The Tribune

• Governor warns price increases yet to peak

• Drops GDP expansion forecast amid ‘drag’

• $3.2bn foreign reserves to beat ‘21 year-end

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor yesterday trimmed forecast Bahamian economic growth for 2022 “to at least 5 percent” while warning that the cost of living crisis facing many families has yet “to peak”.

John Rolle, speaking as the regulator unveiled its half-yearly economic and financial update, said Bahamians should expect to see higher US inflation rates, which are running at 40-year record highs and hit 9.1 percent last month, increasingly reflected in the price of goods and services sold locally.

While official measures place Bahamian inflation at below 5 percent, the Central Bank’s report yesterday pegging it at 3.8 percent for the year to April 2022, he added that the country’s dependence on US imports - and inability to influence prices itself - meant consumers should brace for further increases.

Mr Rolle said that while Bahamian inflation has “not yet reached the same level represented in the US, nevertheless we do expect the average inflation rate in The Bahamas will continue to move a bit higher in the near term. Right now, the official government measure estimates that probably The Bahamas’ inflation rate is below 5 percent but that is still significantly higher than a year or two years ago”.

Asked how high Bahamian inflation rates may go, the Central Bank governor replied: “I would not speculate, but I would say the rates that have been published are still below where we expect they will peak in The Bahamas. We have to appreciate that if inflation in the US is 7-8 percent, and we are still running below 5 percent, since we import goods that largely originate in the US we are going to see more of that reflected in our prices.”

Mr Rolle said the one counter to inflation, and where The Bahamas has seen some “head off”, has been on electricity (energy) costs that have been somewhat contained via the fuel hedging initiatives employed by Bahamas Power & Light (BPL) and Grand Bahama Power Company.

It is unclear, though, how long BPL will be able to hold fuel costs at their current level given the ongoing doubts about the status of its fuel hedging initiative and whether the Government is subsidising the utility’s fuel costs - something it is supposed to be blocked from doing by law under regulations passed in 2020.

Low-income Bahamians, especially, but also those in the middle class as well as on fixed incomes such as pensioners, have been hit hard by food and gas price increases in the wake of COVID-19. Wages have largely remained stagnant, which has resulted in living standards for many eroding while the cost of living remains high.

“We are feeling the impact in terms of higher prices for imported goods and services, as well as fuel costs,” Mr Rolle added, indicating the worst may be yet to come. “What I also think we need to appreciate, which has been said on several occasions, is inflation is imported by The Bahamas. This is not something we should expect to have a significant, or any ability at all , on the Bahamian side in terms of influencing the rates coming through.”

Warning that higher-priced imports inevitably such up increased amounts of vital foreign exchange, the Central Bank governor added: “What’s important is that the economy is able to adjust prudently because higher inflation for us really means that there’s an additional amount of every dollar spent on imports. There’s an additional amount of foreign exchange represented in that as a result of higher prices.

“Higher inflation for us is an increased claim on foreign exchange we use to pay for goods and services. At a national level, it means there’s going to be some managing of expenditure as we continue to satisfy our import needs.”

Still, Mr Rolle said he expected the country’s foreign currency reserves - which support the one:one exchange rate peg with the US dollar - to finish 2022 higher than the prior year’s close of $2.459bn despite the anticipated second half drawdown for summer vacations and Christmas inventory purchases.

“At the end of June, the reserves were estimated at $3.2bn, and as of the beginning of August, the balances were still around those same levels,” he added. “Over the reminder of 2022, a normal seasonal contraction in the reserves is expected. However, it is still forecasted that balances will end the year at a higher level than at the end of 2021.”

As for the overall economic outlook, the Central Bank governor indicated a slight revision downwards from previous projections that Bahamian gross domestic product (GDP) will expand by 6 percent. “The economy is projected to grow at a healthy pace of at least 5 percent in 2022, and gains are also expected in 2023, continuing to reflect a bounce back from COVID-19,” Mr Rolle said.

“In this environment, it is important to continue lay a foundation for sustained and strengthened growth, particularly beyond the COVID-19 recovery phase. This would impact the speed at which the unemployment rate falls to below pre-COVD levels, and the pace at which the Government’s finances improve.”

Noting the mixed US economic performance, with recession fears running parallel to strong job market numbers, Mr Rolle said The Bahamas must understand that “any slowdown in the US economy will impede or step on the ability of consumers to travel”. 

Adding that The Bahamas’ post-COVID recovery would be much stronger, and would have progressed further without the negative global headwinds affecting it and its major source markets, he said that while tourism and investment was expected to continue strengthening through 2023 “we should appreciate the positive outcomes would be greater in the absence of the headwinds being experienced”.

Mr Rolle said The Bahamas’ post-pandemic recovery momentum is “still sufficient” to offset “the drag of these forces”. He added: “The momentum in tourism is being sustained, despite other challenges in the international economic environment, which are expected to discourage some travel. Such headwinds are expected to reduce, but not eliminate the total economic gains being experienced through at least the end of 2023.

“By this point, the major part of the recovery from COVID-19 is likely to be completed, leaving other external factors to become more dominant in influencing travel sector trends. At present, headwinds include elevated labour shortages that are holding back the airline industry’s ability to swiftly restore seating capacity, fuel costs that are making travel less affordable for some consumers, and increasing central bank interest rates which, while intended to fight off inflation, would also make travel less affordable for some households.”

Focusing on the tourism rebound, he added: “The recovery is driven significantly by a return to pre-pandemic levels of tourism. In this regard, there is room for additional gains as a result of pent-up demand for travel previously unmet, particularly during the first year of the pandemic.

“The tourism turnaround has featured both rebounded visitor volumes and steady-to-improved average pricing for stopover accommodations. Moreover, performance in the vacation rental market remains strong, with significant benefits accruing to the Family Islands.”