Prices: A Never Ending Spiral - May 8 2006

Prices: A Never Ending Spiral

INTRODUCTION

Hello Saint Lucia,

I know many of you will either have attended the opening of the 2006 Jazz Festival on Friday night, or you would have been to Fond D’Or on Saturday, or you would have been part of the first Jazz on Campus at my old school, Campus B, Vieux Fort Secondary School. This week, there will be jazz everywhere, every day – whether on the Square, at Pointe Seraphine, or elsewhere.
 

I know you will also be tempted to spend your hard-earned income to go to as many places during this Jazz Week. You deserve some fun and entertainment. However, you need to be careful. When the Festival is over, you will, once again, face the full realities of life. One of these realities is the cost of living. It is this subject that I want to return to and share some thoughts with you.

REDUCING THE COST OF ENERGY

This Government, as indeed every Government in Caricom, has had to face the spectre of constant increases in the prices of fuel, food, electricity and other necessities. It is not easy to keep the cost of fuel, household energy and food within reach of the average person. Everywhere in the region, the complaints are loud and frequent.

Sometimes, we have subsidized the price of fuel at the gas pump to the tune of millions of dollars per year, just to ensure that motorists do not have to pay the increases each time the price of oil increases on the world market. Yet, this comes at a cost, because the Government loses millions of dollars of revenue to finance our recurrent expenditure and to fund development projects. It is a vicious cycle.

A SUBSIDY ON LPG
 

Government also loses substantial revenue on cooking gas. The Government has continued its policy of subsidising the cost of cooking gas, in an attempt to reduce the cost of living to consumers. The current subsidy on LPG is 59 cents per pound, which, in effect, amounts to a subsidy of $14.75 per 25 pound cylinder.

In other words, as I said in my Budget Address, every single time someone buys a small cylinder of cooking gas for $28.20, the Government is paying $14.75 – more than half the price. This is to ensure that the price of that cylinder remains at a level that those Saint Lucians who use small cylinders of cooking gas, can afford. Without that subsidy, the cost of each 25-pound tank of cooking gas would cost you, not just $28 dollars, but over $42.00.

Similarly, we have kept the prices of basic commodities like rice, flour and sugar within reach. We have been able to ensure that the prices for sugar, rice and flour have not increased since this Government assumed office in 1997. Government, as you know, imports and retails these items and absorbs the movements in the prices of these commodities from time to time.

DELIBERATE GOVERNMENT POLICY

In effect, some of these prices are kept in check by the deliberate intervention of the government. We continue to do the best we can to keep prices down as much as possible for those who can least afford the increases. The real question is this: How long can these policies continue in the face of mounting increases in the prices of imported goods?

This question invites me to revisit an issue I also raised in my Budget Address.

COST OF LIVING CHALLENGES

A frequent topic on our Talk Shows is the issue of rising retail prices. I pointed out that no citizen is immune and all have been affected.

All kinds of reasons had been offered for this phenomenon. Some said it was because there was no competition in the supermarket business. Some said it was because Super J enjoys a monopoly. Others blamed the absence of price controls. Still others said that the increases in prices have to do with “greed”.

Since the Budget, some of the critics have sought to pour cold water on the measures which I announced. Unwilling to accept that the proposals have been applauded by most, they have poured scorn on the people who will benefit most from these measures by derisively describing the Budget as a “Chicken Back Budget.”

THE TAX REGIME
 

Despite Government’s intervention, some prices will continue to increase. Some will seek, as always, to blame Government and the taxes on imported goods. I believe it would be helpful if I explain the regime of taxes that applies to food items and why the prices of some items will be seen as increasing more than others. I will repeat today some of the statements I made in the Budget Address.

NO ENVIRONMENTAL LEVY

Imported food is subject to three taxes, namely Import Duty, Consumption Tax and Service Charge. The Environmental Levy, contrary to what some believe, does not apply to food items. In other words, food items are exempted from the Environmental Levy.

COMMON EXTERNAL TARIFF

The rates of Duty for all imported goods into Saint Lucia are CARICOM-determined rates. We do not set these rates. They are set by CARICOM, because all CARICOM States have a common rate of Duty, usually described as the Common External Tariff, which is applied on goods originating outside of CARICOM. The objective here is to protect goods produced in CARICOM. We therefore cannot change these rates of Duty without seeking and obtaining the approval of CARICOM.

CONSUMPTION TAX

Then there is the regime of Consumption Tax. The Consumption Tax, introduced in Saint Lucia in 1968, is a domestic tax, which applies to all goods on a non-discriminatory basis.

In recent years it has been adjusted upwards in order to compensate for losses in revenue arising from the changes in Duties introduced by the Common External Tariff.

Some items like potatoes, garlic, some peas and beans do not attract any Consumption Taxes. However, others do -- and the rates may vary from 0 to 5 percent, 5 to 15 percent and exceptionally, 0 to 25 percent.

One commodity group that has attracted considerable interest in recent times is milk and dairy products.

Several citizens have approached me to complain about recent increases in the price of milk. However, you would be surprised to know that Government charges no Duty on milk and milk products. There is, however, a 5 percent Consumption Tax.

In effect, contrary to the popular belief, the increases in the price of milk and milk products have little or nothing to do with increases in Duty.
 

SERVICE CHARGE

There is one other tax we need to bear in mind. It is Service Charge. A Service Charge applies to all goods entering Saint Lucia. It was introduced in 1989, well before this government took office. Currently, it is set at 5 percent.

A BALANCING ACT

When determining the respective rates, the challenge I have is to balance the rates in such a way as to protect the interests of CARICOM and local producers, while simultaneously safeguarding the interests of the consumer.
 

Take an item like tomato ketchup. The duty imposed on this commodity is 30%. If CARICOM had to reduce the duty on tomato ketchup, then ketchup imported from outside of CARICOM would become cheaper, competing directly not only with Baron’s and other locally produced ketchup, but with all other ketchup produced in CARICOM.

The same applies to whole chicken. Chicken is a staple in our diet. If Government decided, for whatever reason, to reduce the CARICOM-imposed rates of duty on whole chicken, then we might as well say goodbye to locally produced whole chicken. That’s because the imported chicken would become considerably cheaper than our locally produced chicken.

By the way, contrary to what “Sir John” propagates, the Government does not charge or impose any Import Duty on chicken backs, wings or legs. However, Consumption a Tax of 5% is applied to these items – that is, before the Budget.

THE PRICE CONTROL MYTH

Then, there is that other myth about price controls keeping prices down. That may be so, but not in all cases. It may work with flour, rice and sugar, simply because Government imports these commodities and bears the fluctuations in the costs involved. But, contrary to the popular view, price controls do not prevent increases in the retail prices of commodities.

Price Controls normally limit the profit mark-ups that a retailer is allowed to enjoy. Thus, if the importer is compelled to pay more for the items from abroad, for example, because the cost of fuel has increased, then the price of the items will still show increases on the shelves, even though the profit margin is controlled.

RISING COSTS…

I do not wish to down-play the challenges that face us. Everywhere in the region, Governments are contending with increases in the cost of living, particularly in respect of food.

Every Government has had to cope with rising inflation. There is no doubt that the increases in the price of fuel are primarily responsible for this inflationary spiral. The price of fuel has led to higher costs of production and expectedly, higher shipping costs. So long as the price of fuel continues to increase, so long will the price of imported goods continue to increase.

LOWERING COSTS EVEN MORE

How then do we deal with this situation? I have indicated that the Government will remove the rate of Consumption Tax on some items, and reduce the Consumption Tax on others.

Indeed, there will be no Duty and Consumption Tax on the following items: Chicken Backs and Necks, Chicken Wings, Chicken Thighs, Breasts, Leg Quarters, Legs, Chicken Drumsticks, Turkey Backs, Necks and Wings, Turkey Drumsticks, Evaporated Milk and Powdered Milk.

The Consumption tax will be reduced to zero in the case of the following items: canned tuna fish, canned mackerel, canned sausages, red kidney beans and disposable diapers. The rates of Duty will however remain.

But the respite may well be short-lived. Even though Consumption Taxes have been reduced to zero on some items and in others to lower rates, consumers will continue to experience increases once the importers have to pay more for the goods imported from abroad.

REMAINING COMMITTED UNTIL…

As I said in the Budget Address, if the cost of oil continues to increase as it has been these past few weeks, we may have to review the extent to which we can continue to pay the cost of keeping those prices lower than they actually should be. We have to understand that we are in the midst of an energy crisis.

A CHALLENGE

As usual, some make it appear that prices in Saint Lucia are the highest in the region. “Things are worse here,” is their cry. But is it? I’ll tell you what. I will ask our Statistics Department to compare the prices of basic items in our food basket with the identical items in the other islands. I will then disclose the results to you.

A WORD OF ADVICE…

At the end of it all, we must all face reality. The unprecedented increases in the price of fuel will continue to cause pain to consumers. The pain will be particularly felt when we buy imported foods. One way to fight the increases is to grow more of our food and consume more of what we grow. I will repeat what I said earlier, only because I want you to understand what we face. Increases in the price of oil will cause increases in the price of shipping, and haulage. These increases will be reflected in the prices we pay for manufactured goods. So, buy local, let’s grow our own food as much as possible, because there is little we can do to change the price of oil. That, frankly, is not good news, but it is reality!

Let me end as I began by saying: Do enjoy as much as you can of the Jazz festival. But remember, do not ignore the realities that confront us.
 

And during this Jazz Week, please take some time out to spare a thought and say a prayer for Francis Mindoo Phillip, our late great cricketing hero, who died on Friday after a long illness. He will miss the Cricket World Cup next year, but we miss him now -- and we will miss him then. May his good soul rest in peace. Next time, I shall offer a tribute to him.

So, until next week, God Bless, be of good cheer -- and take care.

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