High price to pay for cost controls in Malaysia

Carolyn Hong, Straits Times 14 Jan 08;

KUALA LUMPUR - MANY Malaysians like to buy in bulk, but the scenes in supermarkets recently were nothing less than surreal.

Anxious customers were seen pushing trolleys filled with nothing else but bottles of cooking oil.

Single-minded shoppers were seen swiping bottles of oil shamelessly even as supermarket staff struggled to replenish the shelves.

Everyone was stocking up on enough cooking oil to last any regular household at least a year.

If the scenes, played out in Kuala Lumpur and several other parts of the country, seemed crazy, they were also familiar.

It was classic panic buying, sparked by rumours of an impending price increase and fuelled by media reports showing bare supermarket shelves.

Malaysia's complicated system of government-imposed price controls has been blamed. It helps to ensure that poorer people can afford essential items, but leads to huge distortions in the market when prices are kept down artificially.

The cooking oil saga came to an abrupt end practically overnight. Nobody is worrying about cooking oil any more or giving a second glance at well-stocked shelves.

The Malaysian government flooded the retail market with 70,000 tonnes of cooking oil, far more than actual demand.

But almost as soon as that 'shortage' vanished, it looked like a flour crisis was looming next.

Restaurant owners began complaining that they could not get stocks at old prices, and some warned that Malaysians might have to do without their favourite roti canai - the fried flat bread Singaporeans know as roti prata.

The government reacted swiftly, telling the country's largest flour miller to up production by 15 per cent.

Such shortages and panic buying are not uncommon in Malaysia. They happen with some regularity, but especially of late as global commodity prices soar.

Some time last year, it was sugar that ran out, and two years ago, it was a shortage of diesel that had vehicles snaking around petrol stations. Once, even onions ran out.

The problem lies in Malaysia's complex system of price controls on essential items, ranging from food to fuel. Cooking oil, flour, sugar, rice, chicken and a host of other items are subject to a fixed ceiling price.

During festive seasons, the list extends to items such as certain types of fish, meat and seafood.

It has resulted in a serious predicament for the government because Malaysians are worrying more about inflation.

Price controls have kept the cost of some goods in Malaysia significantly lower than in neighbouring countries. Cooking oil, for example, costs twice as much outside Malaysia.

Malaysian prices for cooking oil and flour, to name just two items, have not been revised in 10 years, when commodity prices were less than half of what they are today.

To add to the complexity, prices of certain items such as flour and cooking oil are controlled only to a certain extent. Small packets meant for household use are subject to maximum prices, whereas bigger quantities for commercial use are sold at market price.

The recent rush for cooking oil was partly the result of industry users buying up items meant for household use.

The rise in demand for cooking oil in small packets rose by 46 per cent in the past few months, almost matched by the 56 per cent decrease in demand for 17kg packs.

Mr Thong Kok Mun, secretary of the Flour Millers Association, told The Straits Times that the same could be happening with flour supplies.

The ceiling price for a small pack of flour is RM1.35 (60 Singapore cents) a kilogram, whereas the industry pays RM2.30 to RM2.90 a kilogram.

The situation is made worse by suspected smuggling to neighbouring countries and hoarding by retailers who are banking on a price increase.

Associate Professor Asan Ali Golam Hassan of the economics faculty at Universiti Utara Malaysia noted in a column in the Utusan Malaysia newspaper that mere speculation of a price increase could cause a shortage.

'Traders will take the opportunity to hoard in hopes of getting a bigger profit. It will also spark panic among users, causing panic buying,' he said.

This is a perennial problem that is not likely to end as the government will find it hard to dismantle price controls without risking a serious political backlash.

Mr Ibrahim Suffian, who runs the Merdeka Centre, an independent polling organisation, told The Straits Times that his polls have shown that the cost of living is the No.1 concern of most Malaysians.

'The public's radar to prices has been very much heightened especially after fuel prices went up in 2006,' he said.

To the governing Barisan Nasional coalition, this will be a serious concern for the coming general election. Inflation will hit the lower-income groups hardest, and they form the backbone of its support.

The government has already indicated that it will not allow prices to rise, taking piecemeal action to check against smuggling and hoarding.

'It will be very costly politically to allow prices to rise, especially with the prediction of an early election,' said Mr Ibrahim.