‘Keep subsidies to stop inflation’


PETALING JAYA: The government should continue controlling the price of petrol, energy and electricity and food to curb inflation, say economists.

While price changes are cyclical and economists expect inflation to ease for the year end, they have called for the retention of subsidies and more assistance for the low-income groups.

Malaysia University of Science and Technology economist Prof Dr Geoffrey Williams and HELP University economist Prof Dr Paolo Casadio said the government should also bring down the electric tariffs.

“The reduction of the electricity bills can bring an easing of 0.5% in inflation and at the same time boost the disposable income of the consumers.

“We think this manoeuvre could be done again, subsidised by the additional revenues the government gets from the high oil price through the government-linked companies (GLCs) such as Petronas,” they said in a joint reply in an interview.

Although it would not be an easy feat, independent economic analyst Emeritus Prof Datuk Dr Zakariah Abdul Rashid said the government needed to help the people wade through inflation.

“It is short term, so the government must help through social assistance and maintain the subsidies for now. It’s not easy because the government is also facing a fiscal deficit, high debts and leakages,” he said.

While the government continues subsidising the 1kg cooking oil in poly bags, Dr Zakariah said other subsidies for electricity, oil and gas and fuel should go on to ease the people’s burden, especially the low-income groups.

“Those who earn below RM1,500 are increasing, while our nominal and real income have also declined. If more subsidies are taken away, it will be difficult for them.”

He also said the reintroduction of the Goods and Services Tax (GST) should wait until the country’s economy improved.

According to analyses, Williams and Casadio think that “the peak of inflation is happening right now in the international economy” with the “decreasing inflation” phase expected next.

“For the end of the year, we expect a relaxation in oil and other raw material prices together with a solution (at least partial) to the supply chain disruptions.

“The inflation should go to a more moderate level in Malaysia, back to 2.5% year-over-year after a short period of over 3%.

“Internationally, it should slowly converge to the more ‘normal’ 2% to 4% range,” they said.

Zakariah said there were two main causes of inflation in Malaysia: cost-push and demand-pull.

“We are experiencing an increase in production costs; there is too much money chasing too few goods now, causing prices to increase.

“We have strong, effective demands, but they are not on par with the supplies which are facing disruption now due to the Russia-Ukraine war and other issues such as the export ban in India and lockdowns in China due to Covid-19,” he said.

Zakariah said the global situation would depend on whether these disruptions could be resolved.

“So the inflation will depend on how long the supply disruption will last,” he said.

Asked if the time of cheap food and goods was now over, Zakariah said it was more of an “affordability” issue, as “we should not compare current prices with those of five years ago”.

“To guarantee affordability, which is a function of income, we must improve our production methods by going high-tech, high-skilled and high value-added.

“Then we can pay higher wages to our workers,” he said.

He also said the government needed to encourage production and increase efficiencies by reducing wastage and corrupt practices.

Zakariah, Williams and Casadio also cautioned against tightening monetary policy, as the factors driving higher prices could not be effectively controlled.

Williams and Casadio suggested that Bank Negara consider a wait-and-see policy to get more information about the unfolding cyclical risk.

At the same time, Zakariah said that curtailing production might lead to recession.

“We may face both inflation and recession, which is stagflation – a stagnant economy with inflationary tendency,” he said.

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