Cost-of-living relief ‘unlikely’ as Price Compact return questioned

Economist Jeremy Stephen has warned that the government is unlikely to have the fiscal room or market conditions to restore its Price Compact in its original form, despite mounting pressure on household budgets.

Speaking to Barbados TODAY after Prime Minister Mia Mottley urged regional supermarket chains to adopt Barbados’ Price Compact model, Stephen argued that the conditions that once made the arrangement workable no longer exist.

Mottley suggested Caribbean countries could use the framework to shield consumers from global economic shocks by limiting mark-ups on essential goods.

The Barbados Price Compact, officially known as the Prices Social Compact, was introduced in July 2022 as part of efforts to ease inflationary pressures. The agreement between government, trade unions and the private sector capped mark-ups and removed Value Added Tax (VAT) on dozens of essential grocery and sanitary items.

Although the compact expired in 2024, some of its measures remain in place for select essential goods.

Stephen said many people viewed the compact as a simple solution to rising prices, but cautioned that such agreements only succeed under specific economic conditions.

“Pricing compacts, the success of them, are based on timing rather than just everybody holding hands and singing ‘Kumbaya’ for the consumer,” he said.

According to the economist, price controls are more effective when businesses can absorb temporary cost increases because demand remains strong and consumers have sufficient spending power. However, he argued that Barbados is currently experiencing a different type of economic growth.

He noted that much of the country’s expansion is being driven by large-scale capital investment projects, with benefits flowing primarily to investors and developers rather than directly into the pockets of ordinary consumers.

“At the same time, materials are becoming more expensive, and the majority of it is imported,” Stephen said.

He also pointed to the increasing use of imported labour on major projects, arguing that a significant portion of earnings generated by those workers eventually leaves the country.

“So you’re creating a net outflow of capital during this growth in the economy.”

These conditions make it difficult to expect importers and wholesalers to continue absorbing inflationary pressures for extended periods while maintaining fixed prices.

“There’s no incentive to continue supplying the market at a fixed cost or a fixed price for years back while absorbing inflation.”

He warned that if a price compact is introduced when businesses are already facing rising costs, the likely result would be reduced supply as companies scale back the availability of certain products to protect profitability.

“The question then is whether as an economy or as a society, we are fine with the idea of more contraction in supply.”

Asked whether government could introduce another major cost-of-living relief programme, Stephen suggested that Barbados’ fiscal position is far more constrained than it was several years ago.

He said previous relief measures were helped by the fiscal space created through the Barbados Economic Recovery and Transformation (BERT) programme, but “they really don’t have as much space as they did before”.

Stephen argued that any new intervention would ultimately come down to political priorities. The government, he said, would have to decide whether it is prepared to collect less revenue, spend existing funds elsewhere, or borrow additional money to finance further relief measures.

He also warned that excessive borrowing could reverse years of progress made in stabilising the country’s finances.

“I really don’t think our fiscal situation in Barbados just now allows an ease going into next year of greater proportions.”

Instead, Barbadians should brace for price increases rather than expect a broad return of the Price Compact measures introduced at the height of the inflation crisis, the economist said. 

(SB)