PETALING JAYA: The war between Russia and Ukraine, which has caused global commodity prices to shoot up, has sparked fears of supply-side ramifications as both countries are major producers of crude oil and wheat.
Bank Islam Malaysia Berhad chief economist Dr Afzanizam Abdul Rashid said the surge in oil and wheat prices has brought a serious effect, notably on food prices, despite the fact that fuel subsidies have shielded the rise in petrol prices.
He said the country may suffer inflation and the government should not remove subsidies as it would amplify the level of price hikes.
“Thus far, food prices are on the rise and the purchasing power of many Malaysians is being affected by these higher prices.
“From the Consumer Price Index (CPI) component, we can see that (prices of) food and non-alcoholic beverages rose by 3.6% year-on-year in January 2022 compared with last year. It has accelerated from 1.9%, 2.7% and 3.2% for October, November and December 2021,” Afzanizam told theSun.
“Bread and bakery products and biscuits have risen by 3.7% and 1.2% in January 2022 respectively from 2.7% and 0.6% in the preceding month. We also look at the average prices for roti canai, fried kuey teow and mee hoon which have risen by 3.5%, 5.6% and 5.7% year-on-year to RM1.18 per piece, RM5.46 per plate, and RM5.41 per plate respectively.”
Afzanizam explained that the government has to come up with a strategy to gradually phase out subsidies while ensuring fair and transparent market-based pricing.
Adding to that, he said the government should ensure relevant laws and regulations related to price control and anti-competition are adequately implemented so that the authorities can apprehend the perpetrators and restrain the price increase.
AmBank Group chief economist Dr Anthony Dass, who agreed with Afzanizam, said Malaysia may expect other commodity prices, such as that for corn, soybean and palm oil, to go up.
He said the spike in commodity prices has the potential to disrupt a wide range of businesses, including transport and retail.
However, he emphasised that as a benefit, the rising oil price returns additional revenue for the government despite consumers’ struggles.
“We foresee factories and wholesalers may have to increase their selling prices, and the same goes with traders. We can expect higher transport costs that will result in a domino effect either directly or indirectly on all other goods and services; perhaps an increase in the prices of non-controlled goods following an increase in oil prices, due to the conflict.
“Every US$1 increase in Brent oil price is associated with an increase in CPI by about 0.03%. A 1.0% increase in Brent oil prices is associated with a 0.014% increase in CPI. So we can assume that a 30% rise in Brent price should see inflation up by an additional 0.42%,” he told theSun.
“On the government’s fiscal revenue, for every US$1 rise in crude oil price, it will generate an additional RM300 million in oil-related tax revenue. In Budget 2022, the Treasury had estimated the price of oil at US$67 per barrel. So based on the current spot price of US$90 a barrel, it will generate extra revenue of RM7.2 billion.”
Meanwhile, Sunway University’s Economy Professor Dr Yeah Kim Leng warned that the impact of increased crude oil and wheat prices will be very unfair, stating that although producers and the government will gain from greater exports, consumers will have to face the brunt of the price inflation.
Therefore, he opines that the government should boost subsidies and prioritise targeted subsidies above general subsidies.
“Most importantly, the government will have to set aside or increase the subsidy allocation, especially for oil and gas as well as wheat which will be affected by the global supply market.
“For example, look into the petrol price allocation to identify a new mechanism that enables low-income people to benefit from the oil price, but not to have a general subsidy that benefits across the board including high-income households.”
