KUALA LUMPUR (March 24): Malaysia needs structural reforms that address cost and income factors to help households better cope with future cost of living challenges, Bank Negara Malaysia (BNM) said in its annual report 2024.

To address this, structural reforms are needed to boost productivity, increase competition, and strengthen economic resilience.

These reforms focus on long-term changes to policies and economic systems, aiming to create a competitive and efficient economy that promotes higher income growth and keeps inflation low and stable.

To address cost of living pressures, structural reforms should focus on reducing regulatory burdens, such as reforming tax and subsidy systems, improving public services, and simplifying compliance.

This will help businesses operate more efficiently and reduce costs.

Encouraging technology adoption and research and development through incentives like tax breaks can boost productivity, leading to higher wages and competitive prices.

Additionally, enhancing competition through the removal of trade barriers and enforcement of anti-competitive regulations will help maintain fair pricing and improve product quality. For consumers, this translates into more affordable goods and services of better quality.

The central bank highlighted that since the pandemic, wage growth has not kept pace with the overall rise in prices, eroding purchasing power and lowering living standards. This issue is particularly acute for lower-income households, who have minimal financial buffers and spend a larger proportion of their income on essential goods, especially food.

"The increase in food inflation is particularly concerning as it further erodes their already low purchasing power. Income growth must match or surpass inflation to preserve purchasing power to maintain or improve living standards," BNM said.

While managing inflation through monetary policy is necessary, BNM stressed that it is not sufficient on its own to fully tackle cost-of-living challenges. Instead, long-term structural changes are required to boost productivity, enhance competition, and promote higher income growth. 

As such, it underscored the need for strategic and innovation-driven industrial policies, alongside labour market reforms, to increase household incomes. This includes initiatives directed at promoting creation of high-skilled jobs. 

"In the longer term, reforms of he education system that encourage more students to pursue science, technology, engineering, and mathematics (STEM) fields would also help meet the labour demand of a high value-added economy," it said.

To address cost of living pressures, increasing household income is key. This can be achieved through strategic industrial policies, labour market reforms, and improved productivity.

Furthermore, the central bank contended that it is crucial to strengthen labour market institutions and implement policies that promote fair compensation aligned with worker productivity. 

"This includes enhancing existing wage policies such as the minimum wage law and the Productivity-Linked Wage System. Additionally, more transparent and fair wage-setting practices can be encouraged through collective wage bargaining and negotiations, to improve earning capacity of workers," BNM stated. 

Key strategies include creating high-skilled jobs, enhancing education and training to upskill workers, and encouraging students to STEM fields.

Labour market flexibility can be improved by easing restrictive laws, promoting workforce mobility, and offering flexible work arrangements, especially for women.

Strengthening labour market institutions is crucial to ensure fair compensation, including updating wage policies and promoting transparent wage-setting practices.

The social protection system must also be improved to provide a safety net, including financial assistance and social insurance for vulnerable groups, especially those in the informal sector.

Besides that, fiscal policies must complement monetary measures, it added. This includes targeted subsidies, tax relief, and cash assistance for vulnerable groups, though BNM cautioned that such measures should be judicious and temporary to avoid long-term fiscal strain.

BNM reiterated that addressing the cost of living requires a careful balance between short-term relief measures and long-term structural changes. While price controls and subsidies can provide temporary financial relief, they are not sustainable solutions.

"In this vein, countercyclical macroeconomic policies such as monetary and fiscal policy along with structural reforms must work together in keeping inflation low and stable. Achieving price stability is also a prerequisite for creating the favourable conditions necessary for further structural reforms to take root and flourish, and most importantly, raise household income," the central bank concluded.

Click here to read more stories on BNM Annual Report 2024.