Economic tsunami heading our way
From paying more to buy a house to higher prices for public and private transportation, food items, restaurant bills, health care, utilities, Malaysian consumers can expect a steady escalation in their cost of living on all fronts.
By Dr. Lim Teck Ghee
Most Malaysians are still blissfully unaware of the important economic changes that are just around the corner. These changes are going to affect not only their wallets but also way of life.
According to recent news report, the Cabinet is going to discuss the issue of subsidy cuts as early as next week. Although actual action on withdrawal or reduction of various subsidies may take some time to implement, it looks like the government is finally going to bite the bullet on this sensitive and contentious issue.
In fact the government should be faulted for not taking earlier action to wean the Malaysian public away from subsidies. Subsidies on the pricing of essential goods and services that do not reflect market prices can only be sustained for a limited period of time in any country unless the country has permanently deep pockets.
The phasing out of subsidies should have taken place much earlier in Malaysia but for political reasons and to curry favour with the electorate, that day of reckoning has been postponed several times by the BN government.
In the last two years, it has become abundantly clear to many economic analysts that the longer the government waits to reform the pricing system, the more economic damage it will inflict on the country.
In 2007, the government spent RM40.1 billion on subsidies. In 2009, the figure had ballooned to RM79 billion. This has led to the country’s biggest budget deficit in more than 20 years. The national subsidy bill on petrol and essential goods amounts to some 22 percent of government expenditure – a figure that has finally spooked the government.
Economic impacts of subsidies
It is well recognized that price controls and subsidies not only distort price signals, but they also result in over-consumption and waste. In a scenario where global prices are rising, imported price-controlled items will become increasingly costly to support. It is also important to note that subsidies were originally intended to support the vulnerable groups.
However, what has taken place is that it has been extended to benefit a wider group, including the well-off. This absence of targeting has made the subsidy system in Malaysia wasteful and inefficient.
What has also taken place has been the unintended impact in terms of smuggling and hoarding of subsidized items. Cooking oil which is subsidized for domestic use only, for example, has been hoarded by industrial users for industrial use. During periods of shortage – such as the January 2008 cooking oil crisis – the government imposed a 5kg limit for each purchase to restrain public demand. However, the limit on purchase resulted in buying, which necessitated theg to negotiate with cooking oil manufacturers to increase their supply.
Another example is when vehicles (boats and cars) from neighbouring countries come to Malaysia or Malaysian waters to purchase or smuggle cheap petrol and diesel out of the country. Leakage of these subsidies is costing Malaysia at least several billion ringgit annually.
It is not only the ordinary consumers that will be hard hit by subsidy withdrawal. Businesses such as the construction industry will be adversely affected by the withdrawal of subsidies on steel products and cement. The withdrawal of subsidies on gas and petrol will mean higher energy and transport expenses for all businesses and services, which in turn can be expected to pass on the higher costs to consumers.
From paying more to buy a house to higher prices for public and private transportation, food items, restaurant bills, health care, utilities, Malaysian consumers can expect a steady escalation in their cost of living on all fronts.
How will these higher prices and higher cost of living affect Malaysians?
Various economists have speculated that the impending cuts in subsidies will add a relatively small burden to the Malaysian consumer because of their expectation of a very gradual phasing out of subsidies. Estimates of an increase in the consumer price index by a miniscule 1.5-3.5% for 2010 have been provided by the more optimistic economic analysts.
Since we do not have details yet of the extent of subsidy cut, these low projections are premature.
Any projected low inflation rate in the event of subsidy withdrawal this year, however, seems to be unrealistic if we take into account the Finance Ministry’s estimate that the Government is currently spending around RM8,000 per person annually for subsidies on various goods, including rice, sugar and fuel.
Another estimate is that subsidies amount to RM12,900 for every household annually. If these figures are to be believed, it will mean that each household will have to pay tens of thousands of ringgit more in the coming year for the same goods and services they spent on last year, should subsidies be completely removed in one stroke.
Of course this complete withdrawal of subsidies will not happen since it is not desirable nor is it politically possible for the government to remove the subsidy system all at once. Such a drastic measure will certainly bring about a voter backlash that will mean the end to the BN government.
However, even with a very gradual withdrawal of subsidies over a period of years and with the side effects of arbitrary price increases and the expected round of wave of profiteering minimized, we can expect the average Malaysian household to have to spend at least a few thousand ringgit more a year to maintain the present consumption and lifestyle.
So, be prepared for this impending drop in your living standards and new demand on your savings!
