Inflation in Malaysia is increasing the class divide
Cronies are taking over the supply chains
Over the last six months the prices of everyday staples have been on the rise. Now some markets are beginning to see chronic shortages of items like chicken. This is beginning to bite very heavily into Malaysian households’ consumption, which has already been strained over the last two years with Movement Control Orders (MCOs) restraining business and trade, at community and micro-enterprise levels.
With limited government assistance, many households are relying on charity to eat. Some pundits are even predicting that hardship may manifest into spontaneous demonstrations on the streets in coming months. There are already signs of this, where flash mobs have been quickly broken up by authorities. Food security is also becoming a major concern, where there doesn’t appear to be any coherent national strategy to address this problem.
The problem is being dismissed
Some economists argue that inflation will only be a temporary ripple as economies re-open after intermittent restrictions during the last two years. Last week, the Bank Negara Malaysia (BNM) governor Nor Sham Shamsiah Mohd Yunus said the nation is nowhere near the risk of high inflation because upward consumer price pressure has mainly been to Covid-19 pandemic supply chain disruptions.
However, there are signs that inflation maybe here to stay for a much longer time.
A severe bout of inflation is breaking out across the world and Malaysia is particularly vulnerable with the relatively poor performance of the Ringgit against the US dollar over the last twelve months. This has magnified the rising costs of imports of intermediate goods used in the production of local products and food, where Malaysia imports 60 percent of its needs.
Oil prices has risen from US $20 per barrel back in 2020 to over US $ 70 per barrel at the end of 2021. Current oil prices are over US $ 90 per barrel as of February, with only mild price relief forecast for later in the year. Supply chain costs have also dramatically increased with sea-freight costs going up 10 fold over the last year.
This is being fuelled with a massive growth in the money supply. The US money supply is expected to continue growing rapidly until 2023. Malaysia’s money supply had a 27 percent increase over the last quarter of 2021.
Although the government is enacting measures to fight the rise of food prices, inflation will continue to rise during the year. Putting price ceilings on food items like chicken, isn’t solving the problem. Local chicken producers are actually withdrawing from the market, and/or producing value added products, not subject to price controls. This is creating shortages.
Shortages of staple products like chicken, coupled with shortages in labour is beginning to see price rises due to demand and scarcity of supply. If this situation continues, forecasts for 2022 GDP growth will be in jeopardy. Although there was a 3.1 percent increase in GDP during 2021, this was pumped by government stimulus packages and Employees Provident Fund (EPF) early withdrawals. With continuing shortages and no primary economic driver to push a strong recovery, 2022 may continue to be a flat year. Last year investment was primarily driven by public sector spending, while private investment actually declined.
Malaysia’s actual inflation rate was 3.2 percent in December 2021. Most of the pressure on the CPI came from food and transportation. Any continuing rise in food prices will have a major impact on inflation, as the CPI is 30 percent weighted towards food items. According to the Malaysian Department of Statistics, higher prices are flowing through to other sectors like construction.
Food imports is the Achilles heel of food security
Malaysia relies on imports for more than 60 percent of its food requirements. In 2019 Malaysia produced only 46 percent of its vegetable, 70 percent of its rice, 61 percent of fruits, 25 percent of beef, 11 percent of mutton, and 5 percent of its dairy requirements. The food import bill in 2020 was RM 55.5 billion.
Five million hectares of land is cultivated with palm oil controlled primarily by government linked companies, while only 1 million hectares are utilized for food production, mostly in the hands of small holders. In addition, most Approved Permits or APs for the importation of food are in the hands of selected companies. In Malaysia, who can import food is heavily regulated.
This situation has allowed the prices of local vegetables to rise more than 200 percent over the last six months.
Price controls are not working
Inflation and cronies are increasing the class divide
Although, economic growth may be enough to keep the Malaysian economy technically out of recession, the benefits of any growth will accrue to the top few percent of the population.
Malaysia’s unemployment was 4.7 percent during the 2nd quarter of 2021. However, this figure grossly under-represents both unemployed and under-employed people in Malaysia’s informal employment sector, estimated at 2.5 million people back in 2017.
Malaysia’s poverty rate in 2019 was 8.6 percent, and due to the restrictions during the pandemic, this rate has increased dramatically. The real value today is hidden by statistical lags. Nevertheless, the issue of poverty was mostly ignored in the 12th Malaysian Plan released only a few months ago, and in the government’s latest budget.
According to the World bank, Malaysia’s GINI Index, a measure of inequality of income is 41. If income was distributed perfectly equally, the score would be zero, while 100 would represent perfect inequality. According to World bank data, the lowest 10 percent of the national population earned 1.8 percent of household income, while the top 10 percent of households earned 34.7 percent of income. With growing poverty, this income gap will continually widen.
The supply chain grab
Over the last decade, the food sector has been slowly taken over by UMNO cronies. Syed Mokhtar Albukhary took over the sugar business from FELDA, where sugar prices have dramatically risen. Through his vehicle Tradewinds, Syed Mokhtar took a controlling interest in Padiberas Nasional Bhd (Bernas) which has a monopoly on the import of rice into Malaysia.
Bernas crippled the Chinese rice millers by importing cheap low-grade rice the mills couldn’t compete with. Most paddy farmers in the Northern Malaysian states are now in debt due to depressed prices created by Bernas. Syed Mokhtar’s Gardenia Bakeries owned by Syed Mokhtar and controlling 60 percent marketshare, raised the prices of its products in December last year, with its competitor Massimo following, owned by Federal Flour Mills.
The government has changed the equity requirements for freight forwarders. Local companies are now required to have a 51 percent Bumiputera equity stake in their companies to renew licenses. This is forcing long established players in the industry to divest to Bumiputera interests.
The latest target is the poultry industry
With UMNO back in power, industry sources told the writer that a play is being made for undisclosed interests to take over the broiler industry in the country. The industry has been hit with rising feed prices, substantially adding to production costs. Late last year the government set a maximum price of RM 9.10 per kilogram retail. This price has caused companies producing chicken for the wholesale and retail markets to cease production. Other producers have switched to producing value-added chicken-based products not subject to price controls, or selling chicken through the black-market.
The government has allowed some 35 companies import chicken on a temporary basis to alleviate chronic shortages in the market. These highly sort after import permits were, according to industry sources not given out fairly. There are wide spread claims by players within the industry that a cartel of companies is preparing to enter the market as producers, once existing producers have closed down.
Currently the whole chicken supply chain in Malaysia is in total turmoil. The chicken industry was previously one of the best managed and self-sufficient farming sub-sectors in the Malaysian economy. Now it almost destroyed due to the government manipulating prices to the point of driving producers into bankruptcy.
The government is getting ready to prime the economy once again this year. However, most support packages will go large industry, government agencies, and GLCs. Although SMEs will be given some support, the quality and depth of these initiatives planned by the government are not sufficient to kickstart the sector and assist those within the informal sector. Any recovery within the manufacturing sector will increase demand for foreign, rather than local workers, so will have little, if any positive impact in assisting the alleviation of local unemployment.
Financially stressed SMEs are unable to meet bank collateral requirements for loans. There is an artificial credit squeeze going on within the SME sector which the government is not addressing.
Decreasing the incidence of poverty should be a major priority for government. In addition, the informal sector needs to be empowered to produce food on idle and non-productive land. Failure to address these issues will lead to higher levels of poverty, which could spill over into civil unrest. As many middle-class professionals are slipping into relative poverty, the class divide is becoming much more apparent. With little outgoing empathy from the current government, rising food prices and shortages are dangerous. Malaysians’ culture of patience and acceptance is wearing thin.
Originally published in FMT 14th February 2022
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