Fighting food inflation

Call for gover me t to rethi k strategies

“Subsidies must be removed slowly as prices fall naturally. We can help prices to fall on some goods by liberalisation but for oil, we will need to wait for global markets to cool.” Prof Geoffrey Williams

PETALING JAYA: Food inflation is about to rise further in Malaysia but with the government struggling from a limited fiscal capacity, it may not be able to fully shelter all Malaysians from soaring food prices.

Experts said that the government would have to rethink its strategies to tackle rising food prices, without significantly hurting its coffers.

Targeted subsidies, food vouchers and cash transfers are among the immediate shortterm solutions recommended by experts, in order to protect Malaysians’ purchasing power.

Currently, as a stop-gap measure, the government has introduced price ceilings and subsidies on certain items.

For example, 1kg of polybag cooking oil is subsidised by the government to control the price at RM2.50. As for fresh chicken, the price ceiling has been capped at RM8.90 per kg.

However, many quarters have questioned the effectiveness of such measures over the longer term, fearing an adverse impact on the market dynamics.

Socio-economic Research Centre executive director Lee Heng Guie suggested the removal of price ceilings to allow prices to rise.

“The savings from the targeted subsidies can be rechanelled to help the needy and low-income households to mitigate the impact of rising food prices. Food vouchers can be considered.

“This is the only way at the moment to help both producers and consumers, considering the government’s limited resources.

“The prices need to be raised gradually. If not, some producers will go bust and this will create more supply-related problems,” he told Starbiz.

By moving towards targeted subsidies from outright subsidy, Lee said price increases will compel consumers to make spending adjustments and hence, help to ease pressures on demand relative to the supply constraints.

“Producers could still operate and continue production if prices were allowed to increase to cover their unit cost of production,” he added.

In a starkly different opinion, Malaysia University of Science and Technology’s Prof Geoffrey Williams said that targeted subsidies “will not work”.

“Not only do they distort the market, they are almost impossible to implement effectively; they are prone to corruption.

“We simply do not know how to target subsidies correctly,” he said.

Williams warned that removing subsidies too quickly, especially on fuel, is the “recipe for hyperinflation” in Malaysia.

“Subsidies must be removed slowly as prices fall naturally. We can help prices to fall on some goods by liberalisation but for oil, we will need to wait for global markets to cool.

“Once the subsidies can be reduced, they must be replaced with income support systems such as a universal basic income, which can provide direct cash help to people according to their income and needs,” he said.

In order to tackle rising food inflation, Williams said the removal of approved permits (APS) on all imports and the removal of all restrictions on domestic food production, processing and distribution through the supply chain would help.

Price caps and petrol subsidies are also helpful, although they are not long-term solutions, according to him.

He said direct cash transfers are always preferable to other schemes, but such cash transfers are one-off in nature and are not a long-term solution.

“One form is a tax credit or negative income tax scheme where people are given a cash transfer through the Inland Revenue Board (IRB) if their income falls below a threshold and they pay tax as normal above the threshold.

“This is targeted, it gives people direct cash to spend as they choose, it can be administered through the IRB and it distorts the market less.

“It provides a long-term solution which is similar to cash transfers but varies according to people’s income. So it can be cheaper overall,” he said.

For the long term, Williams opined that full liberalisation of markets, especially food and supply chain businesses, is necessary to support domestic production and reduce dependence on imports.

“This must be part of a full market liberalisation agenda, which would include changes in APS, other licensing and permits, issuing of concessions and contracts and ownerships

requirements for companies involved in food production.

“It will also require labour market reform,” said Williams.

Rising food prices are not exclusive to Malaysia alone and have been affecting both advanced and developing economies alike.

Global supply chain disruption post-reopening of economies, lockdowns in China and the Russia-ukraine war have, among others, caused a spike in inflation globally.

In its earlier assessment, Bank Negara expects Malaysia’s core inflation to trend higher to average between 2% and 3% in 2022, up from 0.7% in 2021.

“Core inflation is expected to average higher for the year, reflecting the improvement in economic activity and continued cost pressures.

“The inflation outlook continues to be subject to global commodity price developments, as well as domestic policy measures on administered prices,” the central bank said.

Considering the external factors, Institute for Research & Development of Policy senior advocacy officer Ammar Atan acknowledged that Malaysia, or any other country, cannot fully tackle food inflation.

“But this does not mean that the government’s hands are tied.

“The only progressive way to deal with food inflation is to help producers lower their burgeoning cost of production. One way to do this is through increased subsidies on raw materials.

“While I understand that subsidies will hurt the already limited fiscal space, the government has no other choice for the sake of protecting Malaysians.

“The government can consider reallocation of Budget 2022 or fund the subsidies through borrowings,” he told Starbiz.

Ammar also urged the government to help producers secure fast and cheap working capital financing.

Such an approach would help the producers expand their operations without being bogged down by cash flow constraints.

“Increased production will lower unit cost of production.

“But of course, expansion of production would be counterproductive if the government does not accelerate the approval of foreign workers.

“I recommend that the government prioritise approval of foreign workers into sectors that are involved in the production of basic food,” he said.

When asked whether the government should announce another round of cash handouts in response to rising food inflation, Ammar said food vouchers would be a better option.

“By giving out food vouchers, we would know that the assistance will be utilised in the way it is intended to,” he said.

Yesterday, following the Cabinet meeting, Prime Minister Datuk Seri Ismail Sabri announced that four short-term measures will be taken to resolve the issue of chicken supply and prices, including to stop Malaysia’s monthly export of 3.6 million chickens from June 1.

Buffer stocks will also be created to optimise cold storage facilities owned by the Agriculture and Food Industries Ministry as well as its agencies.

The Cabinet also decided to lift the requirement for APS for chicken imports, including for whole birds and parts.