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Response to Questions from Bernama on BR1M

Ref No : 03 Mar 2018 Embargo : For immediate release    
1. How did the BR1M idea come about?
Is BR1M the only model or were there any other suggestions alike? If so, why was BR1M chosen?

The idea was first mooted in BNM's Board of Directors Briefing to the Prime Minister in March 2011. The proposal was carefully considered and deliberated in subsequent Economic Council Meetings in March and August 2011. In essence, the proposal was to help deserving groups directly once the Government's blanket subsidy was gradually reduced.

Prior to BR1M's introduction in 2012, the Government was already on its path towards fiscal consolidation, which included subsidy rationalisation. However, there was no existence of other mechanism to help the poor and vulnerable groups affected by this exercise. BR1M was meant to be a direct and targeted assistance to the low income groups to ease the pressures arising from subsidy rationalisation. In this regard, a cash transfer mechanism was seen as a critical first step towards deeper reforms in the country's welfare system and social protection. Therefore, the Bank forwarded its recommendation to the Government to help the vulnerable groups.

2. Did BNM conduct any studies before it was introduced in 2012? If yes, how many studies and how was it conducted?
Was BR1M modelled from any other countries? If yes, can BNM cite them and explain how it worked for the other countries?

The Bank had conducted research on the then prevailing subsidies mechanism and also the social safety nets in other countries.

It was found that wide ranging subsidies, administered prices and price controls had created deep inefficiencies and rigidities that prevented the economy from adjusting to global and domestic realities.

The Bank also found that the existing subsidy and price control mechanism had incurred large fiscal costs, and that it could potentially weaken the financial position of the Government in the long term. Equally important, the existing subsidy regime was regressive as the mechanism was disproportionately subsidising the rich, much more than the poor. The cost of blanket subsidy to the economy was enormous.

Given the prevalent conditions, BR1M was introduced to direct assistance to the targeted vulnerable groups in a more effective and cost efficient manner.

3. What was the feedback gathered by BNM on BR1M from its implementation till date? Was the allocation of BR1M adequate?

At the household level, BR1M assisted the low income groups in mitigating the pressures from subsidy rationalisation.

It has supported consumption and growth as the low income groups' marginal propensity to consume is high. The post BR1M period also saw gradual and sequenced adjustments and removals of subsidies and price controls. With fewer price distortions, the economy also became more flexible and nimble in adjusting to shocks, and therefore delivering growth and sustained rise in income.

4. Explain targeted subsidies and why was the previous handling deemed flawed?

Targeted subsidies are a form of direct transfers from the Government to the vulnerable groups to ease their financial burden. In the previous blanket subsidy regime, every segment of the society, regardless of their financial background, was entitled to the same subsidy. Thus, it was an unbalanced system. An example of a blanket subsidy would be the fuel subsidy which was subsequently replaced by the managed float system in 2014. A study based on the Household Expenditure Survey 2009/2010 showed that the richest 20% of households received a large 42% of the subsidy. On the other hand, the poorest 20% of households received only 4% of the fuel subsidy. This is due to wealthy households owning more and bigger cars, and therefore consuming larger quantities of fuel. Thus, the blanket subsidy system is a less effective tool in ensuring the benefits of low fuel prices are widespread and inclusive. This calls for more targeted measures to replace the blanket subsidy system.

5. Was the distribution of BR1M to tempt the Rakyat?

BNM forwarded its proposal on BR1M, focusing solely on economic considerations which were to assist the poor and to ensure the targeted subsidies were more efficient and effectively implemented.

6. Is BR1M sustainable? Can BNM explain whether it would be continued or if there was a deadline for such model when the Central Bank mooted it?

For BR1M to function efficiently, continuous refinements are necessary:

  • At the entry level, the cash transfers should be prioritised for the truly underserved and vulnerable groups.
  • Equally important is for BR1M beneficiaries to graduate out of the lower-income bracket over time.

The sustainability of BR1M would depend on mobilising the lower income groups to break the vicious inter-generational poverty cycle and moving up the income ladder. To do so, BR1M could be enhanced by ensuring there is an exit mechanism, by linking it to promotional programmes to enhance human capital and productivity. In other countries (e.g. US and Latin America), some forms of conditionalities on schooling and healthcare are attached to social transfers.

Given structural changes (such as aging population, changing nature of jobs due to technology, and shifts in the social fabric) already taking place in our society, we need to ensure a comprehensive social protection framework for the future. In the long term, any cash assistance programs should only form one part of a more comprehensive national social security system. Critically, the social security system must not engender an over-reliance on state welfare or stigmatise the poor, but rather empower and build the capacity of households. Broader fiscal, structural and social policies including on the labour market and education, are key in shaping the adequate level and coverage of the social protection framework.

A holistic framework for national social security system would rest on three key pillars: protection, prevention and promotion. At the very least, for protection, there should be what is known as "social protection floor", which includes BR1M or any other form of income security targeted to the poor, lower income and vulnerable groups. In terms of prevention, which focuses on social insurance (including pension and unemployment insurance), the recently introduced Employment Insurance System is a step in the right direction. Of importance is to complement the income support with the promotional aspect, that is, tools and opportunities for Malaysians to have access to quality jobs, better livelihoods, and higher standard of living.

Ultimately, these steps towards a more comprehensive social security system would require a strong fiscal position and management.

Bank Negara Malaysia
03 Mar 2018

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