As the curtain closed down on 2016 some days ago, several economic indicators clearly indicated a weak economy for that year and the burden of rising cost of living as felt by households throughout the country.
The Gross Domestic Product (GDP) in 2016 was projected to grow at 4.3% compared to 5.0% in 2015. Towards this, the growth rate of salaries and wages was forecasted to slide down against 5.4 % in 2015 in line with the decline in GDP.
As of November 2016, the inflation rate in 2016 decreased by 0.1% to 2.0% but food prices continued to rise by 3.7%. The average value of the ringgit depreciated by 2.5% in December 2016 compared with the average rate in January 2016, at RM4.35 per US dollar.
Declining salaries and wages, aggravated by rising food prices had put pressure on the cost of living of households in 2016. Households were also indirectly affected as the result of depreciation of the ringgit exchange and slow growth of the economic sectors.
What about the prospects in 2017? The economic performance in 2016 gives an early signal of the high tendency for the cost of living to continue soaring in 2017 if these three matters mentioned below are not given due attention.
Firstly, make an effort to overcome the increase in food prices across the board by making targeted efforts to change the structure of the oligopolistic nature of food production. Our research at the Institute of Agricultural and Food Policy (IKDPM) found that the supply of raw materials across the value chain of food production is affected directly or indirectly by a number of large-sized firms.
Efforts towards making production more competitive structure through market liberalization is seen as an efficient policy option to lower food prices. However, the 2017 budget speech did not touch on the policy related to food market liberalization.
Secondly, depreciation of the Ringgit should be addressed immediately. Depreciation of the ringgit against the US dollar directly and indirectly increased the cost of food as a result of higher prices of imported raw materials.
An analysis revealed that for every ringgit of processed food products, RM0.11 contains imported raw materials while for every Ringgit output of unprocessed foods such as vegetables and fruits, RM0.28 contains imported raw materials.
Food manufacturers are likely to absorb the rise in prices of imported raw materials if depreciation of Ringgit is temporary. The Ringgit exchange rate situation that has exceeded RM4 per US dollar since January, does not give much choice other than producers having to raise the prices.
Thirdly, address the economic structure that relies heavily on high petroleum and natural gas sector. While there is a view that the Malaysian economy has diversified, the impact of the prevailing oil price crisis at present gives a clear signal to us about the level of dependence on petroleum and natural gas sector. Various efforts towards diversifying sustainable economic activities must be done and most of these opportunities can be maximized through small- and medium-scale enterprises (SMEs).
The implementation strategies as mentioned above may be medium- or long-term in nature. There are several short-term options that can be adopted by the government to ease the burden of high living cost through price controls, for instance, by delaying the implementation of subsidies rationalization on essential goods until the economy stabilizes.
Dr. Mohd Yusof Saari
Faculty of Economics and Management, Universiti Putra Malaysia
Date of Input: 22/03/2017 | Updated: 14/04/2017 | hairul_nizam
Institute for Mathematical Research, Universiti Putra Malaysia, 43400 Serdang Selangor