Wednesday, June 21, 2006

Tom Phillips Lecturer in Economics at UCCI

The report of 1.6 percent deflation by the Economics and Statistic confirms what the general public is already experiencing, that housing and other cost of living expenses have finally been coming down a little in recent months.

However, the Economics and Statistics Office still predicts the inflation rate will rise by 3 percent by the end of the year. That means that cost of living will still be 10 percent higher than it was two years ago, which is having a long term impact on the purchasing power of the average worker according to Tom Phillips, Economics Lecturer at the University College of the Cayman Islands (UCCI).

"Problems caused by inflation after Hurricane Ivan can't be solved by lowering inflation," said Dr Phillips.

"The damage has already been done. The ramification of record inflation is still much higher than the growth of wages."

Dr Phillips explained the 3 percent forecast means that people will have three percent less purchasing power than they did in January, 10 percent lower than they had pre-Ivan. To stay even, employees will need to receive 3 percent raise by December to compensate for their lost in purchasing power since January or 10 percent to compensate for lost purchasing power since before Hurricane Ivan.

Because this country is a service-based economy, it is dependent on attracting large numbers of qualified and knowledgeable people. However, the high cost of living is discouraging qualified people to come and work in this country.

With the US reporting 3 percent inflation, it has much of the nation in fear of rising prices among its citizens demonstrating how serious a 3 percent inflation rate is.

Furthermore, Dr Phillips questioned the viability of a forecast of only 3 percent, because even before Hurricane Ivan, Cayman was experiencing 4 percent inflation especially with rising oil and gas prices.

"This also has an impact here, in terms of transportation, electricity and indirectly other goods and services. To think that inflation will be 25 percent lower than before Hurricane Ivan is unrealistic," he added.

Another aggravating factor is the Cayman dollar is fixed to the US currency and because the US currency has been depreciating compared to most countries, then the Cayman dollar has also been depreciating, noted Dr Phillips.

"The Canadian dollar has appreciated 28 percent to the US dollar since 2003. That appreciation has removed the tax advantage the Cayman Islands once had. And the US dollar has also depreciated against the Euro, against the pound and most currencies around the world. So recruiting talent is becoming an issue," he said.

As this country has limited natural resources, the country must be able to attract knowledgeable workers to sustain its economic development. Right now the economy is heavily reliant on tourism and finance, but it could easily be diversified into other sectors.

One area would be to develop into an educational centre.

"There are a lot of economies that have no natural resources but do have a body of people developing educational communities. Cayman has yet to embrace that idea. St Matthew's University is  a great example that you can have a successful institution in a place that is not known for medicine," he added.

shurna@caymannetnews.com

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