Urgency to address rising cost of living

(File pic) A family member helping to get groceries at a Giant Hypermarket for the Prihatin Kasih programme’s beneficiaries in the disabled category. — KK SHAM/The Star

SOARING cost of living in this country has become increasingly worrisome among Malaysians.

To sustain an assured standard of living, Malaysians need to have a stable income that, at least, could provide them with enough money to cover their essential expenses like accommodation, health services and public transportation.

What is cost of living? It is the amount of money an individual needs to maintain his or her standard of living. Housing, food, transportation, clothing, taxes, entertainment, equipment, and education costs are just some of the basic expenses included in the cost of living.

How is the cost of living calculated? It is calculated by comparing the prices of a range of goods and services on which consumers spend their money. Costs are broken down by category, like healthcare, food, and housing, and weighted based on spending patterns and individual budgets.

In 2020, Malaysia reported an additional of 12.5% of households with income of less than RM2,500. Looking at the M40 group with income of between RM4,850 and RM10,959, about 20% has moved to the B40 group. The rich or those in the T20 group were also affected from this pandemic where 12.8% has shifted to the M40 group.

And the number of poor households rose to 639,800 in 2020 from 405,400 households in 2019. Absolute poverty increased from 5.6% in 2019 to 8.4%. The number of hardcore poverty rose from 0.4% or 27.2 thousand households in 2019 to 1% which involved 78,000 households.

With the loss of hundreds of thousands of jobs and many households have shifted from the higher income group to the lower income group, causing severe financial pain due to this pandemic. And to make matters worse, living cost is on the rise caused by multiple factors. For instance, the higher business cost driven by the rise in material prices are transmitted to the end consumers.

Other factors are a rise in average food prices, housing, power, water, groceries, clothing, healthcare, education, and gas.

And even if Malaysia can provide cheap rent and bargain prices on food, it could be pricey in other areas.

High taxes, low wages and above-average transportation costs can all contribute to a high cost of living for residents. So, this makes it difficult, especially for the low and middle-income groups, to make ends meet. To worsen the situation, the cost of living varies amongst different households or income groups.

It clearly shows there is a strong disconnect between consumer price (CPI) inflation against the rising cost of living.

For example, our CPI does not include costs that have a high investment component, such as the cost of buying a home. Property prices have risen rapidly in Malaysia in the last few years. But it is not captured in the CPI.

Despite the low and stable inflation in recent years, different households lived with different rates of inflation.

Malaysians, especially low and middle-income living in cities are still feeling the pinch due to increases in food, housing, education, and healthcare.

For instance, those with lower income spent a higher share of their family budget on food and would therefore experience a higher rate of inflation when food prices rise faster than prices of other items.

Growing pressure

There is an urgent need to tackle the growing pressure in the cost of living.

Malaysia’s average cost of living for a family of four is around RM9,000 to RM9,500 a month while for a single person is around RM4,000 to RM4,500 a month. If we compare with the minimum wage in Malaysia, it is only RM1,200 for workers in the peninsula and RM1,100 in Sabah and Sarawak.

The average mean monthly salary in 2020 in Malaysia is around RM2,900. The average monthly salary varies greatly, depending on the education level, employment sector, and especially between urban and rural areas. And the mean monthly household gross income fell by 10.3% to RM7,089 in 2020 from RM7,901 in 2019 due to the Covid-19 pandemic.

The median monthly household gross income plunged by 11.3% in 2020, down from RM5,873 to RM5,209.

The drop in income, rising jobless numbers and escalating living cost are real cause of concern as we strive ahead.

In today’s rising living cost, it could be attributed to the higher food prices. This will certainly hurt many Malaysians, mainly the B40 and M40 group.

To address the rising food prices, it is time to revisit the importance of the approved permit (AP) system on food and essential items across the board. By having such AP, it will result to higher prices. The AP holders will certainly charge a fee that has no value add. And the fee charged by the AP holders will be passed on to consumer resulting to higher prices.

This should be replaced with a more open importing system that will benefit consumers through lower prices. We should allow retail companies who are confident that they can import food at lower prices. Cost savings from lower import prices would be passed on to consumers.

At present, retailers are unable to import many food items and need to purchase from the AP holders.

While the reopening of the economy is being viewed positively, added with the high vaccination rate, equally important is the need to create more jobs and bring back the living standard quickly to the 2019 levels for many Malaysians. This would mean, business activities must pick up.

Investments must grow. Under the current circumstances, it is tough for many good businesses to survive. The moratorium and current measures are positive in the very near-term. They help temporarily “freeze” the risk of escalating bankruptcies, delinquencies, and non-performing loans. What will happen when these measures start to roll back in 2022?

For instance, if we look at the retail sector, it experienced the worst in 2020 since the 1997 Asian Financial Crisis (AFC). And expectations are for the local retail industry may take as long as up to four years to recover to 2019 levels. Certainly, there will be many other businesses with the same plight.

As a result of their poor performance in 2020, some are experiencing a reduction in trade facility from their banks. Like them, there could be many other businesses with the same predicament.

Adverse impact

These could be businesses who do not fall into the “zombie” category. If financial assistance is going to be a challenge for businesses, the adverse impact will be on jobs and wages as well as salaries. And with rising living cost, it will drag the living quality with more falling into B40 and M40.

Hence, a desirable way is to establish a special purpose vehicle (SPV) to assist companies seeking funds.

This SPV could model that of the Danaharta concept that was set up during the 1997 AFC where the non-performing loans from the financial sector are transferred to this entity.

It will free up banks who can now focus on supporting business activities, who in turn will be able to create jobs, improve living quality and lift the overall economy. And for households, they should be allowed to embark on a “step-up” loan repayment based on their income and wages.

There is a need to establish a housing affordability threshold setting since it differs across states and localities.

For example, Kuala Lumpur’s desired median market price is RM379,764 while Terengganu would be RM199,620.

We should use the household income and basic amenities survey as baseline for national affordable house price and at state and district levels. Also, there is a need to develop a cost-of-living index that can provide better accuracy on the cost of living. This new index can be used alongside the inflation rate to improve efforts in addressing the rising cost of living and the diminishing real wage increase.

The pandemic has resulted in a sharp drop in income and wages besides job loss. While the current recovery measures are vital, what is more important is when the reality hits once these measures are rolled back.

If many Malaysians are unable to move back to the 2019 levels of income quickly and added with rising cost of living, it will only add more pressure on the already rising mental health issues as well as other social issues.

It is important to take note that the cost of living depends on two elements i.e. incomes and prices. On the “income-based” approach, we need to focus on raising income through jobs, tax breaks, flexible working arrangements for B40 families to make it easier for parents to participate in the labour force, expanding childcare services and minimum wages as this would gradually ease the over-dependency on subsidies and cash assistance. Wages must grow in line with productivity.

At the same time, “prices” must be checked by creating a level playing field of competition across the supply chain of goods and services that exert influences on final prices. This would mean removing the role of the middleman who tend to create price distortion and price discrimination.

Hence, it is extremely important to address rising cost of living as quickly as possible. While immediate actions are needed, we must at the same time focus on the medium and long-term agenda – realign investment, hiring incentives towards high-quality job creation, expand early childhood education, promote life-long learning and upskilling, strengthen consumer protection, encourage more responsible behaviour by financial institutions and lastly, increase financial incentives to encourage retirement savings.

Anthony Dass is the chief economist and head of AmBank Research and the secretariat of economic action council. The views expressed here are the writer’s own.

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