The Tribune

• Construction, food hikes may rob revival impetus

• Tax system worsens impact for many consumers

• ‘Domino effect’ for purchasing, govt revenues

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Rising inflation poses “a very significant” threat to the speed and strength of The Bahamas’ post-COVID economic revival, a prominent economist warned yesterday, with key building material prices up by double digits.

Rupert Pinder, who lectures on economics at the University of The Bahamas, told Tribune Business that the sustained and escalating price increases being experienced in key sectors - especially construction and food - and over which this nation has little influence could undermine prospects for a faster rebound from the pandemic.

Speaking after Rupert Roberts, Super Value’s president, warned consumers to brace for grocery and meat prices increases of eight percent and ten to 12 percent, respectively, by Christmas, he added that “the domino effect” of increased construction input costs could rob another industry of vital impetus.

The government is relying heavily on construction to lead the post-COVID revival, and absorb some of The Bahamas’ record unemployment levels, but Mr Pinder said inflationary impacts imported from abroad “can dampen any sort of growth prospects” in a variety of ways.

He explained that borrowers “on the margins” of qualifying for a mortgage for a new building, or existing property that requires upgrades, could be pushed over the edge and no longer be eligible to receive financing as the rise in construction costs pushes them outside sustainable debt servicing limits.

As a result, some construction projects in the pipeline may be paused and abandoned as their sponsors are no longer able to proceed, Mr Pinder added, while warning that The Bahamas’ consumption-based tax system - with its reliance on border duties and VAT - only serves to worsen the impact inflation has on imports.

While there will be no impact on the one:one exchange rate with the US dollar, he said its “real value” - on a purchasing power parity (PPP) basis - will be weakened by the sustained price increases for key products. And, if inflation results in subdued economic growth, Mr Pinder said the impact will also filter through to government revenue projections that many already view as overly-optimistic.

While not possessing any actual inflation data or statistics, the economist said: “Just look at the magnitude of the increases in construction products and basic materials. There’s no question it’s going to have a significant impact on the cost of housing and construction generally, which is going to have a domino effect throughout.

“The increase in construction costs impacts those persons on the margins, those persons the banks are kind of iffy about as to whether they qualify for a mortgage. Now, on that same mortgage for residential construction, if the project’s costs go from a $1,900 monthly repayment to $2,200, the bank may that they no longer qualify.

“It (inflation) affects people’s access to credit,” Mr Pinder said. “It affects construction, and when you consider construction as an activity it’s widely used as a measure in terms of how the economy is rebounding. It’s very labour intensive, and can help in terms of alleviating some of the unemployment pressures.”

Stephen Wrinkle, a former Bahamian Contractors Association (BCA) president, yesterday gave Tribune Business an insight into the extent of price increases that have impacted his sector across-the-board. While the 100 percent increase that has doubled plywood prices is most prominent, he added that steel and metal building components have endured two price increases - of 10 percent each - since February 2021.

Glass windows and doors have increased by 20 percent over the same period, and Mr Wrinkle added: “Delivery times have also been backed up. Stuff we bought in January/February, which we should have had here in June, will now be here in August. Everything is backed up 60-90 days. That’s more harmful than the price increases because it backs up the entire construction schedule.

“A 20 percent increase over there [in the US] translates into a 40 percent increase here because you are paying duty and VAT on top. That becomes quite substantial across-the-board. Every time we order we get a price increase. It’s extremely hard to put a firm price on contracts. People who have a loan, mortgage or fixed financing are in trouble.”

While construction projects already in progress have little choice but to see it through to completion, Mr Wrinkle added that those due to start were likely to be most affected. “Anybody starting new work is going to have to have consideration for a substantial increase in the cost of materials. That’s where you’re going to see the most effect. We’ve been hit by factors beyond our control. It’s going to be a long haul.”

The ex-BCA president reiterated that the price hikes had been sparked by a combination of surging post-COVID demand in the US and globally, while materials suppliers were still catching up on the supply chain backlog produced by the pandemic and its health restrictions/lockdowns. The Bahamas, which imports most of what it consumes, is a price taker and unable to influence such developments.

Inflation, which is generally defined as a sustained increase in the weighted average of prices, erodes the value of savings and money’s purchasing power; causes problems for those on fixed incomes such as pensioners; and reduces consumers’ disposable income as well as undermining living standards and quality of life.

“What compounds the situation is that our taxes are ad valorem, where they are levied on the prices of goods,” Mr Pinder told Tribune Business. “When the landed price increases, inflation pressures are exacerbated because of our tax structure. 

“As the price increases in terms of the cost to the merchant in terms of the landed price, it is further exacerbated to the consumer because of the ad valorem taxes, which are based on the value. We are not talking price increases in a vacuum. You have the considerable dampening effect this will have on growth and employment.

“When the price of basic construction materials increases it has the potential to slow down economic and construction activity. It clearly has an impact on employment in the sector. All this flows down through the economy.”

Emphasising that he was not suggesting the one:one peg with the US dollar is under threat, Mr Pinder added: “With this sort of inflationary pressures it also affects the real value of the Bahamian dollar. The one:one peg is a nominal exchange rate; it has nothing to do with the real value of the Bahamian dollar.....”

The spectre of inflation was not addressed in the recent Budget, but he said: “There’s very little the Government can do, particularly in the short run, as we import everything. One thing we cannot dismiss is how rising prices, particularly in a recessionary environment, can dampen any sort of growth prospects.

“And, at the same time, it has the potential to weaken the Government’s fiscal position. Revenues are primarily based on certain growth projections that they have in mind.”