Balancing food inflation and subsidy reforms

THE headlines that grabbed public attention recently were the actions taken by the Indian government to keep the domestic availability of food and vegetables in an effort to keep prices in check.

India started, with immediate effect, a 40% export duty on onions up to Dec 31, 2023, followed by the banning of all exports of “non-basmati white rice”. It is the world’s largest exporter of rice, accounting for 40% of the world’s rice shipments. Around half of its rice exports in 2022 were made up of non-basmati white rice.

Myanmar is the second country to announce that it would temporarily limit rice exports for about 45 days from end-August, adding that rising domestic prices prompted the authorities to limit exports. It is the world’s fifth-largest rice exporter, selling more than two million tonnes a year.

Global rice prices soared to the highest levels in almost 15 years in August after India banned some overseas sales of the grain.

Thai white rice 5% broken, an Asian benchmark, jumped to US$648 per tonne, the most expensive since October 2008.

This brings the increase in prices to almost 50% in the past year.

A confluence of factors have stoked fears of the shortage of agriculture produce and food such as rice output and supplies due to geo-political scenario, El Nino weather phenomenon and extreme climatic conditions from global warming, Russia’s withdrawal from the Black Sea grain initiative and protectionist food policies in the form of trade restrictions and export duties.

Rapid increases in food prices had been one of the main drivers of quickening inflation in Malaysia last year, which saw food inflation increased between 3.6% and 7.2% throughout the year.

While food prices have moderated in the January to July period, from 7% in February to 4.4% in July, it can climb back higher given the risk of supply shocks as well as changes in domestic policies concerning price subsidy and ceiling price controls.

The supply concerns come from the climate inflicted production disruptions, accompanied by the trade restrictions by major producers and net exporters of food.

In this case, the world price of rice has reached a new high due to the trade restrictions, including export duties.

Malaysia’s self-sufficient ratio of rice was 65%, meaning that 35% of domestic consumption is met by the imported rice.

In 2022, the country imported RM2.67bil worth of rice and RM1.2bil in the first half of 2023, of which Vietnam makes up the largest share of 36.7% of total imports, followed by India (25.9%), Pakistan (17.8%), Thailand (10%), Cambodia (5.6%) and Myanmar (3.9%).

Currently, our buffer stock stands at 88.52% or 221,311 tonnes.

Padiberas Nasional Bhd has raised the selling price of imported white rice nationwide from RM2,350 to RM3,200 per tonne, an increase of 36.1% effective from Sept 1 due to climate change, the weak ringgit, high operating costs and the military conflicts in the region.

The increase will cost consumers 85 sen more for a kg of imported white rice.

The price of 5kg super 5% (Anggur Biru) 10kg super 5% (Anggur Biru) increased from RM14.25 to RM18.75 and from RM27.50 to RM36 respectively while 5kg wangi special (anggur ungu) increased from RM20.75 to RM22.25.

In the latest move to ensure sufficient supply of domestic rice, with effect from Sept 7, individuals are restricted to purchasing a maximum of 10 bags of 10kg local white rice, amounting to a total of 100kg.

The current ceiling price is RM2.60 per kg for local rice and there is no control on the imported rice.

As rice is a main staple food for the domestic households with rice consumption per capita of 79kg per year in 2021 or 82.3kg based on latest estimate, increases in the prices of rice will impact on the budget of lower and middle-income households through the following channels:

> Direct household expenses will increase. In 2022, mean monthly expenditure on rice was RM31 or 1.9% of total expenditure of RM1,647 for the household income RM1,900 and below, RM38 or 1.1% of total expenditure (RM3,574) for between RM4,000 and RM4,999;

> Food away from home. Prices paid at restaurants and food outlets selling meals will likely increase.

Expenditure on food away from home was RM158 per month or 9.6% of total mean monthly expenditure (RM1,647) and RM436 or 12.1% of total mean monthly expenditure for household income between RM4,000 and RM4,999.

It was reported that the price of a meal might go up by between 50 sen and 80 sen at least, with the cost of other ingredients increasing too.

As rice supplies hit and prices gone up, other food preparation related to rice also affected.

Prices of rice vermicelli (mee hoon) have increased by 20% starting Sept 5, and could cause the hawkers to increase the price of meal that used mee hoon as ingredient.

The government is still keeping the ceiling retail price controls and subsidies for chicken, eggs, bottled cooking oil and sugar. Ceiling prices of chicken and eggs, which were originally planned to be lifted and floated in July were continued, causing a total subsidy of RM200mil per month. In 2022, total subsidies amounted to RM1.8bil.

A total of 5.8 million people has been identified as being eligible to receive cooking oil subsidies.

The RM2.85 per kg ceiling price for refined white sugar has not been adjusted since 2018 and it is substantially cheaper than those in neighbouring countries.

The much talked about targeted fuel subsidy rationalisation scheme remains to be seen. The energy, gas and liquefied petroleum gas as well as electricity prices are also subsidised.

Based on our estimation, the current subsidised retail price of RM2.05/litre for RON 95 averages RM1.20 per litre throughout this year, incurring an estimated total subsidy of RM17bil based on an annual consumption of 14.4 billion litres.

Limited fiscal space

Limited fiscal space necessitates the government to ease pressures from subsidies.

The pace of elimination of price subsidies should be higher where fiscal space is limited, a large price differential between domestic and international prices and the ability to put in place effective mitigating measures for the vulnerable households is stronger.

The existing subsidies and price ceiling controls are in place to prevent or limit the pass-through from international prices to domestic prices on households and companies.

However, maintaining the blanket price subsidies and ceiling price controls have become more costly.

In the tabling of Budget 2024, the government will have to decide how to balance between managing subsidies, price controls and fiscal sustainability.

Concerns about price and cost of living pressure arising from the elimination of price subsidies may slow the pace of fiscal reforms.

Subsidy rationalisation

Is the government ready to implement the subsidy rationalisation?

Political economy (concerns about political backslash) and social policy considerations may prevent the government from fully adjusting retail prices in line with international prices despite incurring high fiscal costs. The government should not avoid gradual adjustment in retail prices, it should educate the public about the costly, wasteful consumption, and unsustainable nature of a blanket and uniform price subsidies.

The next budget needs to develop and announce concrete plans to eliminate price subsidies and ceiling price controls over the medium-term.

It’s time to roll out the targeted subsidy rationalisation in stages and sequenced it on a measured pace to allow a gradual pace of adjustment in domestic prices, minimising significant and wider impact on businesses and households, to be accompanied by giving a one-off cash assistance for the affected households.

Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.

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