BNM says cost of living needs structural reforms on income, cost

An examination of the supply chain is required to address costs which include diversifying food import sources to mitigate concentration risks 

by ASILA JALIL / pic by MUHD AMIN NAHARUL

STRUCTURAL reforms that address both income and cost factors are essential to strengthen households’ resilience against future shocks, said Bank Negara Malaysia (BNM). 

In its 2021 annual report, the central bank said short-term measures taken by the government to address the rising cost of living may introduce long-term repercussions. 

Read more: Data shows average cost of living in KL is RM3,300 monthly

Multiple short-term solutions have been adopted by the government to mitigate the rising cost of living including price regulations on key essential items such as fresh chicken, fuel and cooking oil as well as income transfers to vulnerable households. 

“While short-term measures such as price controls can benefit consumers in some circumstances, they may introduce long-term repercussions and therefore should be guided by certain principles. 

“When price controls are implemented at the retailers’ stage, players in the supply chain with greater market power could be incentivised to retain their existing high-profit margins by squeezing the profit of weaker players such as fishermen. Over the long run, this may displace fishermen from the fishing industry, harming vulnerable groups which the policy intends to protect,” it said.

Read more: Price control not a good measure to address rising living cost

The pervasive use of price controls could also result in supply shortages. 

As the cost of living is a function of both income and costs, BNM said addressing it requires action on both fronts.

While the Covid-19 pandemic has negatively affected income, the economic recovery provides an opportunity to pursue policies intended for job creation with high productivity and correspondingly higher income. 

BNM said an examination of the supply chain is required to address costs which include diversifying food import sources to mitigate concentration risks. 

Read more: Minimum wage rise ‘tricky’, living cost needs to be addressed

“The elevated cost of living is a long-standing issue at the centre of many households’ lives. It is recently exacerbated by the pandemic which has disrupted supply chains and resulted in supply-demand imbalances. 

“Short-term solutions, while warranted in some circumstances, would not prevent this issue from recurring and may result in unintended consequences. Consequently, structural reforms addressing both income and cost factors are essential to enhance households’ resilience against future shocks,” it added.