Cover Story: Cost of living conundrum

This article first appeared in The Edge Malaysia Weekly, on August 5, 2019 - August 11, 2019.
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THE country may have seen a historical change in government and made major inroads on political and institutional reforms, but the high cost of living remains a legacy issue that policymakers in neither the past nor the present government have been able to handle.

Economists point to structural issues — income growth that is not keeping pace with rising prices, unaffordable property prices and, most importantly, a weak ringgit — which they say are making the rising cost of living a big obstacle to overcome. Other contributors include an increase in food prices and changing lifestyles.

We take an in-depth look at the factors.



A weak ringgit

Sunway University Business School economics professor Dr Yeah Kim Leng says the ringgit, which is at around 4.13 to the US dollar at present, has depreciated past its pegged value of 3.80 before it was floated in July 2005.

“The ringgit’s trade-weighted index is presently at around 12% to 13% below the 2010 level. This is reflective of the quantum of the erosion of purchasing power or the higher cost of imported goods,” he tells The Edge.

Yeah estimates the share of imported commodities in private consumption at 14.1% in the 2015 input-output tables published by the Department of Statistics Malaysia, which is relatively unchanged from the 14.5% reading in 2010.

“It therefore contributes a sizeable but not overly large share to the cost of living of the average household.”


Housing affordability

The surge in property prices, especially in the cities, has not made things any easier. Yeah cites the property market boom from 2011 to 2015, and the continuing, albeit slower, pace of price increase in the subsequent years.

“The knock-on effects on rental rates also contributed to price levels remaining high relative to median income,” he says.

The average price of a terraced house in Malaysia rose from RM191,055 in the third quarter of 2010 (3Q2010) to RM360,262 in 3Q2017, an increase of 88% in seven years, according to the Malaysian House Price Index published by the National Property Information Centre.

In the same period, the average price of a high-rise unit climbed 91% to RM334,821.

However, not all assets have seen an increase in prices in the past 10 years or so. For instance, a Perodua Myvi 1.3 premium cost RM49,700 in 2008 but in 2017, a Perodua Myvi 1.3 Premium X was priced at RM46,590 — a decline of 6.3%. As for the Honda City, another middle-class family favourite, the price of the 1.5S model dropped to RM73,836 from RM84,980 in 2009 — down 13% — according to data from the portal, Paul Tan’s Automotive News.

The lower car prices have been attributed to the liberalisation of the automotive sector under the New Automotive Policy 2014.


The income dilemma

Academy of Sciences Malaysia Fellow Dr Madeline Berma says the slow growth in income and low wages have resulted in the inability of workers to cope with the rising cost of living.

“Workers can barely afford to meet their basic necessities by earning the minimum wage. What this means is that Malaysians are not earning enough,” she says.

The minimum wage in Malaysia is set at RM1,100 nationwide while the urban median monthly salary stood at RM2,260 in 2017.

Institute for Democracy and Economic Affairs director Laurence Todd says wages have been growing much faster at the top tier than at the bottom tier.

“Although the fastest-growing occupations, which are the professionals, are well paid in Malaysia, a range of middle-skilled and middle-paid occupations are growing at a slower pace, further exacerbating income inequality,” he says.

The power that income and currency strength has in influencing purchasing decisions can be illustrated by comparing the prices paid for a grande or medium-sized latte at Starbucks (see chart) across 10 countries in Asia.

For example, the beverage costs RM13.80 in Malaysia or about 0.6% of the average monthly urban income of RM2,260, while across the Causeway, the same beverage is just S$6.60, a mere 0.15% of the average monthly salary of S$4,437 in Singapore.

However, it would be more costly for someone in India or Vietnam to enjoy a Starbucks latte, which costs 1.5% of the average monthly income in Vietnam of VND6.6 million and 2.18% of the average monthly income in India of INR13,562.


Increasing food prices

Food costs constitute 29.5% of the Consumer Price Index weightage, says Professor Datuk Dr M Nasir Shamsudin, an academician at Universiti Putra Malaysia’s Faculty of Agriculture.

“Thus, food prices tend to make the largest contribution to the overall increase in inflation and, therefore, the cost of living. This is a common phenomenon in developing economies where the proportion of income spent on food is high.”

The food import bill surged from RM4.6 billion in 1990 to RM45.39 billion in 2015.


Disconnect with CPI basket

The inflation rate in Malaysia, measured by the CPI, was 1% last year.

Socio-Economic Research Centre executive director Lee Heng Guie says there is a disconnect between what is reflected by the CPI and the reality of the situation faced by consumers.

“There is a substitution bias as consumers adjust their spending behaviour according to price fluctuations. They shift their consumption to alleviate the impact of any price increase but the CPI does not capture this as it is based on a fixed basket of goods and is only updated every five years,” he says, adding that the CPI also does not reflect quality improvement.

“Prices captured by the CPI basket need to be adjusted downwards or upwards to account for the effect of quality improvement.

“The housing element is also undermined in the CPI as it only captures the rental rates but not the cost of owning a house, including the cost of servicing a home mortgage,” he points out.


Line between needs and wants blurs

The lifestyle that Malaysians choose to lead also impacts cost-of-living issues. Those who choose to live beyond their means to keep up with the Joneses and maintain a high standard of living find themselves trapped in debt.

“The cost of living is also related to lifestyle. The quality of life has increased for Malaysians, resulting in a change in their lifestyle. Unlike the cost of living, the cost of lifestyle is the expense of keeping up a certain way of life, for example, purchasing items such as the latest mobile phone model, entertainment and holidays,” says Berma.

Yeah says the line between “needs and wants” has blurred. “Choices influence the cost of living. A lot of people tend to have higher aspirations for the type of life they want as society today is more integrated, so much so that needs and wants become conflated. This has resulted in people spending beyond their means,” he explains.

Many who wish to own luxury items but cannot afford to pay the full amount resort to instalment schemes and become indebted to their credit card providers. That is fine provided they can service their debt on time but there are serious implications if they are unable to do so. This happens more often with the younger generation. Thus, it is not surprising that more than 50% of the clients of Agensi Kaunseling dan Pengurusan Kredit (AKPK) debt management programme (DMP) are below 40 years of age. The DMP is a rehabilitative plan to assist consumers regain financial control.

As at Dec 31 last year, 246,041 Malaysians had enrolled in the DMP, of which 44,925 registered just last year.

Statistics from the Malaysian Department of Insolvency show that 64,632 Malaysians, ranging from 18 to 44 in age, have been declared bankrupt over the last five years.




Tackling the cost of living issue

Dr Shankaran Nambiar, senior research fellow at the Malaysian Institute of Economic Research, says a holistic approach is needed to target all the different elements that contribute to the rising cost of living.

Handouts, such as the first and second phases of the Bantuan Sara Hidup financial aid programme this year, which cost the government RM2.62 billion, are not a long-term solution.

“Handouts are a temporary solution to the problem; they are not sustainable. In fact, they are a strain on our already overstressed fiscal situation. The country must work towards technology upgrading and a wage system that is productivity-linked, and there must also be a more judicious use of foreign labour,” Nambiar says.

Yeah says the supply-side issues of capacity, efficiency and cost, especially with respect to food and energy, need to be addressed.

“Dismantling monopolies and enhancing productivity and efficiency in all sectors of the economy are crucial to keep costs low,” he stresses.

Lee opines that policymakers should focus on strategies that improve work incentives as a means of raising the income levels of low-paid employees.

“A better policy for improving wages would instead focus on increasing productivity through lower capital taxes and improving individuals’ skills and knowledge to take up higher-paying jobs,” he says.


The government’s response

Domestic Trade and Consumer Affairs Minister Datuk Seri Saifuddin Nasution Ismail acknowledges that the ringgit’s strength plays a role in determining the cost of living. He says one of the ways to reduce the impact of currency fluctuations is to reduce our dependence on imported goods and services.

“[The ministry] is stepping up efforts to promote local entrepreneurs and convince Malaysian consumers to buy more local goods and services. For example, the ministry has been working closely together with the supermarkets to help local entrepreneurs develop and improve their products with the goal of putting more local goods on the shelves of supermarkets.

“Up to now, the ministry has helped more than 841 local brands and SMEs list 19,842 products in foreign supermarkets, both locally and abroad. This is an ongoing effort and we will strive to increase these numbers,” he says.

The government recognises the sentiments of certain quarters that the CPI alone is not an actual reflection of the cost of living.

“As previously announced by myself and the Minister of Finance, the government is working on developing a new index to deliver more accurate readings on the price of goods and the cost of living. It is our hope that this new index will be used alongside the CPI and other indexes to help with policy and decision-making, especially when it comes to efforts to alleviate the cost of living,” Saifuddin says in a written response to questions from The Edge.

Other measures taken by the ministry to reduce the cost of living include the launch of the Food Bank initiative in August last year, which aims to channel food surplus from industry players under the ministry’s purview, such as supermarkets, restaurants, manufacturers and hotels, to needy families nationwide.

The ministry also launched 332 “inisiatif Kedai Ekonomi Pengguna” or i-KEEP stores nationwide on the premises of its strategic partners. The stores offer up to 197 basic consumer goods, such as sugar, cooking oil, flour, rice and other branded necessities, at prices that are 2% to 20% cheaper than the market rates.

The ministry is also the main secretariat of the National Action Council on Cost of Living, which was activated to address the problem and challenges in various sectors, including housing, education, transport, utility, health and food.

Among the council’s initiatives was the establishment of a special task force to carry out a supply chain (food) study to determine elements that contribute to the final retail price of staple food products.

“The results of the study will be announced soon and be used to assist in the formulation of policies and strategies to reduce the cost of living,” says Saifuddin.

Though it may be an uphill task for the government to completely eliminate all cost of living issues, it is hoped that the initiatives will help provide some buffer to reduce the burden of working-class Malaysians as they struggle to keep their households afloat (see “Making ends meet in Malaysia”).


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