This research paper focuses on the Financial Risks arising out of Global Inflation and suggests mitigation measures for the Contractors involved in Large Construction Projects (e.g. Construction of large tunnels, Construction and development of large stretches of highways, Construction of very large Infrastructures such as mass housing project etc.) which are typically spread over a multiple years of Contract duration. In order to remain profitable, the Contractors are required to mitigate the financial risks involved in the execution that are direct result of Global Inflation.
South Asia, as well as the Middle East are fast leveraging towards their GDP growth by economical boost of infrastructure Projects by the State Governments. Major part of the Government spending comes in the form of Finances set aside for the Large Construction Contracts spanning over a period of time. This research paper focuses on the major Financial Risks to the Contractor (arising out of Global Inflation) while executing these large Construction Contracts spanning over a comparatively large duration and outlines the mitigation actions.
Domestic Vs. Global Inflation
Whilst the Domestic Inflation was a matter of concern until a few decades ago, most of the countries are now more and more affected by the Global Inflation. Meanwhile, it is easy for the central banks to somewhat control the Domestic Inflation by the way of changing the strategical rates; it‘s somewhat more of a herculean task to let the country not affect by the Global Inflation. The major outcomes of Global Inflation which affect the Contractor‘s financial abilities directly are as below:
i) Rising Oil Prices directly affecting the consumables such as diesel, electricity etc.
ii) Depreciation in the local currency with respect to the foreign currency thus affecting negatively the imports which eventually become costlier.
iii) Another Global Inflation impact is the price of inflated international rates of the commodities constituting the construction material such as steel, copper etc.
iv) Central banks‘ rates being dependent on the Global Inflation, some of the countries may apply stringent rules on the repayment of loans taken by the Contractors based in other countries and thus making the external borrowing less rewarding.
v) A host of other activities such as higher expenditure on the recruitment and retention of specialist expatriates as well as higher price for technology transfers etc. are also the major effects of the Global Inflation.
Global inflation trends in past years
A look at the Global Inflation from the Period 1999 – 2017 shows that there are sudden abruptions and no continuity observed, thus making it necessary for long term Projects to mitigate risk of Global Inflation so as to remain profitable.
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