By Siti Radziah Hamzah
KUALA LUMPUR: Subsidies are, by nature, a short-term fix and need to be gradually removed as they can distort prices if allowed to continue for a protracted period.
Running a budget deficit, Malaysia has seen its fiscal position strained by the cost of keeping essentials at below market prices. Government subsidies have been estimated to hit a record RM80 billion in 2022, with fuel and cooking oil subsidies accounting for half of the amount.
In January this year, Prime Minister Datuk Seri Anwar Ibrahim said Malaysia’s national debt including liabilities had reached RM1.5 trillion and should be addressed urgently as the ballooning debt was already more than 80 per cent of the country’s gross domestic product.
Structural reforms are already in the offing. The gradual removal of subsidies, among others, is on track with the government scrutinising and fine-tuning the mechanism, as Putrajaya aims to cut off aid to more well-off Malaysians.
Anwar, who became the 10th Prime Minister in November last year, said the government spent RM66.3 billion in subsidies in 2022, largely to offset the prices of fuel, electricity, and poultry.
Malaysia University of Science and Technology economics professor Geoffrey Williams said the subsidy reform for electricity is the most practical and straightforward way of removing the distorting effect of subsidies, where those in the highest income groups benefit most.
“Electricity is metered so we can easily identify the highest users in the T20 (top 20 per cent of household income) group. Removing subsidies on those using more than 600 kWh per month can save RM1.96 billion and would affect only 11 per cent of households,” he told Bernama.
On June 23, the Natural Resources, Environment, and Climate Change Ministry announced that the top 1.0 per cent of electricity users in the country will pay a higher tariff between July and December this year. Under the new imbalance cost pass-through mechanism, about 83,000 users will pay at least RM187 more per month.
Meanwhile, Williams said a cut in fuel subsidies could be achieved in the same way as a cut in electricity subsidies — by charging full unsubsidised prices to the high users and low subsidised prices to the low users.
“This mostly captures the T20 and B40 (bottom 40 per cent of household income) groups. Just removing subsidies for high users will save tens of billions (of ringgit). The technology can be achieved at point-of-sale at the petrol pumps. It is the middlemen who resist this because they lose from the payments,” he pointed out.
Williams stressed that Malaysians need to understand the economic issues and that it is the middlemen who benefit most from subsidies as well as the high-income groups.
“Subsidies also distort the market in the long term so we need reforms now,” he added.
Putra Business School economic analyst, Associate Prof Dr Ahmed Razman Abdul Latiff, said the government is on the right track by reforming the subsidies as Malaysia is experiencing a downward trend in inflation rate and the economy has recovered to pre-pandemic level.
“However, while some of the households have recovered, many still need additional assistance; hence the need for the subsidies to be targeted rather than maintaining the current broad-based approach,” he told Bernama.
Malaysia’s inflation eased further in May 2023 with the Consumer Price Index slowing to 2.8 per cent from 3.3 per cent in the previous month, mainly contributed by the fall in the indices for food and non-alcoholic beverages; transport; and furnishings, household equipment and routine household maintenance.
It marked the ninth consecutive month that the country’s inflation rate had softened since the peak of 4.7 per cent in August last year.
Four C’s for successful fuel subsidy reform
The World Bank said in June 2022 that Malaysia’s proposed subsidy reform, which is intended to replace blanket fuel subsidies with a targeted system, is an appropriate approach, but it will require additional inputs to guarantee success.
“Fundamentally, governments struggle to address the (vexing) political economy behind fuel subsidy reform of overcoming resistance from those who benefit from the status quo – typically the richer segments of society,” it said.
According to the bank, successful reform for Malaysia requires 3 C’s – credible commitment, consensus and coordination (of government programmes) – which are underpinned by a fourth C, communications. This must be accompanied by a narrative which goes beyond relieving fiscal pressures.
Ahmed Razman said normally, when any government intends to give subsidies to the populace, it must be matched with revenue generated via tax collection.
He added that currently, the government is at the stage of reducing subsidies allocated to ensure that it can still afford them.
“If they do not have enough revenue for it, tax reforms are probably needed to ensure enough collection for the purpose of disbursement of subsidies,” said Ahmed Razman.
Bank Muamalat Malaysia Bhd chief economist and social finance head Dr Mohd Afzanizam Abdul Rashid subsidies are, by nature, a temporary fix and should be removed once everything has stabilised.
In Malaysia’s case, subsidies have become a permanent feature, which makes the task of removing them extremely challenging, he noted.
“Subsidies will distort the market prices. It could result in overconsumption and less incentives for producers to produce more.
“This will create imbalances in the economy which can impede the investment to upgrade the production capacity of the economy,” Mohd Afzanizam told Bernama.
To remove it, the government needs a strategy, including ensuring the removal is gradual and follows a strict timeline, he opined.
He explained that the savings from subsidies must be channelled back to those who are deserving in a swift manner because subsidy removal is inflationary.
Mohd Afzanizam said there will be irresponsible parties who would want to take advantage of the situation, and law enforcement and prosecution have to be robust enough to curtail any wrongdoing.
He added that issues like price manipulation, hoarding, and the cartel have to be completely eradicated via strict enforcement of relevant laws. That way, the determination of market prices will be fair and transparent.
“Database on those who are qualified to receive financial aid is readily available.
“Investments for capacity building also must be accelerated especially in areas relating to education, healthcare, and infrastructure. These are long-term investments and, in order to enjoy the benefits, the investments have to be executed in a timely fashion,” he noted. – BERNAMA
