Despite Malaysia’s low inflation rate, many still struggle to get by. Why is this so? The World Bank’s latest Malaysia Economic Monitor report highlights areas that may contribute to our high cost of living.
MALAYSIANS say they are struggling to get by financially with the prevailing perception being that that cost of living is cripplingly high.
This is despite the fact that Malaysia experiences consistently low rates of inflation. Headline inflation averaged less than 2% per year since January 2015 and moderating to less than 1 per cent since January 2018 – well below the growth rates of the economy and average nominal incomes.
Why then, are Malaysians feeling the pinch?
In its latest Malaysia Economic Monitor (MEM) report released on Monday, the World Bank Group Malaysia identified four factors that impact the cost of living and may account for Malaysians’ difficulty in making ends meet.
They are (i) inadequate income, (ii) insufficient affordable housing, (iii) high household debt, and (iv) consumer price inflation differentials.
According to the Gallup World Poll, as of 2018, nearly 30% of Malaysians felt that they do not have enough money for food and 23% reported having inadequate money for shelter.
In fact, the World Bank found that approximately 27% of households in Kuala Lumpur earn less than Bank Negara’s 2016 estimated monthly living wage – RM2,700 a month for a single person, RM4,500 for a couple without a child and RM6,500 for a couple with two children in the city.
Although median incomes continue to outpace inflation, the MEM report found that wage growth for the youth and workers without tertiary education has been slow-moving.
How do we bring down costs?
According to Khazanah Research Institute’s (KRI) director of research Dr Suraya Ismail, government-led social programmes have a positive impact on consumption expenditure by lowering living costs.
“The expenditure for households will be lower in countries where the provision of government services is extensive and cover households’ basic needs. Examples would include universal healthcare, free formal education, subsidised childcare and subsidised mass transportation systems, ” she says in an email interview with Sunday Star.
One way to finance these initiatives is through progressive tax.
“As reported in MEM, the total tax revenue is only 14% of GDP. This is not enough even when compared to international benchmarks. More could be done to increase this percentage, by increasing taxes on personal wealth as well as the top income earners, ” says Suraya.
Apart from progressive tax, the MEM suggests increasing stamp duty on purchases of higher-value properties and widening the scope of the real property gains tax.
Sunway University Business School economist Professor Yeah Kim Leng believes that the issue of low wages can be overcome by raising the quality of the education system, improving industry competitiveness and productivity, and accelerating the shift to higher value, knowledge-based and technology-driven activities.
“This will require sound, prudent macroeconomic management that not only ensure a stable price environment but a well-functioning economy that engenders investor confidence, ” says Yeah, who is also Malaysian Economic Association Deputy President.
“Investor confidence will lead to sustained domestic and foreign investment that in turn generates the demand for skilled and high-paying jobs, thereby creating a virtuous cycle of investment, employment and wage growth that banishes the low wage-high living cost conundrum, ” he explains.
Furthermore, Yeah suggests that given the country’s low labour income share, companies that achieve a certain minimum profitability could be encouraged to adopt the shared prosperity goal.
In this model, B40 employees would be given greater emphasis in salary and wage allocation of company budgets and performance incentives.
“A 10-10 “double happiness” formula of at least 10% annual salary increase and a bonus of at least 10% of the employee’s annual salary would not only address increase employees’ morale but also contribute to a more equitable society, ” he says.
Variation in consumer price inflation
In Malaysia, living costs vary significantly depending on geography. The MEM report found that although household incomes tend to be higher in high-cost areas like Kuala Lumpur, oftentimes the extra income is not enough to fully offset higher prices.
This is why many in urban areas say that they feel especially burdened by high costs.
Suraya explains that costs of living will always be more pronounced in urban settings, hence why the calculation of living wage for families are normally calculated for a specific metropolitan area.
“This is to give an indication to both families and employers the comparatively high costs of living in cities. For families, this the compensation needed to attain a decent life in this area and for firms, this is the price to retain good talent, ” she says, explaining that food, shelter and transportation are the three main contributors to the high costs of living.
She says that the price of housing and food items need continuous monitoring by the government to ensure they remain competitive.
The MEM report also recommends the development of a spatial price index in addition to a cost of living index can also help consumers manage their finances.
Shortage of affordable housing
According to the MEM report, various studies have found that housing affordability has deteriorated over the years to the point that overall housing is considered “seriously unaffordable” in Malaysia using the price-income ratio (PIR) as a measure.
The report found that the lack of affordable housing is particularly severe among households earning less than RM5,000. Furthermore, only 18% of newly-launched home units in 2016 were priced below 200,000.
Apart from prioritising low to middle income households in current housing policies, the MEM points out that Malaysia can strengthen the rental market by enacting the Rental Tenancy Act, establishing a Tenancy Tribunal and developing a rental database and rental affordability indicators.
“The MEM mentioned that since 2004, real growth in employment income for 20-29 year-olds with post-secondary education has been marginal. The ensuing age cohorts; 30-39,40-49,50-59, fared better during the same time. If the trend suggests that wage stagnation occurs during this period for the youth (20-29), it is prudent not to purchase any big-ticket items on debt or loans (cars and houses included), ” says Suraya.
Instead, she illustrates how more can be done to assist this group with the provision of affordable rental facilities and efficacious public transport systems.
The Institute for Democracy and Economic Affairs (Ideas) Senior Fellow Dr Carmelo Ferlito takes a step back and questions whether Malaysia should even implement policies to improve home-ownership.
“How much the problem is a real one and how much a perceived one? Let’s not take PIR in isolation. Let’s look at PIR in combination with the fact that home-ownership rate is 76% and household debt is 82% of GDP, ” he says in an email interview with Sunday Star.
“Should we address the former figure or the latter? Probably household debt is more an issue than homeownership. Have we reflected on the fact that there is a rising number of unsold affordable housing? We should reflect more broadly on the factors of such weakness of demand: how much is really due to prices (as affordable units go unsold) and how much to a change in the system of preferences, which means with new generations preferring mobility to stability, traveling today rather than building a house for tomorrow?, ” he questions.
“I think that if we allow the market to correct itself, rather than trying to interfere with its readjustment process, the market will provide the necessary solutions, ” he says.
However, Ferlito believes that the government should eventually focus on addressing the shelter issue for those most in need, the B10, not by forcing them to get a home loan but by implementing supported rental schemes.
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