Huge unfulfilled potential in Malaysia’s agrofood sector, says World Bank

PETALING JAYA: Concerns about food security and supply amid economic shutdowns in containing the Covid-19 pandemic have thrust the agricultural sector into the spotlight as a potential driver of sustainable long-term economy growth and shared prosperity, but there is underexploited potential in serving the demands of a modern agrofood economy in Malaysia.

According to the latest edition of the World Bank Malaysia Economic Monitor: Sowing the Seeds launched today, Malaysia’s agrofood sector is at a surprisingly early stage of modernisation and diversification. The country’s policies have focused primarily on meeting self-sufficiency in rice, causing an increased reliance on exports for higher-value foods.

“Malaysian households spend three times more on fruits and vegetables and more than twice as much on bread and cereals compared to rice. Thus, a more encompassing view of food security, agricultural competitiveness and rural development is needed, beyond the focus on paddy production. Modernising and diversifying this sector promises to boost incomes of rural households, which make up a majority of the country’s farmers,” the report said.

It said Malaysian agriculture has not diversified to the extent seen in many high-income countries around the world, nor has it yet become a top exporter of a diverse set of high-value food products.

While Malaysia has demonstrated its cutting-edge capabilities in the transformation of palm oil production, it ranked only 69th out of 101 countries (below Mozambique, Egypt, Ethiopia, and Zimbabwe) in an agribusiness benchmarking exercise conducted by the World Bank in 2019; with the food side of its agricultural sector experiencing attrition.

“While Malaysia has taken steps to address environmental issues in its palm oil sector, it still has more ground to cover and it has been slow to take on mounting environmental challenges on the agrofood side.”

In the rice sector, Malaysia has performed relatively poorly in terms of productivity, profitability, and quality if the effects of subsidies are discounted. The rice-centricity of the government’s policies has led to lopsided public support, with it allocating more public resources to rice than to any other agricultural product.

Furthermore, public support for the rice sector in particular has been provided largely through distortionary and protectionist instruments. Public expenditure has also been heavily channelled towards the subsidisation of private goods, including fertilisers and pesticides, farm equipment, irrigation and drainage hardware, and planting material.

Despite its natural advantages, Malaysia has not become a major exporter of fruits and vegetables, as many other countries have at similar points in their development trajectory.

Meanwhile, the World Bank expects Malaysia’s economy to grow by 6.7% in 2021 following a projected contraction of 5.8% in 2020 caused by the Covid-19 pandemic.

“The successful containment of the third wave of Covid-19 infections and effective rollout and distribution of vaccine could lead to a faster-than-expected recovery in consumer demand, greater investor confidence, and consequently a more robust recovery in domestic economic activity in 2021.”

Signs of recovery are showing with Malaysia posting a smaller contraction of 2.7% in Q3’20 compared to a 17.1% in Q2’20. Fiscal measures like cash transfers and wage subsidies have boosted household spending with private consumption contracting 2.1% in Q3’20 compared to 18.5% in Q2’20.

However, the recent surge in Covid-19 cases and renewed movement controls could slow recovery down due to uncertainties surrounding the deployment of an effective vaccine and the robustness of a rebound in global growth that will influence the pace of economic recovery.

The fiscal deficit is expected to widen to 6% of gross domestic product (GDP) in 2020 while federal government debt has increased to 60.7% of GDP. The federal government’s revenue is also expected to fall to 15.1% of GDP in 2021, straining the government’s ability to respond to future shocks and sustainably finance its longer-term inclusive growth agenda.

Over the medium term, Malaysia is expected to return to its pre-pandemic trend at a modest pace.

“The protracted economic impact of the Covid-19 pandemic underlines the importance of adopting a dynamic approach to policymaking – through which a clear set of strategies can be developed for different phases of economic recovery – based on difficult trade-offs between providing relief today and stimulating growth tomorrow,” said World Bank country director for Brunei, Malaysia, Philippines and Thailand, Ndiame Diop.