Malaysian inflation seems manageable

In fact, economists and industry observers generally feel that the situation may still remain manageable for most Malaysians.

For one, Dr. Yeah Kim Leng, chief economist at RAM Ratings Bhd points out that 60 percent of Malaysian households, on average, earn more than they spend.

“So they have a buffer to protect against rising prices. It is the bottom 40 percent who earn less than RM1,500 per month that we should be concerned about,” he says.

Consumers, particularly in this income group will have to respond to the changing prices by adjusting their spending patterns, paying for only the essentials, Yeah says.

For others, the effect of higher prices may dissipate quickly as they get used to it, he says. AmResearch Sdn Bhd senior economist Manokaran Mottain agrees with Yeah, saying that Malaysians would still be able to manage price increases even after the next round of subsidy removal essentially for the price of RON95 petrol, diesel and liquefied petroleum gas provided the prices of goods and services do not spiral as a result.

“Here is where the authorities must ensure that prices are not simply raised,” he says. Consumer Association of Penang president S.M. Mohamed Idris says consumers “just need” to manage their finances better to cope with future subsidy reductions.

He believes that the government should lessen subsidies and channel the funds saved from subsidies into addressing the transportation and housing needs of the country.

Manokaran says subsidy rationalisation is inevitable, given the current strong commodity price levels and their impact on the Government's budget.

In his latest economic report, Manokaran says if the Government wants to maintain prices at current levels, an increase in subsidies would mean a reduction in other expenditures, be it operating or development.

The government may introduce austerity measures to operating expenditure, such as reducing ministries' expenses like overheads and promoting fiscal prudence.

However, trimming development expenditure especially will be detrimental to economic growth and welfare of the country.

In this context, the government has no other option other than to introduce a gradual cut in subsidies, according to Manokaran.

Fuel remains the biggest component of the government's subsidies and the current price of global crude oil at above US$100 per barrel is estimated to cost the Government RM18.3bil this year in fuel subsidy, higher than the RM10.2bil set aside for Budget 2011.

The Kenenga research house is projecting budget deficit to reach 6 percent of gross domestic product (GDP) this year from 5.6 percent in 2010, against the government's hopes of shrinking it to 5.4 percent of GDP this year.