Economists tell why Malaysia urgently needs subsidy reforms

 

Prime Minister Anwar Ibrahim recently said that the targeted diesel subsidies for Peninsular Malaysia would save the government about RM4 billion a year. (Bernama pic)

PETALING JAYA: Malaysia urgently needs to implement subsidy reforms, particularly for diesel and petrol, to boost the government’s coffers and allow for federal funds to be more efficiently allocated, say economists.

Senior lecturer Goh Lim Thye of Universiti Malaya said government subsidies often cause market distortions, which lead to the inefficient use of government resources and overconsumption of a subsidised good being encouraged.

This also weighs heavily on the government’s annual budget, he said, limiting its ability to invest in other more critical areas such as health and education.

“Fuel subsidies tend to disproportionately benefit higher-income households who consume more fuel, making them an ineffective tool for social equity,” he told FMT.

Goh also pointed out that Malaysia’s national debt had reached 62% of the gross domestic product (GDP) and was still rising, while Putrajaya had aimed to slash its fiscal deficit – last year, the fiscal deficit came to RM91.4 billion, or 5% of the GDP.

“This was partly due to subsidy spending. This year, Malaysia aims to reduce its fiscal deficit to 4.3% of the GDP; rationalising subsidies would play a significant role in achieving this target,” he said.

Bank Muamalat Malaysia Bhd chief economist Afzanizam Abdul Rashid said the targeted subsidies would “reorganise” financial aid to the rakyat and prevent leakages, with more than half of fuel subsidies enjoyed by those in the T20 upper income group.

He added that subsidised fuel in particular had fallen victim to smugglers and foreigners, when it should be meant for Malaysians.

“The country needs money to develop its own economy. Therefore, the government cannot afford any form of wastage as this represents a loss of opportunity where the money should be used to benefit its own citizens.

“The subsidy rationalisation will result in savings which can be used to distribute cash assistance directly to those who are deserving, such as recipients of the Rahmah aid schemes and early schooling aid.”

Afzanizam also said subsidy savings would provide greater allocations for education, health services and infrastructure, helping to improve national productivity in the medium to long-term, thus yielding economic benefits.

Nazari Ismail of Universiti Malaya said the reality was that the government simply did not have the funds to continue subsidising fuel for everyone, with national debt growing annually.

He acknowledged that slashing subsidies was a widely unpopular move among the masses, and that previous governments were reluctant to do so because of the political implications and potential impact on prices of goods and services.

“We should realise that the savings from fuel subsidy rationalisation will enable the government to prioritise its expenditures and ensure that it helps those who really need assistance.”

Prime Minister Anwar Ibrahim announced on May 21 that the Cabinet had agreed on targeted diesel subsidies for Peninsular Malaysia, which would save about RM4 billion a year.

Anwar, who is also finance minister, said 10 types of public transport vehicles and 23 types of goods transport vehicles will continue to enjoy diesel subsidies.

The finance ministry has also unveiled a RM200 cash diesel subsidy aid programme for eligible individuals.

In February, domestic trade and cost of living minister Armizan Mohd Ali said Malaysia faced daily losses of RM4.5 million due to three million litres of diesel being smuggled out of the country every day. - FMT