By Elcott Colbey
Nassau, Bahamas – If current economic trends continue, and all indications are that existing trends will continue, the government will have little choice but to place its operations in a state of fiscal austerity. Additionally, there are some other innovative measures the government can take that will offer relief to many overburdened working Bahamian families. To date the government has not presented a comprehensive relief plan to the Bahamian people. I charge that a vacuum in leadership and the absence of political will within the government are the reasons why this has not happened. This plan is necessary as it gives the Bahamian people a reason or reasons to continue to repose its confidence in the government. There are at least three proposed areas that the government may focus on:
In times of crises, it is normal for the political directorate to request ministries to reduce operating expenses by a modest 5%, or $70 million. Ministries usually defer discretionary spending in areas such as travel, launching of new government programs, and in some cases, hiring of additional staff. These cost savings can be passed on to consumers in the form of lowered duty rates on breadbasket staple food items. This will bring measurable relief to literally thousands of Bahamians in the form of improved consumer confidence. This confidence stimulates consumerism, which buoys the Bahamian economy. I caution the government to be vigilant in enforcing its price control regime so as to minimize profiteering by unscrupulous businesses.
Stabilize fuel prices at the pump
Both the government and the media have said that the government is powerless to do anything about rising fuel prices. I disagree. If the government has the political will, it can make taxes on imported fuel variable instead of fixed. This tax option will eliminate shock in the market place that causes consumers to panic. If the government makes a policy decision to cap the price of gasoline at the pump at $5 for example, then if and when gasoline prices are hiked by five cents, the government can lower its taxes on that batch of fuel by five cents. The net effect is that the price at the pump remains unchanged and shock and panic in the market place is avoided. It is the shock in the marketplace that creates the panic that adversely affects consumer confidence and impacts spending habits.
Fuel hedging for Bahamasair and BEC
Bahamasair’s fuel last year was just under $20 million and BEC’s fuel bill is much higher. Bahamasair has announced a $10 hike on ticket prices to cope with ever increasing fuel costs. BEC uses a fuel surcharge formula to pass on increases to the consumer. As for Bahamasair, it should implement the practice of fuel hedging. History has proven that the high fuel prices have dealt a much milder blow to carriers that have used the practice of fuel hedging; which most often involves purchasing futures contracts that allow airlines to fix or cap the price they’ll pay several months or years in advance. I encourage the board of directors of Bahamasair to closely examine this alternative cost reduction measure. If Bahamasair, through the purchase of futures contracts, can cap the ceiling on Jet fuel, and the market price continues to increase by $2 per gallon above the cap by the end of the fiscal year, then Bahamasair can realize cost savings of as much as $9 million in the coming fiscal year. This reduces the government’s subsidy to Bahamasair by as much as $9 million. Further, this initiative gives Bahamasair the option to reverse or reduce the $10 hike on ticket prices. Thirdly, the cost savings can compensate for the loss of tax revenue from a variable tax regime on gasoline. This initiative will improve market efficiency.
The same principle holds true for BEC because Diesel and Heavy Fuel Oil prices continue to rise and this adversely impacts electricity costs and the cost of goods and services in the economy at large. I also encourage the board of directors of BEC to consider the option of fuel hedging through the purchase of futures contracts. Cost savings realized by BEC can allow the government to roll back the 10% tax on BEC’s fuel. It would also significantly reduce the surcharge passed on to the consumers.
This reduction in energy cost will reduce the cost of goods and services in the general economy in addition to increasing the level of disposable income among the many thousands of BEC consumers. There is no doubt that this disposable income will be spent in the economy and will buoy the Bahamian economy through increased consumerism. This too will improve market efficiency.
The price of fuel is dictated by international financial markets, therefore, the government should not be afraid to engage and exploit the financial instruments of these markets for the benefit of the Bahamian people. The external environment is filled with uncertainty and risk, so risk management has to necessarily form a major component of government’s public policy. I remind Bahamians that the government, not the private sector, is “the legal guardian of market efficiency”.