OVER THE LAST SIX MONTHS, international oil prices have declined by about 50 per cent.
Strangely enough, it has taken rather long for Barbadian gasoline users to see the benefits of lower prices and the drop in the local price at the gas pump is in region of only 30 per cent.
There are wide ranging implications of the decline in oil prices for the major agents in the Barbados economy that include businesses, households and the government.
In the circumstances, it is becoming clear why the Government was hesitant to pass on the benefits to suffering households, since the impact on the two major entities – gas stations and the Barbados Light and Power – is neutral.
Variations in oil prices do not affect the profitability of the two major entities given that their profit margins are fixed, though determined very differently.
The benefit to households represents a transfer of income from the two entities, which means that, holding all things constant, there is no effect on output or economic growth.
However, there is potential for some impact on economic output, which depends on the way that households allocate the increased disposable income that will result from lower gas prices and electricity bills. The relief is certainly welcomed.
In the face of the reduction of these two critical household bills, it is hoped that the rate of growth of local prices will slow down even more, especially if the decline in oil prices persists or at least levels off for some sustained period of time.
So why did the Government not jump to past on the lower oil prices to Barbadian consumers?
The two biggest problems confronting the Barbados economy have been the fiscal crisis and the lack of growth. While the decline in gas prices and the electricity bill benefits the households, the government stands to lose revenue in the form of the value added tax (VAT), particularly.
Clearly, the fiscal position will worsen, even if households spend some of their new found disposable income.
Furthermore, given the benefit from having to look for less foreign exchange to import energy products, it is hoped that the policymakers do not find ways of increasing taxation in the April budget as has been promised by the governor of the central bank and the minister of finance.
Encourage growth
The key to solving the country’s economic problems is to encourage growth, not stifle it. Contrary to what has been said, Barbados’ foreign exchange position between 2008 and 2012 was as good as, and indeed better than any previous five-year period when measured by import cover per week.
The economic decline created the unusual situation of the foreign reserves because of the fall in imports. In essence, there was an unexpected good from the country’s bad economic performance. This occurrence was apparently lost on the policymakers.
The dramatic fall of the foreign reserves in 2013 was triggered by the refusal of the Government to prudently address its fiscal crisis as it relied even more heavily on the printing of money at the central bank. It seems not to be recognised that the Government was putting in place a fiscal adjustment programme since the end of 2009.
No one knows how long the current benefits from lower oil prices will last but one thing is clear, the Government will find ways to erode the gains of the households by introducing new taxation. In addition, the incidence of the new taxation on credit unions and other financial institutions will take effect this year.
In the midst of externally driven hope, there is still despair as the fiscal crisis lurks like a life sore.
It is the ever-present problem that emerged as the policymakers ignored the early signs, preferring to mask the wound. No amount of dressing will remove the deep-seated kernel of the country’s ill-health.
So deep-seated is the fiscal sore that the Government maintained higher energy prices than necessary to assist in replenishing the tanks of the Barbados National Oil Company (BNOC), which has been used to help finance the likes of the Transport Board and the Barbados Agricultural Management Corporation (BAMC).
As a consequence, BNOC’s drilling programme has suffered to the extent that there is a natural gas shortage that has become the bane of hotels and restaurants during the current tourist winter season.
Even when good happens, the Government finds ways to make bad. The common thread is poor economic leadership.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email mascoll_clyde @hotmail.com.