Are We Regaining Fiscal Space?

The government finally floated the price of diesel in the market at RM3.35 per litre. This is a 55.8% jump from the previously fixed price of RM2.15 per litre. According to the Finance Ministry (MoF), the real intention is to generate savings from apparent smuggling activities and leakages, which has cost the government more than RM14bil in 2023.

As the government is expected to continue providing concession to key economic sectors via a fleet card system as well as direct cash transfers to individuals, the real impact in terms of savings from the new diesel market price is expected to be minimal, as some 80% of diesel users are expected to continue to be subsidised. The MoF may also be adding other transport operators impacted by the jump to ensure that there would not be an impact on the price of goods and services.

The new market price is only applicable to Peninsular Malaysia, while the regions of Sabah, Sarawak and the Federal Territory of Labuan will continue to enjoy the subsidised price of RM2.15 per litre.

Based on the information provided by the government, the floating of diesel price to reflect the current market price will save the government some RM4bil annually. These savings in return are expected to be redistributed to lower income groups in the form of cash transfers as well to fund the recently announced salary increase for civil servants.

The question one would ask the government is where is the real savings from the subsidy rationalisation move? How would it impact Malaysia’s effort to reduce the budget deficit, which is expected to hit 4.3% this year?

As it is, while we had spent some RM14bil subsidising diesel, the bigger subsidy burden that Malaysia carries is certainly on RON95 petrol, which is another RM45bil thereabouts or approximately 2.3% of gross domestic product (GDP).

Malaysia therefore spends approximately RM60bil a year in providing fuel subsidies, which is almost two-thirds of the expected budget deficit level for 2024.

While the savings will be derived from a reduction in leakages or smuggling activities, the current market price of diesel at RM3.35 per litre is still not good enough for smugglers to discontinue their ways. 

The Borneo states are still adopting the full subsidised price of RM2.15 per litre, the current market price in Indonesia, which is equivalent to RM4.44 per litre, is more than double the price in these Borneo states. Hence, smuggling activities are likely to remain unabated if enforcement is lacking.

Up north in Thailand, the current diesel price is approximately RM4.23 per litre and based on the current market price in Malaysia, there is still an opportunity for smugglers to continue their activities as there is still money to be made from the price discrepancies. They are price arbitrageurs – somewhat like forex traders. I have sanctified their work!

Before the move to float the diesel price early, Malaysia’s price was the 10th cheapest in the world. With the jump to RM3.35 per litre or 71 US cents per litre, we are now the 21st.

Subsidy rationalisation as many see, is key to government reform efforts but leakages will not stop and unless we get a grip on enforcement, we are just “chasing the tail” or is it tale? I am not subscribed fully on subsidy rationalisation. This idea of targeted subsidy is very difficult to fix unless we have a well integrated and robust computerised system. In the end, we are actually going to increase inequalities even after the proposed B40 handouts!

Reference:

Regaining fiscal space via subsidy rationalisation, Pankaj C. Kumar, The Star, 15 June 2024