With inflationary pressure still strong as interest rates are likely to remain high for a longer period and supply chains are disrupted, wouldn’t it make sense to cap the prices of these necessities?
Uncapping prices and removing subsidies may appear logical for most but there are potential long-term repercussions that will ultimately hurt consumers.
The price ceiling for chicken was discontinued on Nov 1, 2023 while that for diesel will be taken off in stages based on a timeline to be determined later.
These steps are part of a subsidy rationalisation plan under Budget 2024.
Prime Minister Anwar Ibrahim said this was to ensure that overall, price controls and subsidies that remain for other necessities benefit only those who need them, while ensuring fiscal sustainability.
The resulting savings are substantial. The government saved RM4.1 billion by limiting the subsidy for electricity tariff only to the lower income group in 2023.
Savings from general subsidies are redirected to targeted programmes like Subangan Tunai Rahmah, where the maximum rate has increased from RM3,100 to RM3,700.
Another targeted subsidy is Sumbangan Asas Rahmah, which has risen from RM600 to RM1,200 per year.
The subsidy expenditure in 2023 was expected to exceed RM81 billion.
Supply squeeze
One consequence of price control is a sudden drop in supply, known as a supply squeeze.
To illustrate, look at the poultry industry. When a price ceiling is in place, a chicken supplier is unable to maximise profits even if demand increases because he is not allowed to raise prices.
On the other hand, if the price of chicken feed rises, raising his production cost, the price ceiling bars him from increasing his selling price to cover the additional cost.
This takes away the incentive to boost production, potentially creating a shortage of chicken and leading to long queues at the market or consumers paying more in the black market.
Such conditions can mean less incentive to invest, leading to lowered wages and job losses.
Producers may even resort to supplying lower quality products, or be forced out of business, which leads to a supply squeeze.
A bane to competition
A price ceiling discourages the entry of new players into the market, thus curbing competition.
Typically, more players means more intense competition, leading to a price war, which is good for consumers.
In contrast, a price ceiling prevents the supplier from maximising profits, thus reducing the incentive for others to enter the market.
The negative impact of the lack of competition is obvious in the supply of feed to poultry farmers.
An investigation by the Malaysia Competition Commission in 2022 revealed that five local chicken feed millers colluded to keep feed prices up in early 2020 and mid-2022. They were fined RM415.5 million.
Given that poultry feed accounts for 70% of production cost, such collusion puts pressure on the already small profit margin for chicken suppliers.
On the other hand, a floating price mechanism enables poultry farmers to raise prices to cover the additional costs.
This is also an incentive for new players to enter the market, leading to increased supply and lower prices.
Sugar and cooking oil next?
With chicken and diesel out of the way, there are now calls for subsidy rationalisation to be extended to other items such as sugar and cooking oil.
The sugar industry is a duopoly, with MSM Malaysia Holdings Bhd having a 60% market share and Central Sugars Refinery Sdn Bhd (CSR) accounting for the remaining 40%.
In May, the two companies asked the government to raise the price ceiling of sugar at retail outlets by as much as RM1 from the RM2.85 per kg level fixed in 2018.
In November, retail chain Mydin Mohamed Holdings Bhd managing director Ameer Ali Mydin said the government should float the price of sugar or raise the ceiling to RM3.80.
He said it was “illogical” to maintain the current price ceiling amid the rise in cost of raw materials.
According to him, MSM and CSR have to bear 80 sen of the cost for every kg of sugar produced.
Similar calls have been made to pull out subsidies for cooking oil sold in 1kg polybags.
Last year, Titiwangsa MP Johari Ghani suggested that the subsidy for cooking oil sold in 1kg polybags be replaced with direct cash aid for the low-income group.
He claimed that under the current system, big businesses would buy the cooking oil in bulk at the subsidised price to then sell to smaller firms for a profit.
Doing away with the subsidy would ensure that the 1kg packet of cooking oil can be sold at market price while the government gets to save on subsidies and prevent leakage.
The government began conducting an audit on the sale of subsidised cooking oil across the country in October last year to resolve the issue of leakage.
Domestic trade and cost of living minister Armizan Mohd Ali said last year that this would help Putrajaya determine the actual needs and streamline the method for granting subsidies.
A total of RM500 million has been allocated for cooking oil subsidies but the government expects the final bill to be RM1.9 billion, almost four times as much, Armizan added.