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Food imports, exchange rate and cost of living: A catch-22 situation

22 Dec 2019 / 13:13 H.

KUALA LUMPUR: Transforming Malaysia into a net food exporter may still not wean the country off the need for imports. Neither will it completely help the country in addressing the cost of living issue.

While addressing challenges in food production issues require relevant domestic policies and time, cost of living, on the other hand, will need to be tackled by raising productivity and improving education to lift income levels, as ultimately, cost of living issues go beyond just rising cost, said Bank Negara Malaysia (BNM).

Explaining in detail, the central bank said Malaysia is, on the whole, self-sufficient for a considerable number of food items although its total import content for food which is about 24% is not insignificant.

Out of the 24%, the import component of domestic food production accounts for 9.0% and imports of finished goods of 15%, it said in a written reply to Bernama.

In reality, Malaysia produces enough to meet domestic consumption for many basic food items.

“Out of 33 most commonly consumed agricultural products, 16 have a high self-sufficiency ratio, implying that for these food items, domestic production is adequate to cater to local consumption,” it said.

Exchange rate movements explain only a fraction of food price changes and other factors may be equally if not more important. Its impact is limited and varies across food items, BNM expounded in an article entitled “Food Imports and the Exchange Rate: More Than Meets the Eye,” authored by Mohamad Ikmal Ahmad Nordin, Nur Aimi Abdul Ghani, Eilyn Chong and Zul-Fadzli Abu Bakar.

For example, the exchange rate pass-through is estimated to be around 26% for Indian mackerel (ikan kembung) prices, compared to 8.0% for apple prices. This corroborates the fact that there are other factors that affect food prices, which include labour, utilities, logistics, industry margins, market structure, and other policies and regulations.

Exchange rate is not the main solution

Secondly, as such, caution should also be exercised when suggesting the exchange rate as the main solution for rising food prices. Exchange rate movements explain only a fraction of food price changes and other factors may be equally, if not more important, BNM said in its box article.

Since food items are globally traded commodities, global demand and supply are also important determinants of import prices. These fundamental factors serve to drive fluctuations in world food prices beyond the control of any given country.

For example, as cited by a report by the Malaysia Competition Commission (MyCC), prices of imported beef from India have been on an uptrend in recent years even when the ringgit exchange rate was appreciating during the same period, contributed by increased demand from countries such as China and Indonesia, when previously Malaysia was the sole importer of Indian beef.

Separately, the recent increase in prices of Indian onions was due to supply disruptions following the monsoon season in India, at a time when the ringgit exchange rate actually appreciated against the Indian rupee.

Global prices for fish and seafood have also risen in recent years, as supply tightened and demand consistently grew.

Commenting on the ringgit, BNM said in this highly uncertain global environment, flexibility in the ringgit exchange rate has allowed the Malaysian economy to respond effectively to external shocks, including by helping cushion the impact of lower external demand on exports.

In the recent period, concerns over global trade tensions, moderating global growth and geopolitical developments have affected regional financial markets and exchange rates.

Despite these challenges, the value of the ringgit against a trade-weighted basket of our major trading partners’ currencies has been stable, said the central bank. “While the ringgit has depreciated against the US dollar, Japanese yen and Thai baht since 2018, it has also strengthened against the Australian dollar, Euro, Chinese renminbi and Korean won.”

Over the medium term, the ringgit exchange rate will reflect Malaysia’s economic fundamentals. As it is, the economy is on a steady growth path, inflation is low and the banking system is resilient.

Ongoing policy initiatives and structural reforms to further strengthen Malaysia’s resilience, productivity and growth potential, including modernising infrastructure, improving digital connectivity, promoting high-valued investment and strengthening governance will contribute to the long-term sustainability of the Malaysian economy, it said.

Going forward

While the challenges remain and some are beyond the control of any specific nation, not doing anything is equally risky as higher food prices pose a burden on consumers’ cost of living, said BNM.

“The problem of rising food prices has to be addressed comprehensively; reducing imports alone may not necessarily result in lower prices, especially when imported inputs are a significant component in the costs of producing food items domestically,” it said.

In addition, the lack of economies of scale compared to other food-producing countries might prove an obstacle in achieving self-sufficiency in food production; in which case a more practical approach would be to import food items at a cheaper cost, it said.

“In light of the multifaceted layers involved in food production, the relevant domestic policies currently proposed are timely and warranted, which include diversifying import sources, streamlining regulations and modernising production and distribution technology.”

These measures, while requiring time to materialise, would address the structural issues that have been at the core of Malaysia’s food supply for decades, it said.

As for the cost of living in totality, BNM is steadfast in the view that policies to raise productivity and improve education in lifting income levels are imperative for a more sustainable approach to address the cost of living issues.

“In the environment of elevated housing costs, it is also crucial to focus on household indebtedness,” it said, adding that efforts to promote household resilience must continue in order to improve affordability and to limit the accumulation of excessive debt by households.

A shift towards greater price transparency and flexibility would enable households and businesses to respond better to demand-supply conditions.

However, this must also be accompanied by policies to address long-term supply-side factors such as ensuring competitive market conditions for market-driven prices of goods and services in the economy.

“Focusing our efforts on getting the right policy mix to stimulate productive investment and employment creation, as well as modernising infrastructure will go a long way in raising incomes and alleviating the cost of living issue,” said the central bank. — Bernama

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