Generally, I do not believe that any government could “ease” the cost of living in any small open economy with no natural resources. Trinidad doesn’t determine our price levels. I mean to say that its businesses, as owners of significant capital in Barbados, set their profit margins. Their inputs are set externally, as Trinidad and, by extension, Barbados largely import the necessary raw materials and/or products meant for further production. What obtains then is that transportation costs should largely influence the cost of imports. I’ve said before that this matters more in Barbados’ context, as we don’t export enough to naturally afford our imports. We then have to borrow foreign currency to finance what we bring in.
Foreign debt makes our sensitivity to foreign-determined inflation even more worrisome in times like these. Trinidad doesn’t borrow as much as we do, especially where external debt is concerned. But even then, our only saving grace, to a point, is that we have stringent capital controls. Our US dollars do not leave as easily as those of our southern neighbour. We should also be thankful that we don’t have more home-grown conglomerates with a regional footprint. These alone would have guaranteed further leakage and inflation down the road.
Let’s talk current affairs for a moment, focusing on Barbados and why the upcoming Budget doesn’t truthfully matter for the time being. Setting the context, all of the recent debate over the Estimates of Revenue and Expenditure clearly did not account for the instability surrounding us. I was actually surprised that the projections assumed business as usual. There was no significant increase in the appropriation for the importation of fuel and energy, despite very clear indications that this would be needed in the aftermath of the skirmish in Venezuela, the “Donroe” Doctrine in general, and the well-followed transatlantic movements of significant military assets since early January.
The Budget does give the country the chance to correct the wrongs done by the government’s budgeting exercise. I’m afraid, however, that given our size and worsening debt position of late, it is once again a case of choosing stability over growth or reclusion. Reclusion, by my terms, points to taxation as a priority in search of stability for the public purse. I do not envy the job of our Minister of Finance this Monday evening. The optimum choice for him is to balance a dose of reclusion so as not to balloon debt while making it easier for the private sector to be nimble. Such a strategy should include tax breaks on merchandising imports, though not on VAT; a delicate freeze or cut on excises on fuel; and, in the latter half of the year, a further subvention on aviation fuel. These are merely off-the-top suggestions coming to me as I type. Bear them little consideration, even if they are plausible. However, I believe there to be others, but I won’t insult the goodly Minister by setting a bar for unfair criticism. I do not envy his position right now. The country shouldn’t look for growth if the conflict in the Middle East blows further out of proportion or even simply persists.
The Strait of Hormuz is a significant choke point. It certainly resembles one on a map. Iran’s retaliation to strikes by the USA and Israel resulted in an effective closure of that maritime corridor, one that is responsible for the passage of 20 per cent of the world’s oil. This oil not only feeds Asian powerhouse economies that drive production of consumer goods, it is also transported by very large, reputable shipping interests. The insurance markets do not easily insure against Acts of God or war, for that matter. There are certainly some ways for those shipping companies to access that coverage, but at a raised premium on any given day. Iran’s response has stretched the bounds of war. By going after military bases and civilian infrastructure, endorsing cyber attacks in the USA, and openly threatening US private-sector technology businesses also operating in the Middle East, it is clear that Iran is redefining guerrilla tactics on the world stage before our very eyes.
Insurance companies are shaken and, worse yet, reinsurance companies are shaken. This is one of the contagion points that no one was prepared for. It is similar to the effect that a hurricane disaster in Florida has on the rest of us in the Caribbean. Insurers and reinsurers insure with other insurers. Say that ten times fast. This will amount to a general increase in insurance premiums in and beyond the global shipping industry for the foreseeable future. This will push the already high cost of imports even higher in the coming months. Just take a quick look at Amazon to see the jump in prices in the days after the conflict began. Minister Straughn can do little, if anything at all, to prevent this from affecting us. Well, he could consider a quite temporary ease in line with what I mentioned earlier. We don’t want our public debt ballooning in the long term, do we?
Tourism will be impacted going into next winter season as well. A quick search on Google Flights should indicate the recent jump in prices, despite this period being traditionally relatively quiet for tourism. As I type this, I’m being told that Air New Zealand is dropping flights from its schedule until May instead of raising prices in an unsustainable manner. New Zealand may be far from Iran, farther than we certainly are, but it is affected by the conflict. Furthermore, New Zealand, like us, doesn’t even import fuel from Iran. So why the bump in fuel prices in areas that should be unaffected?
Notwithstanding the fact that everybody should understand what OPEC is and why it controls production to influence the global cost of oil, there are a few additional considerations to bear. Buyers taking delivery of oil in the future are incentivised to purchase that future oil at a higher cost if there is a threat to the future supply of oil. Who knows how deep this conflict will go by that point? Buyers who wish to take delivery of oil in the nearer term will be affected by this as sellers in unaffected regions will anticipate more profit in the future, thereby making today’s sale more expensive for the short-term buyer.
In other cases, short-term buyers in the regions affected by the conflict may begin to source oil deliveries from sellers they do not usually purchase from, driving up the price in the process due to relative shortages being created for buyers who do purchase from those sellers of oil. It’s simple and indeed the reason why Emera just gave some of you the shock of your lives when it said that our light bills will be more expensive in the near future. Minister Straughn can’t do anything about that without creating more public debt in the long term. But, seeing that he may be ever so encouraged, he could possibly look into that excise freeze I mentioned earlier. It will certainly hold the cost of fuel at the pump steady in the near term.