PROVIDE ANY MEASURES THAT CAN BE TAKEN BY GOVERNMENT THAT CAN REDUCE INFLATION.

QUESTION: PROVIDE ANY MEASURES THAT CAN BE TAKEN BY GOVERNMENT THAT CAN REDUCE INFLATION.

            Inflation is not a deviant issue in Malaysia. According to Islam et al.(2017) as cited in Amadeo (2012), inflation is define as a continuous upsurge of goods and services price in the market. In the history of inflation in Malaysia, inflation started to penetrate into Malaysia economy since 1970s. There are three significant events relating to inflation in Malaysia, the first one was during a sharp increase in oil price in 1973 and 1974. The next one happened in 1980 and 1981 where the country experience an increase in industrial raw materials and investment price. The biggest catastrophe was recorded in 1997 which were mainly cause by a surge in interest rate, fuel prices and prices of goods and services (Ming & Hui, 2014). Today, it can be seen that the inflation rate in Malaysia is reducing from time to time. As reported by Department of Statistic Malaysia (2018), the most recent inflation rate recorded was 0.2%, which is below market expectation of 0.4%. This has proven that the inflation rate in Malaysia has clearly improved as compared during the year 1974 where the inflation rate was at the highest peak, 23.90%. However, the country had managed to overcome the crisis due to several actions taken by the government. Hence, this report will discuss on the measures taken by the government to reduce inflation in Malaysia.

            There are three methods that can be used by the government to control the inflation rate in Malaysia (Mahbob, S., 2018). The first method is by using the economic instruments. The use of economic instrument is by applying the fiscal and monetary policy. According to Forsythe (2012), fiscal policy can be defined as government’s action in controlling the spending and taxes. Fiscal policy is used when the government want to stabilize goods prices, employment level and a stable economy. There are two branches under the fiscal policy which are expansionary and contractionary fiscal policy. Expansionary fiscal policy takes place when the economy is in a recession while contractionary fiscal policy is materialized when the growth rate of the economy is out of control (Forsythe, 2012). On the other hand, monetary policy focus on controlling the amount of money in the market by Bank Negara Malaysia (BNM). Similarly, it can be divided into two branches. Contractionary monetary policy is a strategy used by the Central Bank of Malaysia (BNM) to reduce the money supply in the market to fight inflation. Meanwhile, expansionary monetary policy happens when the BNM focuses to reduce the interest rate (Niculae, 2013). In occurrence of inflation, the government focuses on contractionary monetary policy as well as contractionary fiscal policy. Under contractionary fiscal policy, the measure taken by the government is by increasing direct taxes such as personal and commodity tax. The effect of increasing taxation will result to less disposable income by the households to spend. Government of Malaysia also come out with the solution by imposing Sales and Services Tax (SST) to handle the problem of inflation. SST works differently from the personal tax. The function of SST is to reduce the burden of consumers during transaction (Yusof, 2018). The country has to reduce the aggregate demand during inflation. In order to lessen the demand from the people, government spending has to be reduced. For example, the amount of subsidies given for petrol can be cut. When there is less subsidies given, the consumer has no option but to pay a high price for such goods and services. Hence, this will decrease the aggregate demand for the consumers.

            On the contrary, monetary policy functions to regulate the amount of money in the market. By using the contractionary monetary policy, BNM impose high interest rate for fixed deposit. For example, Bank Simpanan Nasional (BSN) introduced Skim Simpanan Premium (SSP) in order to encourage saving among public. When people save more in the bank, the money flow in the market will be stabilized.

            Another initiative taken by the government to control inflation is through supply-side policy. The purpose of this policy is to ensure the price in the market will not fluctuate (Mahbob, 2018). This policy encourages people to prioritize on local produce rather than relying on import products. For example, the government had introduced Green Book program (Program Buku Hijau) (Mahbob, 2018). This program stimulates the local production of vegetables by using their personal living area.

            The final solution taken by the government is in term of administrative action. Administrative action can be done by imposing The Price Control Act (Mahbob, 2018). This instrument works extremely well to control the price of basic goods and services especially during festive season. This is because during festive season the demand of basic goods is high as compared to normal days. The supplier will monopolize this situation by simply increasing the price higher than the price ceiling set up by the government. The other form of administrative action is by having wages control. When people have high wage, their purchasing power will also increase concurrently. Therefore this will cause high demand and result to inflation (Pettinger, 2017).

            In conclusion, both Malaysian government and the public have to play a vital role in combating the issue of inflation. Since Malaysia had experienced many incidents involving inflation the government shall be more proactive in finding a proper control to safeguard the Malaysia economy. Although it is expected that the country will experience another inflation turbulence soon, the country can easily escape the problem if there are correct measures planned since the early stage.

Contributors

  1. INTAN FARHANA BINTI NAZRI  2016421866

  2. NUR FARAH AISYA BINTI AZMAN  2016419508

  3. NUR SYAZA NIZA BINTI AMIRUN NIZA  2016421678

  4. NUR NISHAREENA BINTI ABDUL HAMID  2016419506