BANK NEGARA: BR1M MAKES A DIFFERENCE TO LOW-INCOME FOLK
It eases pressures from subsidy rationalisation, says central bank
THE 1Malaysia People’s Aid (BR1M), a brainchild of Bank Negara Malaysia (BNM), has been helpful in providing assistance at the household level by assisting lowincome groups mitigate the pressures from subsidy rationalisation undertaken by the government.
The central bank said BR1M had supported consumption and growth as the low-income groups’ marginal propensity to consume was high.
“The post-BR1M period saw gradual and sequenced adjustments, as well as removals of subsidies and price controls.
“With fewer price distortions, the economy became more flexible and nimble in adjusting to shocks, and, therefore, delivering growth and sustained rise in income,” BNM said on the impact of BR1M.
On whether the BR1M payout was to “tempt the rakyat”, BNM said it was solely focused on economic considerations, which were to assist the poor and in ensuring the targeted subsidies were more efficient and effectively implemented.
It also acknowledged that the idea of BR1M was first mooted during BNM’s Board of Directors Briefing to the Prime Minister on March 2011. The proposal was considered and deliberated in subsequent Economic Council Meetings in March and August 2011, said BNM.
“The proposal was to help deserving groups directly once the government’s blanket subsidy was gradually reduced.”
It added that prior to BR1M’s introduction in 2012, the government was on its path towards fiscal consolidation, which included subsidy rationalisation.
“However, there was no existence of other mechanism to help the poor and vulnerable groups affected by this exercise. BR1M was meant to be a direct and targeted assistance to low-income groups to ease the pressures arising from subsidy rationalisation,” BNM said, adding that in this regard, a cash transfer mechanism was seen as a critical first step towards deeper reforms in the country’s welfare system and social protection.
BNM forwarded its recommendation to the government to help vulnerable groups.
Asked on the studies done before the introduction of BR1M, BNM said it conducted research on the then prevailing subsidies mechanism and social safety nets in other countries.
“It was found that subsidies, administered prices and price controls had created deep inefficiencies and rigidities that prevented the economy from adjusting to global and domestic realities.”
It was found that the existing subsidy and price control mechanism had incurred large fiscal costs, and that it could weaken the government’s financial position in the long term.
“Equally important, the existing subsidy regime was regressive as the mechanism was disproportionately subsidising the rich, much more than the poor. The cost of blanket subsidy to the economy was enormous. Given the prevalent conditions, BR1M was introduced to direct assistance to the targeted groups in a more effective and cost-efficient manner,” it said.
In the previous blanket subsidy regime, every segment of the society was entitled to the same subsidy. An example of a blanket subsidy would be the fuel subsidy which was subsequently replaced by the managed float system in 2014.
A study based on the Household Expenditure Survey 2009/2010 showed that the richest 20 per cent of households received a large 42 per cent of the subsidy. On the other hand, the poorest 20 per cent of households received only four per cent of the fuel subsidy.
BNM also noted that for BR1M to function efficiently, continuous refinements are necessary.
At the entry level, the cash transfers should be prioritised for underserved and vulnerable groups. Equally important is for BR1M beneficiaries to graduate out of the lower-income bracket over time.
“BR1M’s sustainability would depend on mobilising the lower-income groups to break the inter-generational poverty cycle and moving up the income ladder. To do so, BR1M could be enhanced by ensuring there is an exit mechanism, by linking it to promotional programmes to enhance human capital and productivity,” it said.
“Given structural changes (such as aging population, changing nature of jobs due to technology, and shifts in the social fabric) which are already taking place in society, we need to ensure a comprehensive social protection framework for the future.”
In the long term, any cash assistance programmes should form only one part of a more comprehensive national social security system, it said.
“The social security system must not engender an over-reliance on state welfare or stigmatise the poor, but empower and build the capacity of households.”