What has the COVID-19 pandemic taught us as a nation? This crisis proved to us that we must prepare and plan economically, socially, financially, and sustainably. If we aren’t moving in this direction, then the answer to the question earlier is that we have learnt nothing from the pandemic. The time to learn from our past mistakes is now. Why now? Well for starters, the global economy is on the brink of a recession and policy experts believe that economic conditions will deteriorate as we enter 2023. So, what will we do with the remainder of time we have left to ensure that we can survive in the bear market? The better question is what are we doing to prepare for the inevitable?
Recessions have a history of hurting emerging markets and developing countries more since these countries/industries are extremely reliant on manufacturing countries. In this segment, we will discuss The Bahamas’ outcomes and opportunities as we brace for another cycle of a global growth slowdown.
As a developing country, we need to prepare both monetary and fiscally, to deal with the spillovers from global actions to tighten financial conditions and the slowdown of global growth.
If you take a closer look at the news in recent times, business owners, leaders, government officials and policy makers around the world are preparing for a recession. Central banks around the world are simultaneously increasing interest rates to combat inflation and policy experts are constantly warning us about the sharp decline in global growth. All of these are actions to brace for what is inevitable, a global recession. Due to supply chain disruptions and labor market pressures, inflation has continuously led to an increase in prices across various global industries.
Agencies such as the Federal Reserve and other central banks have responded by increasing interest rates with hopes to slowing down demand. However, inflation continues to rise and as a result, global gross domestic product (GDP) could potentially slow down into what is considered a recession threshold. Some experts believe that this threshold would mean a GDP growth rate of 0.5 percent in 2023, which is a 0.4 percent contraction.
Considering this news, the Bahamian government must prepare now for such an occurrence through the central bank and policy responses. Everything should now be looked at from a demand and supply perspective. Demand should be stabilized by creating price stability through monetary policy. Fiscal policy should be used to stabilize debt. On the supply side, measures should be put in place to help address constraints facing labor markets, energy, and trade.
Since the last recession in 2008, we must ask ourselves what have we put in place as a buffer to ensure that the impact of inflation or any economic downturn does not dent the economy for many years after? Presently, we are still in the policy stages of diversifying our economy to bring in new industries. We are still struggling to fund national disasters, crime initiatives national emergencies, pensions, and other things that can determine our future as a country. We have been using knee jerk responses for quite sometime and while this is not a bad idea for desperate times, it is not meant to be a permanent solution.
It’s apparent that the policy responses we sometimes take have little to no effect, since they are not well drawn out nor measured based on outcomes. For instance, the number of homicides that occurred earlier in the year and continue to occur almost everyday has not signaled an emergency response to shift policies in the judicial or legal system. What it has signaled is a task force that will be used to discuss best steps. But how will this yield a different impact on the rise of crime? To make matters worse, studies have shown that there is a direct relationship between unemployment and increased crime rates. If the recession plays out in full effect, unemployment may rise or hiring freezes will be put in place, leaving many new and remaining members of the workforce without a job. We should ask ourselves, what percentage of that segment will resort to some form of crime?
Policy example: Price control
Price control has a long history of not working yet we continue to use it as a political tool especially in hard times such as inflation. There are two types of price control: ceiling, and floors. Ceiling are price controls on goods and services and a floor is minimum wage. The government has recently implemented a mix of both by increasing the minimum wage to $260 and imposing additional price control measures on grocery retailers to combat the rising costs of food during this period of inflation. But this temporary solution comes at a time when retailers are faced with the rising costs from vendors. There are a handful of key players in the grocery retail sector in The Bahamas. These grocers employ a significant percentage of the retail sector but if their retained earnings are impacted for an extended period, they would likely only break even in terms of profit, put in place hiring freezes or reduce staff costs. The impact is even worse for smaller grocery retailers who would inevitability be forced to shut their doors due to rising supply costs and lower demand.
In addition, price controls lead to the inefficient allocation of goods and services because it only appears to reduce costs but, it does not. Using price controls is like putting on a mask to cover inflation, because it can cause shortages that are far worse than the original setback caused by inflation. This can lead to major shortages in groceries, consumer goods and gasoline.
What can we do?
We need to hear more from the government on what solutions can work. Governments around the world are using their monetary and fiscal policies to combat inflation, so, can’t we? Despite the lack of diversification in the economy, we can do better than interfering with the growth of the private sector especially with an economic recession on the brink. We need to increase growth as much as possible rather than stifle it. Doing this can be harmful and indeed shift a business’ focus from production to more so meeting the government’s needs and being at their whim. There are some monetary and fiscal policies that prove to do more harm than good but at least we have can learn from them. The objective of monetary policy is always to offset an economic downturn by reducing the cost of borrowing for consumers and cost of investing for businesses. There are many ways to achieve this across monetary and fiscal tools such as discretionary spending, reserve regulation or discount lending.
At the same time, governments can only do so much to ensure its citizens are not severely impacted by downturns in the economy. We also need to tighten our spending and budget even more. We need to save where we can and brace ourselves for what could be a very uncomfortable period. While keeping in mind that a little planning goes a long way, we will get through this.
• Roderick A. Simms II is the past BCCEC Family Island Division director. Email: RASII@ME.com.