Last Week I wrote that it is basic economics that small open economies have to import to survive. But it is not true that every dollar spent in the Barbados economy contains 70 cents in foreign exchange (forex) usage/leakage. This does not add up and it never did even when the figure was said to be 60 cents.
This week, I will use the retail price of gasoline at November 11, 2012, to prove that the foreign exchange in domestic consumption is not as high as officials would wish us to believe. The choice of gasoline is on the grounds of (1) the size of the oil import bill; (2) the mark-up/margin at each stage in the local value added process is known; (3) the mark-ups/margins must be the lowest of any commodity, imported or otherwise, in Barbados.
Even though mark-ups are very low, the local value-added is high because of the high taxation on gasoline. The point is that the foreign exchange usage cannot be anywhere close to 70 cents of the dollar.
The marketer transports gasoline from the terminal to the station. The dealer sells it to the consumer.
At November 11, 2012, the retail price for a litre of gasoline was fixed at $3.50. Whatever the retail price of gasoline, the Government receives 54 cents per litre in excise tax. The marketer’s/distributor’s margin is fixed at 20 cents and the dealer’s/retailer’s margin is 25 cents per litre.
Though it is not known what the imported price of gasoline was or is, the price of the gasoline per litre when it left the terminal was $1.99 exclusive of excise tax. The mark-up/margin of the Barbados National Oil Company (BNOC) was, and is still, not known. Gasoline
However, included in the terminal price is a cess of 15 cents per litre, one cent for culture and two cents for clean-up. This brings us closer to an assumed imported price of $1.81 per litre for gasoline.
Therefore without knowing anything about a mark-up for BNOC, the assumed imported price of gasoline represents approximately 52 per cent of the retail price.
There is more. The retailer’s mark-up/margin is seven per cent of the retail price and the distributor’s is about six per cent.
There is no imported commodity in the unregulated retail trade that attracts the very low mark-ups in the energy sector. In fact, the lowest known mark-ups at each stage on imported commodities lie between 25 and 30 per cent on some food items.
Once the mark-ups go higher, local value-added increases. Therefore the imported price as a percentage of the retail price declines. The point is that a foreign exchange leakage of 70 cents out of every dollar spent in Barbados is impossible. Â
In fact, earlier this week on January 6, the retail price for gasoline fell to $3.15 per litre. Not surprisingly, the assumed imported price fell to 47 per cent of the retail price. This makes the argument that as the international price of gasoline falls and the local value added is fixed – with respect to the excise tax, the marketer’s/distributor’s mark-up and the dealer’s/retailer’s mark-up – the foreign exchange usage declines in relation to the retail price.
The foreign exchange usage in the Barbados economy is more in the vicinity of 40 cents out of the dollar. The bigger point in this analysis is that the country’s foreign exchange reserves are adequate enough to handle much needed additional spending in the Barbados economy.
Furthermore, it is not the Central Bank’s reserves that are going to be used. The reserves that matter are in the commercial banking system.
The country continues to benefit from declining foreign debt servicing, which is expected to last for the next decade. In addition, total imports have not gone back to the level of 2007.
If there is tax relief of $100 million in the economy, it will trigger about $200 million in spending using a conservative multiplier. A boost in investment sufficient to help increase total spending to around $400 million, or just over four per cent of nominal gross domestic product, is necessary.
Such an increase in spending would increase Government revenue by some $112 million.
The net effect would be a small gain in revenue to Government, notwithstanding the tax relief. Economic growth is the only sustainable way out of the fiscal crisis as the revenue base increases, while managing expenditure.
Growth is the key.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email clydemascoll@gmail.com.
