4:56pm 08/02/2022
Any solution to solve the imminent inflation problem?

Sin Chew Daily

Deputy agriculture and food industries minister Nik Muhammad Zawawi Salleh has warned poultry breeders, processors, suppliers and retailers not to mark up their prices and add to the burden of ordinary citizens, adding that the government would not hesitate to take stern actions against the violators.

Chicken meat and eggs are essential items as well as major ingredients for the food processing industry. An increase in the prices of raw materials will naturally affect food processing costs, and if the government fails to come up with any effective measure to tackle this problem, a broad-based price hike is inevitable, not just for chicken and eggs.

The question now is how long suppliers and retailers can survive without increasing their prices.

There are several factors that have led to excessive prices for chicken and eggs under global inflationary pressure:

1. The two-year coronavirus pandemic has tipped the demand-supply equilibrium in the production and transportation of many daily necessities and essential items. When the production volume is down, sure enough the supply crunch will give rise to a price hike. The historical high palm oil price is sufficient to illustrate this point.

2. Sharp increase in crude oil prices. In late January, the crude oil spot prices in the US, EU, Asia and Africa reached a high of between US$86 and $93 per barrel. And we know that private vehicles are not the only ones that need petrol. If the uptrend is not contained, secondary manufacturing industry, transportation (air, sea and land) as well as the production of petrochemical, plastic, synthetic fiber and other major industrial products will all be affected, too.

Additionally, electricity supply will also become more expensive, triggering a broad-based surge in the prices of manufactured products as well as essential items for day-to-day consumption. In short, anything that requires petroleum in its production will be affected.

The world has previously witnessed three major energy crises with spikes in petroleum prices: in 1973, 1979 and 1990, all due to suppressed production as a result of wars in the Middle East and Persian Gulf. A direct consequence of high oil prices is inflation. As such, the Malaysian government must seek workable solutions to address this problem as soon as possible.

3. The persistently low ringgit value has exacerbated the situation. The ringgit has been trading around 4.2 to the greenback for quite some time now. A depreciating ringgit is definitely not auguring well for the import of goods (although it will benefit the exporters).

If we were to take 1 to 3.5 as reference, the local unit has devalued by around 20% in just a few years, meaning we have to pay at least 20% more to purchase an imported product, and this does not yet include the annual 2-3% of inflation rate.

As such, if prices of imported products have increased by 30-40% since 2015, we know we should not just blame the merchants for marking up their prices.

In 2020, the country registered a record of RM47.4 billion in trade deficit, not just because of the pandemic, but more of the lingering low exchange rates of the local currency.

Can Bank Negara intervene to force an appreciation of ringgit? No way, because as of end-July 2021, the country’s foreign exchange reserves only stood at US$111.1 billion. By comparison, Taiwan boasted US$550 billion while neighboring Singapore US$330 billion.

During the 1997 regional financial crisis, George Soros was said to have been eyeing also Taiwan’s financial market, but the island’s central bank managed to ward of the assault thanks to its bountiful foreign reserves.

Simply put, we can only afford to let our currency appreciate in a bid to tame the inflationary pressure if we have sufficient reserves.

We rely heavily on the import of many essential as well as luxury items. We cannot count on our domestic market like in China with its 1.4 billion population.

As mentioned earlier, a low ringgit is unfavorable to imports. With our limited foreign reserves, we are unable to strengthen our own currency and therefore unable to prevent the import of externally originating inflation.

Do we really have any good solution to mitigate the inflationary pressure? We feel this is the time to put the competence and wisdom of our government to real test.



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