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Price controls not ideal option for Barbados

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by Marlon Madden

Putting price controls in place and raising interest rates in line with the international community will not solve the rising inflation problem affecting Barbados.

This is according to International Economist Marla Dukharan and Central Bank Governor Cleviston Haynes, as they addressed the May edition of the Caribbean Economic Forum, hosted by the Central Bank of Barbados under the theme How Can Caribbean Central Banks Fight Inflation?

A public survey by the Central Bank showed that 78 per cent of individuals have significantly changed their spending habits as a result of increase in prices, 18 per cent said they have witnessed little change while 4 per cent said they had no change at all.

A second survey, which polled participants on how should policymakers better manage the increase in prices, showed that 40 per cent wanted an introduction of price controls, 26 per cent said reduce taxes on goods, 18 per cent said reduce taxes on income, 12 per cent said Government could subsidise the cost of goods and gas and 4 per cent said reduce interest rates on borrowing.

Economist Marla Dukharan said she did not believe price controls would be ideal given the challenges with supply chain disruption that could limit the supply of goods and easily result in the creation of a black market.

However, she said managing prices required up-to-date information to first see if there is a problem, there is need for an adjustment in the expectations based on changing circumstances, and that countries should keep abreast of international development on fuel costs.

Dukharan also broached the subject of government removing the foreign exchange fee, which is charged on the purchase of foreign currency and foreign currency transactions, to help people cope with rising prices.

In response to a question, the international economic advisor said while removing this fee can bring the prices of imported goods down “in theory”, the question of whether the lower prices would be reflected on those items on the shelf would also need to be addressed.

“So whilst we might say ‘maybe we can flood our market with US dollars and appreciate our currency in Jamaica or in the case of Barbados we can remove the 2 per cent foreign transaction fee and that will bring prices down, in theory all of those things could bring the cost of the imported good down, but does it reflect on the shelf and that is really where I think we need to focus on.

“Perhaps it is a question of how do we ensure that when we make any fiscal policy adjustment on taxes or exchange rate adjustment that is it reflected in the price on the shelf. Making sure that happens, I think, is more important and I am not sure we do a good enough job of that,” she explained.

Furthermore, with the global inflation being driven by both demand and supply, Dukharan said it was about time the region focused on reducing its import dependency.

“I think fuel is probably one of the most important things because the price of fuel, the price of electricity, the price of gasoline affect almost every other price in the economy because goods have to use electricity to be produced, transported, stored and delivered to the final consumer. So we really need to look at reducing our imports of fuel and therefore becoming more energy independent,” she recommended.

Haynes also dismissed the idea of price controls, saying this was not a route Barbados was even considering.

“Price control in my judgment doesn’t really work because once you have price controls you run the risk of shortage, and therefore you think you are controlling a price but you do not have the commodity at all. Therefore, that is not the approach we want to go,” he said.

He also indicated that regional governments had to spend significant sums to manage the COVID-19 pandemic, which resulted in increased borrowing, and therefore, a reduction in taxes to help people cope with rising inflation was also a challenge.

“We have to take an overall macroeconomic perspective. So this is a particular challenge that we have to change. We have to remember this is a supply shock and not something being driven necessarily by the domestic economy and we are effectively importing the inflation of another country.

In our case, as a fixed exchange rate we really import US inflation and once you see that the inflation rate in the US has gone up and likewise in our situation the inflation is going to go up,” he said.

Measured on the traditional 12-month moving average, inflation in Barbados rose 4.2 per cent, but by 9.3 per when comparing March 2022 to March 2021.

Haynes also noted that despite the excess liquidity
in the local banking system, there was currently no plan to raise interest rates in line with international rates, as a measure to help stabilise inflation.

“But I will also say to you that we have to continue to monitor the extent to which international rates rise because if there is a wide gap between domestic rates and international rates it potentially could have an impact on capital flows and that is something we as a central bank have to continue to monitor,” he said.

“I would say to you that at present our thinking is that we will not need to move rates up [as of this day] to be in line with international. Unlike Jamaica, we do not target inflation, we try to get our inflation stability through our adherence to a fixed exchange rate.

Notwithstanding a fixed exchange rate, you are going to be importing the inflation of the country to which your currency is tied,” he explained.

marlonmadden@barbadostoday.bb

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