THERE is much well-founded analysis about the heavy subsidies bill having become fiscally unsustainable, presenting a compelling case to rationalise or remove them.
There is no question that the dismantling of subsidies, especially fossil fuels, is not only good for the economy, but also protects the earth through a reduction in carbon emissions.
Subsidies and price controls have long been a common feature. Malaysians have accepted it as a norm, a sense of entitlement for ‘‘cheap and subsidised’’ goods and services, particularly fuel subsidies, notwithstanding that Malaysia was now a net crude oil importer in 2022-2023.
The crude oil trade balance registered a deficit of RM32.2bil or 1.8% of gross domestic product (GDP) in 2023 (minus RM21.1bil or 1.2% of GDP in 2022), compared to an average surplus of RM9.8bil per year in 2000-2021.
The subsidies and price controls are in a range of products, including petrol, natural gas, electricity, cooking oil, sugar, toll charges and bus fares, which altogether accounted for 13.9% of the consumer price index (CPI) basket in 2020.
From 2012 to 2022, the government had spent RM223.5bil on subsidies or 8.9% of the total operating expenditure.
The bulk of the subsidies was mainly for fuel at 71.6% while the remaining was for interest rates, agricultural inputs, cooking oil, electricity, toll compensation, transportation, chicken and eggs as well as others.
In the 2024 budget, subsidies and social assistance are expected to decline by RM11.6bil or 17.9% to RM52.8bil in 2024 from an estimated RM64.2bil in 2023 (see chart).
On May 21, 2024, Prime Minister Datuk Seri Anwar Ibrahim announced that the Cabinet had agreed to implement targeted diesel subsidies in Peninsular Malaysia first, and later for Sabah and Sarawak.
However, it did not indicate the date (timeline) and mechanism of implementation.
After talking about fuel subsidies cut for almost two decades, the government finally has the courage and demonstrates the political will to undo the blanket diesel subsidy and be replaced with a targeted system to help those most affected by rising fuel prices.
This marks a bold subsidy rationalisation departure from the past whereby the subsidised fuel prices were enjoyed by everyone. It is estimated that the fuel subsidy rationalisation will save at least between US$1bil (RM4.70bil) and US$2bil (RM9.4bil) a year.
From an equitable aspect, blanket subsidies are disproportionately enjoyed by those who are not eligible, and also regardless of their financial backgrounds, are entitled to the same amount of savings.
The benefits accrue more to the affordable and affluent groups, especially the upper-income households, who have high purchasing power and the largest consumers of fuel as they own many expensive vehicles with larger engine capacities.
A study by Bank Negara indicated that the top 20% of households received a significant 42% of the subsidies, while the poorest 20% received only 4% of the fuel subsidies.
It was disclosed that diesel subsidies cost the government RM1bil a month (RM12bil per year), while losses from leakages amount to RM4.5mil a day (about RM1.6bil per year), as the RM1.50 per litre price differential between the subsidized price (RM2.15 per litre) and the market price of (RM3.65 per litre) has incentivised smuggling activities.
The implementation of targeted diesel subsidies in Peninsular Malaysia is expected to result in savings of RM4bil or 0.2% of GDP.
In efforts to manage inflation risk and increased business costs, subsidies would be continued for traders using diesel-powered commercial vehicles and for public transportation (10 types of public transportation vehicles, including buses and taxis, as well as 23 goods transport vehicles, will come under the Subsidised Diesel Control System or SKDS).
Diesel subsidies will also continue for certain categories of fishermen. Cash aid would also be given to eligible individuals who own private diesel-powered vehicles, such as small traders and farmers, among others.
Since 2022, the government has taken some measured form of subsidies rationalisation and price controls reform to manage the fiscal challenge.
These include the electricity tariffs rationalisation, which resulted in savings of RM4bil and the floating of chicken prices (RM1.2bil).
Fuel subsidy reforms offer a path to achieving sustainable fiscal management in ensuring a resilient and sustainable economy. There are a number of issues to be considered.
> The reforms require careful design and considerate execution with ease of administration and better enforcement to enhance its effectiveness.
There must be a foundation of trust with a robust mitigation package that offers support to the targeted segments of society in order to get citizens on board.
While cash aid will be given to those targeted income groups (M40 and B40), there must be credible means-testing to identify the eligible recipients of receiving the financial aid to minimise inclusion and exclusion errors.
> The reform is good, but not all at once. We must phase in the implementation of subsidy reforms gradually to reduce political resistance. Small price increases are easier to bite and make it possible for the people to adapt to the new price situation over time.
Implementing a phased reform approach and gradual removal of fuel subsidies will allow households to adjust and ensure effective rollout of mitigation measures.
In this regard, the sequencing of fuel subsidy rationalisation is deemed appropriate so as to avoid a big shock to consumers and businesses.
The Automatic Pricing Mechanism or APM will continue to be used to track the price differential between the market price and the subsidised retail price, and make a gradual price adjustment (up or down) on a monthly basis until the price differential converges.
Indonesia’s success in reforming fossil fuel subsidies can in part be traced back to the trust-building and phased nature of its reform approach.
> Better narrative to explain the reasons for shifting to targeted mechanism and a clear understanding of the fuel subsidy rationalisation can foster a sense of shared responsibility and work towards sustainable fossil fuel policies that benefit the economy and environment.
Through public consultations, and effectively communicating the rationale, benefits and mitigation measures, including targeted communication campaigns to proactively address the people’s concerns, and clarify misconceptions, this would help to build trust, dispel doubts and fears, and hence, making informed decisions.
> Transparent reporting and regular updates of detailed subsidies and subsidy savings are essential to assure the public that savings from targeting will be used wisely and address misconceptions.
Additionally, it helps to clarify the cost of subsidies and assess trade-offs through transparent reporting and clear communication. The government needs to explain much more forcefully is that the opportunity cost of fuel subsidies in terms of education, health and infrastructure and welfare, as also the environmental damage.
More importantly, the government must continue to plug leakages in public spending so that the subsidies savings are well spent and the people will benefit from the diverting resources from lower valued to higher valued sectors.
> Sumbangan Asas Rahmah and Sumbangan Tunai Rahmah are cash transfer programmes to provide financial assistance directly to the low-income and middle-income households or individuals affected by the removal of fuel subsidies.
The government can use a range of methods to improve targeting effectiveness, such as categorical or geographical targeting or linking benefits to self-development and learning programmes. While these measures are imperfect, they are more cost-effective than universal subsidies in protecting the needy and low-income households.
Nevertheless, there are arguments about social assistance/ cash handouts breeding the “dependency syndrome” on concerns about recipients becoming permanently dependent on “handouts” and losing any motivation to improve their circumstances.
The subsidies reform is the right move towards having a more efficient economy. The transition costs can have immediate effects on the economy, businesses and consumers through an increase in the cost of production, impact on output and consumption, and a rise in inflation.
Nevertheless, the dampening effects on macroeconomic indicators will be partially offset by the reallocation of subsidies savings to the productive sectors to increase output, and also through mitigating measures such as cash transfers to the targeted households.
Lee Heng Guie is Socio-Economic Research Centre executive
director. The views expressed here are the writer’s own.
