IDB brands price controls ‘poorly targeted subsidy’

The Government’s price controls are a poorly-targeted mechanism to counter soaring 16 percent food inflation as they benefit the rich as much as low income and vulnerable families, a multilateral lender is arguing.

The Inter-American Development Bank (IDBO), in its latest quarterly Caribbean economic bulletin, indicated that social assistance to offset the cost of living crisis could be better focused on poor families through the use of conditional cash transfer (CCT) initiatives that build on existing initiatives such as food stamps.

It also backed the Retail Grocers Association (RGA) in warning that price controls will disproportionately impact small and medium-sized food stores that lack the breadth of product range and economies of scale - in comparison to larger competitors - to absorb selling more items at a loss, or below cost.

“A price control, at least in terms of behaviour if adequately enforced, is a de facto combined turnover tax and income redistribution policy (a cash transfer from business to consumers),” the IDB wrote. “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. In addition, they will have to use these same diminished margins to cover increasing electricity bills and labour costs.”

The IDB argued that only the 24 percent or $50 per week minimum wage increase, which is set to take effect on New Year’s Day and raise legal floor to $260, was targeted specifically at low income or vulnerable Bahamians. All other measures unveiled by the Government to combat the cost of living crisis and inflation, such as import tariff cuts and raising the VAT exemption on electricity bills from $300 to $400, benefit rich and poor alike.

“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,” the IDB said.

“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.”

Given that segments in Bahamian society who do not need such assistance also stand to benefit from the Government’s policies, the IDB suggested an alternative. “Unlike price controls, which are blunt policy tools, a more targeted response – such as a conditional or unconditional cash transfer – could build on existing programmes such as emergency food assistance that provides food stamps to qualifying families,” it argued.

“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.

“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 IDB thus added its voice to the controversy circling the Government’s imposition of fresh price-controlled margins on the food distribution and pharmaceutical industries, which it has billed as lasting for just six and three months, respectively, in a bid to ease the cost of living crisis sparked by soaring inflation. The move ran into opposition from both sectors, although the Davis administration was able to agree a compromise with the pharmacies.

The multilateral lender said there was numerous evidence, including from Jamaica and Brazil, as well as statements from the likes of the World Bank, UN Food and Agricultural Organisation and World Food Programme, which showed such conditional cash transfer initiatives “are more effective – both in cost and impact – than untargeted food and energy subsidies”.

Such programmes were first discussed, as a means of directing increased financial and social services assistance, to low income Bahamians when VAT was first introduced in 2015. Obie Wilchcombe, minister of social services and urban development, has repeatedly said the RISE conditional cash transfer initiative is just months away from relaunch only for such deadlines to be missed.

The IDB yesterday pegged annual food price inflation in The Bahamas at 16.1 percent, the second highest in a five-strong Caribbean sample that also included Jamaica, Barbados and Trinidad & Tobago. Only Suriname had a higher rate of food price rises, with The Bahamas’ food inflation outpacing the country’s overall annual inflation rate of 6.5 percent.

The Bahamas’ trade deficit in agriculture and energy products was also shown to have risen year-over-year, expanding from 8.5 percent in 2021 to 9 percent of gross domestic product (GDP) this year. “It is important to note that food prices have been rising faster than overall inflation,” the IDB added. “This is to be expected, given the rise in international prices of food as a driving force for overall inflation.

“However, the increase is important from a social perspective. The overall price index is based on a typical consumption basket for consumers, but the consumption basket of lower-income families is often more heavily weighted towards food. If food inflation is higher than overall inflation, then these lower-income households will suffer a larger cost of living effect than the average household.”


Porcupine 1 year, 4 months ago

The bigger picture here is that we bend over backwards to get the rich to come here, and then refuse to tax them fairly. Worse, we allow our own criminals to get rich on the backs of the poor and then let them buy our government. The pirate mentality is alive and well in The Bahamas. The results of the 50 years of dumbing down our nation should be clearly evident in this article. That we could even suggest that we embrace Christian values and use them to guide our taxation and fiscal policies is an affront to anyone with a solid high school education and shows our elite politicians and financial "experts" to be the moral sellouts that they clearly are. The numbers, even if fudged, are indictments on our souls. That a rich country like The Bahamas finds itself in this predicament after 50 years of independence is a tragedy of epic proportions.


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