Stagger targeted subsidy initiatives

PETALING JAYA: As more clarity emerges on Putrajaya’s targeted fuel subsidy initiative this week, the glaring concern for Malaysians is to what degree would this affect domestic consumption, as well as the increase in prices of goods and services.

Economy Minister Rafizi Ramli had on Monday announced the rollout of the RON95 fuel subsidy programme from the second half of next year (2H24), aiming to better benefit those it should help.

He remarked that the current subsidy model, which has seen those in the top 20 (T20) income group receiving 53% of blanket fuel subsidies, as not sustainable.

Commenting on Rafizi’s case, Deputy Prime Minister Datuk Seri Ahmad Zahid Hamidi noted yesterday that on average, the T20 group utilises up to RM399 a month worth of RON95, while the B40 cluster in contrast only spends RM243 on the subsidised fuel monthly.

Economists have weighed in on the issue – both on the expected effects of the initiative as well as on the timing of its implementation – as Centre for Market Education (CME) chief executive Dr Carmelo Ferlito acknowledged the challenge of fine tuning the subsidy mechanism.

“We have always strongly advocated targeted subsidies, but we also understand that timing is a different issue as there is the issue of consensus.

“To be fair, this is a new step and there are not many precedents that can be used for inspiration,” he said.

He told StarBiz that the actual effect of targeted subsidies on prices of goods and services depends very much on demand elasticity, or put simply, how sensitive demand is to price changes.

To reduce the impact of the targeted subsidy rollout, he suggested it would be crucial for the government to make alternatives such as public transportation more available, while also advocating for purpose-vouchers, for a better and bottom-up allocation of subsidy support.

More notably however, Coface Services South Asia-Pacific Pte Ltd economist Eve Barre pointed out that the end of the blanket fuel subsidy scheme would occur at a time of high oil prices, with her anticipating that global crude oil price would range between US$90 to US$100 on average next year.

“This forecast is subject to upward risks, with more geopolitical tensions – including an escalation of the conflict in the Middle East – possibly driving prices even higher.

“Consequently, the introduction of targeted subsidies on RON95-grade fuel in the middle of 2024 could result in a significant rise in petrol prices,” she said.

She elaborated that higher petrol retail prices will directly affect transport costs, which account for almost 15% of Malaysians’ consumption basket, which would be coupled with “second-round” or secondary effects as these higher transportation prices would affect the supply chain of a wide range of goods and services.

Barre said that the extent of the impact on Malaysia’s inflation would depend on how the measure is introduced, before commenting that with Budget 2024 having mentioned an extension of diesel subsidies for vehicles carrying goods, it could help alleviate the secondary effects on prices of goods and services.

Nevertheless, she said although inflation is expected to accelerate, private consumption is set to keep increasing over the period.

“The announced enhancement of schemes helping to cope with the cost of living – such as the Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara) and the Rahmah sales programmes – will ease the negative impact of rising petrol prices on low and middle-income households,” she said.

Furthermore, Barre believes that the rise in fuel prices would actually be fully felt by the 20% top-earning households, whose consumption is less sensitive to price variations.

As a silver lining, she said as the economy is set to start recovering from 2H24, better exports and manufacturing prospects could support employment, and in turn, consumers’ confidence and spending.

Executive director and veteran economist at the Socio-Economic Research Centre (SERC) Lee Heng Guie said concerns about cost of living pressure and its impact on the economy arising from the elimination of price subsidies warrant a sequencing and gradual pace of subsidy rationalisation and price reforms.

While saying the government should not avoid a gradual adjustment in retail prices, he proposed the government educate the public about wasteful consumption, and the unsustainable nature of a blanket and uniform price subsidies.

“Timing of the reform is crucial to effectively mitigate the impact on the economy. The government can capitalise on the somewhat easing inflationary pressure and softening global oil prices to implement subsidy reform and hence minimising the impact on the economy.

“Mitigating measures such as cash assistance or token solely for subsidised items can be given to the targeted low-income households,” he said, echoing Ferlito’s view.

At the same time, Lee estimates that the subsidy rationalisation on fuel and electricity tariff could lead to an increase in inflation of between 2.8% to 3.5% next year, against the 2.5% forecast for the whole of 2023.