The rising cost of living

Malaysia’s debt-to-GDP ratio is 53.4% as at the end of 2011, and therefore still relatively safe. But if government weans us off subsidies but installs new forms of spending, this brings us back to square one. 

Tricia Yeoh, The Sun Daily

A REPORT ranked Kuala Lumpur as the 74th most expensive city in the world, compared to 86th last year. Data from the Economist Intelligence Unit’s (EIU) “Worldwide Cost of Living 2012” report showed that KL’s cost of living index rose from 67 in June 2009 to 83 this month.

Of course, Malaysians do not need a report to believe that the cost of living is on the rise. Living in the city means expenses on food and transport take a big cut of your monthly income. It comes as no surprise that the consumer price index (CPI), which measures inflation, increased by 3.2% in 2011 compared to the previous year.

The groups that had the highest price rise were food and beverages (both alcoholic and non-alcoholic), transport, restaurants and hotels, and tobacco (Department of Statistics, Jan 18).

Malaysia sailed through the 1980s and 1990s, enjoying a steady growth rate of more than 7% on average, yet with a relatively low inflation rate. But times have changed. While we did achieve a 5.1% growth rate in 2011, inflation is steadily rising year on year. In the meantime, 60% of Malaysian households earn less than RM6,000 monthly, with 80% of households earning an average income of RM2,500.

Political implications

Coupled with global economic uncertainty, the economic climate in Malaysia is not too bright. And everyone knows that the cost of living is high on the list of electoral issues. The dilemma that the federal government has to face this year is how long it can hold off calling an election amid troubled times. The alternative is to wait till the full five-year term, but risk an even worse-performing economy.

Whichever the case, the government is well-aware that the increasing cost of living will inevitably affect voting outcomes. Public sentiment already flares whenever talk of subsidy removal, toll or tariff hikes surface. It is, after all, the bread and butter issues that people are ultimately concerned with.

Enter the flurry of financial schemes that have been announced by the federal government. There have been so many that one needs to pause to examine each carefully.

First was the New Civil Service Remuneration Scheme (SBPA) announced last year, in which civil servants would receive salary increments and bonus payments among others.

Then, the Skim Amanah Rakyat 1Malaysia (SARA 1Malaysia) scheme in which low-income Malaysians can take out a loan to invest in Amanah Saham 1Malaysia shares (which pays out RM13,000 at the end of a five-year lifespan if all dividends are re-invested).

Schemes need further clarification

Finally, the 1Malaysia Housing Programme, where low-income Malaysians can apply for a housing loan to buy affordable houses costing between RM150,000 and RM300,000.

The controversial part of this housing scheme, which interestingly enough has had members of parliament on both sides of the political divide commenting on, is that the scheme is being financed by Employees Provident Fund (EPF) money, as a loan to the government.

The Federal Territories and urban well-being minister announced that RM1.5 billion of EPF funds would be extended in loans to those who failed to secure commercial loans to buy their houses, helping some “20,000 eligible tenants and interested buyers”.

Pakatan Rakyat MPs have cautioned that this puts EPF funds at risk, by increasing government debt through an external body. They claim that if these “guaranteed” loans default, the federal government will be directly exposed to the debt and thus trigger a debt-induced financial crisis.

Khairy Jamaluddin, Umno MP, also questions what risk management processes the government would institute before giving out the loans.

Yes, a large part of Malaysians are feeling the pinch of inflation. And yes, it is generally positive that the government is taking this seriously. All the schemes, for example, have as their common objective to assist the low-income group in managing the impact of the rising cost of living.

But these programmes must be carefully designed, with the lowest risk possible. Let’s not forget that government funds equals the rakyat’s funds.

In the 1980s, the Greek government ran large deficits to finance public sector jobs, pensions and other social benefits, resulting in an extremely high debt-to-GDP ratio of above 90%. Spending for short-term electoral gain at the detriment of long-term consequences sent Greece spiralling downward, to its current debt crisis.

Malaysia’s debt-to-GDP ratio is 53.4% as at the end of 2011, and therefore still relatively safe. But if government weans us off subsidies but installs new forms of spending, this brings us back to square one.

In the rush to implement popular schemes that could boost electoral ratings, such important public policies must ensure that short-term spending must not come at the cost of the country’s future generations.

Tricia Yeoh is director at a market research consultancy. She writes on national and socio-economic issues. Comments: [email protected]