Price stabilisation fund not needed for now, say economists

 

Malaysia should grow its own food crops instead of relying on imported commodities such as corn and soybeans, says Barjoyai Bardai. (Pixabay pic)

PETALING JAYA: A price stabilisation fund only provides a short-term solution and fails to address the fundamental cause of inflation, say economists.

According to Sri Murniati Yusuf, deputy research director at the Institute for Democracy and Economic Affairs (IDEAS), a price stabilisation fund is usually established by the government to absorb extreme volatility in commodity prices.

“If the prices of these commodities rise substantially or are about to rise substantially, the fund provides interest-free loans to relevant government entities to procure these commodities and allow them to maintain strategic buffer stocks.

“These buffer stocks can then be released to the market to stabilise the prices. In this way, a stabilisation fund can be helpful to mitigate rising prices in the short term,” she told FMT.

Sri Murniati Yusuf.

Sri Murniati said it should be noted that these funds were used in oil, gas, and mineral producing countries mainly to anticipate a large influx of revenue.

Since oil and gas prices can sometimes be quite high and bring a windfall to the government, the fund can be used to maintain and manage this windfall, she said.

“I think the establishment of the fund should be based on sound research and analysis. Besides, such a fund can only deal with limited commodities.

“We already have a price ceiling policy for essential goods and subsidies. We need to make sure that if this new intervention tool is being used, it will not be used redundantly,” she said.

Last week, DAP secretary-general Lim Guan Eng urged the government to establish the fund to cap inflation and the increase in food and commodity prices, saying the situation could get worse because of conflict between Russia and Ukraine.

Barjoyai Bardai.

However, Barjoyai Bardai of Universiti Tun Abdul Razak said the fund was not needed at the moment because it was too expensive to bear the large volume of food and commodity transactions by individual customers.

“The bulk of individual consumption of food and commodities is huge, so a big fund will be needed to stabilise the rising prices.

“We don’t know how long these prices will keep rising, resulting in the government having to support the market for a long period of time,” he said.

He said a better way to address the issue was to look at the long-term impact of price hikes and inflation and consider other mitigation measures, such as improving food security.

“Since Malaysia relies on imported corn and other items, when the logistics are disrupted, the costs may go up,” he said.

“If we can grow our own food crops here, and find alternatives to obtain raw materials locally, we won’t be badly affected by price hikes due to war and other international disasters.

“The problem arises because we have no option but to depend on imported goods.”

Carmelo Ferlito.

Carmelo Ferlito, CEO of Center for Market Education, said people needed to understand the cause of inflation to properly address the problem of price hikes.

“When we talk about price increases induced by supply chain interruptions caused by lockdowns, or now by the Ukraine situation, we are not talking about inflation, but about a change in the structure of relative pricing that can only be addressed by resolving the initial cause – lockdowns or war,” he said.

“But why do we have inflation after two years of the pandemic when the economic crisis should have instead brought about deflation?”

He said this was because the government, in collaboration with the central bank, had produced more money to support the budgetary policies they undertook to repair the impact of the lockdowns.

Ferlito said a price stabilisation fund would require the government to spend and may not be a wise policy at the moment as it was complicated to repair what had already been broken.

“At the moment, there is no other way to cap inflation other than controlling the quantity of money in circulation, and this cannot be done without a certain degree of money contraction.

“The best way to do this is to gradually cut government spending,” he said. - FMT