The targeted diesel subsidy is not fully thought through yet. Over 50 percent rise in diesel price to RM3.35 per litre, an RM1.20 jump from just RM2.15 previously is massive. Some will claim it is small as it only constitutes 0.1 to 0.2% increase in inflation! But inflation is also about expectations. It would have been prudent for a gradual price increase. Three measured steps over a year will mitigate inflationary expectations.
Subsidies are a double-edged sword. When they are unstructured and cover everyone – they provide benefits for everyone irrespective of income. That may result in wastage and giving more to those who can afford to spend and consume. Any attempt to restructure will result in targeted subsidies. That still faces leakages and profiteering.
According to Finance Minister II, total subsidies in 2023 amounted to RM70 billion. This is down from RM81 billion in 2022. Reports say fuel subsidies account for RM50 billion of it or some 70 percent of the total. Diesel subsidies, which amounted to RM1.4 billion in 2019, leapt 10 times to RM14 billion in 2023.
Some RM10 billion in leakage is caused by those obtaining the subsidised diesel and selling it to others. The Government hopes to recover some RM4 billion. It implies that there will still be some leakage of about RM6 billion (RM10 billion - RM4 billion).
There is incentive to smuggle diesel across borders as Thai prices are significantly higher at around RM4.24 per litre and Singapore prices being around RM8.79 per litre.
Source: theedgemalaysia.com, 11 June 2024
While the new price of RM3.35 has narrowed the differential, it is still significant. Targeted subsidies are pretty much a work in progress. And one subsidy to the B40 replaces the other for all.
The timing of RON95 subsidy cuts will depend on how the effects of diesel subsidy rationalisation will fare and the effectiveness of the targeted subsidy measures.
Maybank IB simulated that if the targeted RON95 petrol subsidy rationalisation starts on July 1, 2024 and with the goal of achieving RM4.1 billion in government savings within the second half of 2024, RON95 petrol price will need to be raised by 32 sen per litre (+15.6%). And if the targeted RON95 petrol subsidy starts on Oct 1, 2024 to achieve RM4.1 billion savings within the fourth quarter of 2024, RON95 petrol price will have to be increased by 65 sen per litre (+31.7%).
Will the subsidy rationalisation work? There will be a lot of anger because the public perceives the government doesn't spend the public funds well. It is the corruption and the abuse of power that causes the leakages from the system. And that the Government has not done very much on this front. The easier method is to raise revenue by imposing the Tobin tax.
References:
Comment: Will targeted diesel subsidy work? P Gunasegaram, Malaysiakini, 11 June 2024
Diesel subsidy rationalisation a step in the right direction, economists say, Emir Zainul, theedgemalaysia.com, 11 June 2024
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