IDB says expanded price controls negatively, disproportionately impact SMEs
Noting that the government’s recently expanded price controls are “likely to impact small and medium-sized enterprises negatively and disproportionately”, The Inter-American Development Bank (IDB) yesterday said a more targeted response to the inflation crisis would have benefited the most vulnerable more.
This position was laid out in the “Caribbean Economic Quarterly: Volume 11, Issue 3: Headwinds Facing the Post-Pandemic Recovery”, which was released yesterday. The document outlines the Davis administration’s policy response to high inflation.
While highlighting the temporary addition of more categories of food and medicines to the price control list in October and the increase in the value-added tax (VAT) exemption ceiling for Bahamas Power and Light (BPL) bills, the authors of the document said the impact on citizens is too broad.
“Price control, at least in terms of behavior if adequately enforced, is a de facto combined turnover tax and income redistribution policy (i.e., a cash transfer from business to consumers). Revenues for specific products that would have accrued to specific businesses, and possibly to the government in the form of an increased VAT, would now be transferred to all Bahamians. Additionally, despite the updates, the price controls do not differentiate using size or profitability. Therefore, this policy is likely to impact small and medium-sized enterprises negatively and disproportionately, because they are more likely to have neither the volume of sales nor the economies of scale to absorb the per unit loss of revenue,” the IDB said.
“In addition, they will have to use these same diminished margins to cover increasing electricity bills and labor costs. Furthermore, like price controls, the VAT exemption for electricity bills – and even more so the import tariff reductions and exemptions – would result in government revenues transferred to Bahamians, including those who are least affected by inflation. Hence, except for the minimum wage, the remaining policies outlined are effectively untargeted subsidies for everyone – both the rich and the poor. That said, as a short-term temporary measure, the price controls have the advantage of not imposing any direct expenditure costs on the budget.”
The comments from the IDB are in line with concerns raised by small businesses – in particular the Retail Grocers Association – which opposed those price control adjustments, lamenting that it would be detrimental their survival.
The IDB said The Bahamas, as a net food and fuel importer, has acutely felt the impacts of sharp commodity price shocks, but it suggested a more targeted response in the form of direct cash transfers to the most vulnerable citizens.
“Unlike price controls, which are blunt policy tools, a more targeted response – such as a conditional or unconditional cash transfer – could build on existing programs such as emergency food assistance, that provides food stamps to qualifying families. Beneficiaries of this policy would be Bahamians who earn less than a pre-defined income threshold, low enough to ensure that only the most vulnerable qualify, but high enough that it does not distort incentives for those earning close to the minimum wage,” the authors said.
“Beyond targeting food insecurity, well-designed and innovative cash transfers could have other beneficial secondary effects. For example, instead of food stamps, the government could transfer Sand Dollars to restricted digital wallets, which would have the secondary effect of increasing the use of digital currency and fostering financial inclusion for the unbanked and underbanked. The economic literature has broadly shown that well-designed and targeted conditional cash transfers can have positive and statistically significant effects, as seen in Jamaica’s Programme of Advancement Through Health and Education, and Brazil’s Bolsa Familia (Levy and Ohls 2010; Hellman 2015) .
“Furthermore, in July 2022, in line with a broad economic consensus, the IMF, World Bank, Food and Agricultural Organization, World Trade Organization, and World Food Programme argued in a joint statement that cash transfers to the most vulnerable are more effective – both in cost and impact – than untargeted food and energy subsidies.”
Minister of Economic Affairs Michael Halkitis has been unwavering in his position regarding the rollout of the expanded price control list, which he said would only continue into January 2023.
At that time however, the Davis administration intends to increase the minimum wage from $210/ week to $260/week, adding yet another strain on small businesses.