What has the COVID-19 pandemic taught us as a nation? This crisis proved that we must prepare and plan - economically, socially and financially - for a sustainable future. If we are not 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 economic conditions will deteriorate as we enter 2023. So, what will we do with the little time we have left to ensure 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.
Tough Decisions
As a developing country, we need to prepare - both from a monetary and fiscal perspective - to deal with the spillovers from tightening financial conditions and a slowdown in global growth. If you take a closer look at the news in recent times, business owners, leaders, government officials and policymakers around the world are all preparing for a recession. Central banks are simultaneously increasing interest rates to combat inflation, and policy experts are constantly warning us about the sharp decline in global economic growth. All of these are signals to brace for what is inevitable - a global recession. Due to supply chain disruptions and labour market pressures, inflation has continuously led to an increase in prices across various industries. The US Federal Reserve and other central banks have responded by increasing interest rates in the hopes of slowing down demand, which in theory will help to cool surging prices. However, inflation continues to rise and, as a result, global gross domestic product (GDP) could potentially contract. Some believe this would mean a GDP growth rate of 0.5 percent in 2023, which is a 0.4 percentage point reduction.
Considering this, The Bahamas must prepare now for such events through its own Central Bank and policy responses. Everything should now be looked at from a demand and supply perspective. Demand should be stabilised by creating price stability via monetary policy. Fiscal policy should be used to stabilise the national debt and associated interest rate costs. On the supply side, measures should be put in place to help address constraints facing labour markets, energy and trade (Guénette et al., 2022).
Policy responses
Since the last recession in 2008, we must ask what have we put in place as a buffer to ensure the impact of inflation or any economic downturn does not dent the economy for years to come. Presently, we are still in the policy stages of diversifying our economy by bringing in new industries. We are still struggling to fund national disasters, crime initiatives, national emergencies, pensions and other solutions that can determine our future as a country. We have been employing knee-jerk responses for quite some time and they are not meant to be permanent solutions.
It is apparent that the policy responses we sometimes take have little to no effect, since they are not well thought-out nor measured based on outcomes. For instance, the number of murders has not produced an emergency response that shifts policies in the judicial or legal system. What it has done is lead to the formation of a task force that will be used to discuss best steps. How will this yield a different result? To make matters worse, studies have shown that there is a direct relationship between unemployment and increased crime rates. If a recession plays out in full, unemployment may rise and 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 unemployed 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 when inflation is surging. There are two types of price control: Ceiling, and floors. Ceilings are price controls on goods and services, and a floor is a minimum wage. The Government has recently implemented a mix of both by increasing the minimum wage to $260 per week while seeking to impose additional price control measures on grocery retailers to combat the rising costs of food. But this temporary solution comes at a time when retailers are faced with the rising costs from their own suppliers. 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 might 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 they only appear to reduce costs. In reality, they do 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 soaring prices. 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 why 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 looming. We need to increase growth as much as possible rather than stifle it. Doing this can be harmful, and will indeed shift a company’s focus from production to meeting the Government’s needs and being at their whim. There are some monetary and fiscal policies that do more harm than good, and at the very least we 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 businesses. There are many ways to achieve this using monetary and fiscal policy tools such as discretionary spending, reserve regulation or discount lending.
At the same time, governments can only do so much to ensure their citizens are not severely impacted by economic downturns. 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.
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