The Tribune

• AID chief: Elimination to ‘more than offset’ inflation

• Retail co-chair: Lower concessions for duty cuts

• Top finance official: Duties ‘very, very inefficient’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Eliminating price controls “would more than offset” soaring inflation, a Bahamian retail chief is arguing, but politicians remain too obsessed with “perception” and election votes to allow consumers to benefit.

Jason Watson, Automotive Industrial Distributors (AID) president, in e-mailed replies to Tribune Business questions said Bahamians are paying more for price-controlled products than they would otherwise if this “outdated” government policy was ended.

Revealing that AID would sell automotive goods at prices up to one-third cheaper without price controls, he explained that besides the financial advantage to consumers, the retailer would enjoy a higher gross profit while being able to finance higher inventory carrying costs.

“Currently, Bahamians are actually paying higher prices because of price control. The same automotive item that AID sells for $60 would be sold for $40 without price control,” Mr Watson said. “AID would manufacture that item rather than buy it from a wholesaler, and use a higher mark-up than what is currently allowed under price control to finance higher inventory carrying costs and an appropriate profit margin.

“The consumer benefits from a much lower price, and the company benefits from a higher gross profit. Why would a consumer care about what mark-up was used when they bought the same item for $20 less than they would have otherwise? Bahamians are sophisticated consumers, and modern logistics has made price control completely outdated. The benefit of removing price control would more than offset rising prices, but politicians are worried more about the perception and votes rather than the economic benefits.”

Mr Watson said price-controlled companies were finding it increasingly difficult to absorb ever-increasing business costs and remain profitable. Citing the near-inevitable increase in National Insurance Board (NIB) contribution rates as one such example, he added: “Any increases to NIB will have a generally negative effect on our economy.

“The negative effect is even greater on companies that sell goods which are price controlled, such as automotive goods, since we are not allowed to pass higher NIB costs on to the consumer. This has gone on for decades, where we could not pass on higher Business Licence rates, NIB rates, real property tax revaluations, wages, insurance costs, utilities and credit card fees as more customers pay by card rather than cash.

“When VAT was introduced we were told how Business Licence fees would become a nominal fee, and how Customs duties would be reduced significantly. Seven years later and none of that is true. VAT was increased and we are still paying 60 percent duty for auto parts.”

Price controls were imposed by the Government decades ago to prevent what it viewed as an unscrupulous merchant class from exploiting lower income Bahamians by unreasonably hiking the price of food staples and other essential products, thus placing them out of reach while undermining living standards.

However, opponents argue they are an anachronism that have no place in a modern 21st century economy. The private sector views price controls as an inefficient, distortionary mechanism that creates more unintended consequences than the supposed problems they solve. They can result in product shortages, while retailers and wholesalers have to increase prices and margins on non-price controlled items to compensate for selling these goods as effective “loss leaders”.

Mr Watson, besides further strengthening the case to eradicate price controls, also revealed to Tribune Business that while shipping costs from China have reduced significantly from their COVID peak they are still more than one-third higher than pre-pandemic levels.

“Ocean freight from Asia has been reduced significantly but it is still 35 percent higher than pre-COVID levels,” the AID president said. “Ocean freight from Europe as well as Central and South American ports remains significantly higher than pre-COVID levels. Inland freight in the US remains extremely high but ocean freight from South Florida is comparable to pre-COVID levels.”

The latter aspect may help to ease some of the imported inflationary pressures, with Mr Watson adding: “Sales are stronger now than this same period in 2021 and 2019. Usually there is a lag between higher prices and when consumers adjust their spending habits, but it would be less noticeable for AID since the mix of products that we carry perform well during good or poor economic conditions.”

Meanwhile, Tara Morley, the Bahamas Federation of Retailers’ co-chair, told Tribune Business that the implications for the Public Treasury arising from the sector’s call for duty cuts on multiple high-tariff items could be eased if this was accompanied by reduced tax breaks/concessions.

Essentially calling for a rebalancing, she argued that reducing such incentives would help to broaden the tax base and thus enable lower import tariff rates to be charged across a wider variety of goods. In so doing, the Government’s tax revenue streams would not be negatively impacted.

“If we had lower rates of duty we could also enable less tax concessions being needed,” Ms Morley said. “We could then charge across a broader tax base at an average rate of, say, 15 percent. There’s a huge number of codes at 30-45 percent duty.

“If we were to bring down the cost of importing goods into the nation, reduce some of the concessions and make it less of a burden for people to pay, then you don’t have to rely on a lower number of people paying the duties because you’ve broadened the tax base.”

Ms Morley, while not wanting to be held to this, said she recalled a seminar from eight years ago where a consultant revealed that the Government relinquished a sum equivalent to around one-third of its total tax revenues via incentives provided for various developments and industries.

“If we’re able to broaden it by reducing it across the board for everyone,” she added of the tax base, “but not give up so many concessions, that benefits the cost of living for everyone as opposed to a few individual projects. If everything is at a lower duty rate and spread across a wider base, that seems a fairer policy.

“We want to stimulate foreign direct investment, but it doesn’t mean we have to give everything away for free. If we can reduce the cost of doing business in the country, we might get a lot more retailers and service providers winning bids because the cost of doing business has gone down.”

Ms Morley acknowledged this will require careful analysis, but said that it at least “opens the conversation” with the Government. The Retail Federation co-chair, though, would appear to have an ally over her call for tariff rate cuts in Simon Wilson, the Ministry of Finance’s financial secretary.

Addressing the media briefing given by the Prime Minister’s Office last Thursday, he branded Customs duties as “a very, very inefficient” mechanism through which to collect taxes. Emphasising that these were his personal views, and not government policy, Mr Wilson said: “The ministry’s philosophy overall is that Customs duties are a very inefficient mechanism of collecting taxes.

“So one of the things that, certainly for me as an economist I can say, is we have to reduce duties anyhow across the board. That is one of the things I tell my staff all the time when we look at revenue measures; we don’t look at increasing duty rates. They’re very, very inefficient. So that’s my view as an economist. We have to find mechanisms to generate revenues outside of Customs duties. They’re too inefficient.”