The 2022 Economic Report estimated the expenditure for subsidies and social assistance in 2022 (excluding measures announced during the tabling of the budget) at RM17.35 billion. This is up from RM16.7 billion in 2021. Fuel has long been a subsidised commodity in Malaysia, but it was only in early March, the first time since 2008 that the government agreed to subsidise poultry players. According to the Minister of Finance subsidies may total RM 71 billion in 2022 with fuel subsidies alone amounting to RM 30 billion.
Crude oil prices have been climbing. Since last December, Brent crude gained 32% to US$91.38 per barrel similar to levels last seen in 2014. For 2021, crude oil prices hovered at US$51.80 per barrel and US$85 per barrel, averaging US$70 per barrel.
Source: https://www.malaymail.com
Analysts predict that crude oil prices will continue to trend higher, surpassing US$100 per barrel. Two main events have resulted in a steep rise in crude oil, the first being increased demand on global economic rebound and the other is the geopolitical tension between Russia and Ukraine.
While crude oil prices have risen dramatically, consumers in Malaysia have continued to enjoy retail fuel prices that have remained unchanged for 11 months now. Since February 2021, the price of RON95 and diesel has been capped at RM2.05 per litre and RM2.15 per litre respectively.
The RM17.35 billion “subsidy and social assistance” estimated for 2022, includes cash handouts, a cooking oil stabilisation scheme, education assistance and scholarships, interest rate subsidies, electricity subsidies, paddy plantation subsidies, flour subsidies, LPG subsidies as well as farmer, fisherman and livestock incentives.
According to a recent statement by Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz, spending on fuel subsidies may reach RM28bil this year if global oil prices continue to trend above US$100 (RM422) per barrel.
Will fuel subsidy work? In its present form, and in the short term, yes, at least from the perspective of alleviating the financial pain of B40 and M40 groups. In the long term, no, because it will put pressure on the government’s fiscal position. Subsidies give a false impression and eventually result in violence like in Sri Lanka. There is a need to “wean-off” subsidies, otherwise we have a poor fiscal position and a false sense of comfort. This is one distortion we can live without it!
References:
The rising subsidy bill quandary and its implications, Supriya Surendran and Esther Lee, The Edge Malaysia, 3 March 2022
Will targeted fuel subsidies work? Firdaos Rosli, The Star, 9 April 2022
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