Economists: Putrajaya has ace card in subsidies as price stabiliser amid global inflation bite

·3-min read
People shop for groceries at a wet market in Kuala Lumpur January 31, 2022. — Picture by Shafwan Zaidon
People shop for groceries at a wet market in Kuala Lumpur January 31, 2022. — Picture by Shafwan Zaidon

KUALA LUMPUR, April 30 ― The federal government could look to subsidies as a buffer against the global surge in inflation that is expected to reach record high this year but risk derailing efforts to meet its deficit target, economists said.

Julia Goh Mei Ling, analyst with UOB Bank, said a weak ringgit would raise Malaysia’s exposure to the cost shocks that is sweeping global trade, as food and energy imports are made more expensive.

Malaysian manufacturers have already signalled their intention to raise prices by up to 10 per cent to offset rising import costs, Goh noted. Price movements in manufacturing, the backbone of the Malaysian economy, are usually indicative of price trends elsewhere.

The March Consumer Price Index (CPI) rose 2.2 per cent to 125.6 against 122.9 in March 2021, driven primarily by fuel and food prices, Statistics Department data showed. The index surpassed the average inflation for the January 2011-March 2022 period of 1.9 per cent.

Goh forecast inflation to rise but at a manageable level owing to subsidies.

“Malaysia’s inflation trend is expected to rise albeit still moderate compared to other countries that do not subsidise fuel and essential food items,” she said.

“Despite the high cost of subsidies, we think the government will prioritise price stability.”

The Russian-Ukrainian conflict shot global oil and gas prices up as the war disrupted supply, making energy costs the underlying factor driving the global price squeeze.

Supply bottlenecks have also added cost pressure, forcing producers to pass on to consumers.

The International Monetary Fund forecast inflation would hit 8.7 per cent for emerging economies, the highest jump since the 2008 financial crisis, while advanced economies could reach a 38-year-peak of 5.7 per cent.

Official forecasts put the country’s inflation rate at between 2.2 to 3.2 per cent for the year, with only “moderate” effects on living standards.

The pandemic had already decreased consumer purchasing power in 2020. The median monthly salary dropped 13 per cent to 1,894 ringgit in 2020 from 2,185 ringgit in 2019, according to Human Resources Ministry data.

Yeah Kim Leng, director of the Economic Studies Programme at the Jeffrey Cheah Institute on Southeast Asia, said price pressure on imports will have some effect but will remain manageable with subsidies.

“The government is in a position to provide subsidies and control the prices thereby protecting the low-income households from harmful increases in cost of living,” he said.

“Imported inflation will continue to rise due to high world prices and a weaker ringgit but remains manageable as domestic income increases in tandem with the fuller opening of the economy.”

The IMF had cautioned about taking the global price squeeze lightly, reminding policymakers about the severe effects it would have on vulnerable populations.

The Malaysian government spends billions of ringgit on subsidies annually to protect low income groups from price shocks, but support for the programmes have dwindled more recently over concerns about its long term effect on government finances.

Subsidies will take up a sixth of this year’s federal budget, at over RM30 billion or nearly the same amount allocated for development expenditure.

Putrajaya has since pledged to phase out the subsidies as part of a debt reduction push. It has set a 6 per cent deficit target for this year despite having spent billions in Covid relief measures.

Goh said any additional fiscal support would make the goal doubtful although the government is likely to press ahead as its elected leaders look to avoid a backlash.

Goh suggested the government make adjustments to the fuel ceiling price to reduce subsidies, or look for ways to earn additional revenues and rationalise other expenditures.

“The government said that they are studying a targeted subsidy mechanism albeit uncertain when it will be introduced,” she said.

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