Transition to a targeted subsidy mechanism will increase inflation, but the results will benefit the entire economy

by S BIRRUNTHA / Pic by TMR FILE

THE right time to implement targeted subsidies is when the country is not facing high inflationary pressure, Bank Negara Malaysia (BNM) governor Tan Sri Nor Shamsiah Mohd Yunus (picture) said.

She added that the implementation of targeted subsidies must take into account two things — the current inflationary environment and the implementation must be done in stages.

She also noted that the transition to a targeted subsidy mechanism will increase inflation, but the results will benefit the entire economy.

The governor explained that the savings from the transition can be used to support mechanisms like social protection programmes.

“The implementation of subsidies in a targeted and phased manner will help manage the impact of the blanket subsidy removal on the economy.

“The outcome that we want to achieve is to have sustainable and inclusive growth,” she said in a press conference during the second quarter of 2022 (2Q22) GDP announcement in Kuala Lumpur today.

Nor Shamsiah also emphasised that assistance must be channelled to the vulnerable sectors, adding that 20% of the economy is still operating below pre-pandemic levels as of 2Q.

Previously, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said subsidy expenditure this year is expected to reach almost RM80 billion, much higher than the RM31 billion allocation announced through Budget 2022 in October last year.

Tengku Zafrul said more sustainable subsidy management, economic reform efforts and strengthening the country’s resilience against any shocks in the future will be the focus of the presentation of the Budget 2023.

The minister also noted that the government is still studying the development of a targeted subsidy mechanism and it will be expanded to several other methods involving the urban and rural areas.

The Consumer Price Index — which measures the rate of inflation in the country for June 2022 — increased 3.4% compared to the same month last year and was higher than 2.8% in May.

The food index increased by 6.1% and remains the main contributor to the increase in inflation in June 2022.

On that note, Nor Shamsiah pointed out that as an open economy, Malaysia is not immune to the elevated global commodity prices.

She said high food prices are mainly caused by higher prices of key global commodity prices and the strength in the US dollar, although not the main driver, has also compounded the price pressures.

She noted that for example, in the case of the price of wheat, the exchange rate has contributed to approximately 20% of the increase in its price in ringgit.

“Other global and domestic factors, which vary across goods, are also contributing to food inflation. These include logistics, labour costs and demand.

“Moreover, the impact of exchange rate movements can also vary across different items,” she said.

She added that overall for Malaysia, these cost pressures have led to higher headline inflation, which rose to 2.8% in 2Q22 and 3.4% in June.