the most vulnerable rather than broad general subsidies," Nag said. He said such subsides could be counter productive in the long- run, and urged governments not to impose price controls or export bans on commodities. Almost a billion people in the region are acutely vulnerable to rising food prices, including 600 million who are living on less than a dollar a day, he said. "Our concern is that the gains against poverty that Asia has made can start to unravel. And the focus has to be therefore on the price story, and it cannot be done by imposing administrative controls," he said. "The era of cheap food is over but that does not necessarily means that Asia's success against poverty is over. It means that we really have to focus on these critical constraints."