Economist: Gradual rise of inflationary pressure from subsidy rationalisation should be manageable with targeted incentives

KUCHING (Nov 1): The gradual rise of inflationary pressure due to fuel subsidy rationalisation in the country should be manageable as the government will introduce higher targeted incentives, said economist Datuk Madeline Berma.

The Institut Masa Depan Malaysia (Masa) senior fellow pointed out that subsidies are very costly for the government, with diesel subsidies alone costing RM14.3 billion in 2023.

“With a targeted approach to subsidies, the government expects to save RM4 billion annually,” she told The Borneo Post.

Apart from reducing costs, she said the government is looking to reduce market distortion or blanket subsidies in order to stamp out leakages and smuggling.

“It (subsidy) makes fuel prices in Malaysia much lower than its neighbours (Indonesia, Singapore, and Thailand). This encourages criminals to smuggle cheaper fuel out of Malaysia, causing financial losses for the government but rationalisation of subsidies, it will increase efficiency,” she said.

She pointed out that the billions of ringgit spent on subsidising fuels had squeezed the fiscal space, resulting in fewer resources for the government to invest in education, healthcare, and public infrastructure.

Madeline explained that the rationalisation of subsidies is not intended to reduce support for the people but to move away from blanket support, which was previously also enjoyed by high-income groups.

“According to the government’s plan as outlined in Budget 2024, the savings from the implementation of targeted subsidies will allow the government to increase the total allocation for Sumbangan Tunai Rahmah (STR) – a government-initiated cash aid programme – from RM8 billion to RM10 billion,” she said.

“This increased allocation translates into a higher maximum rate from RM3,100 to RM3,700. The higher STR allocation will also help to boost consumer spending this year, given the higher propensity to consume among the lower-income groups.”

However, she cited the Global Market Research report on June 11, 2024 saying the diesel subsidy rationalisation in Peninsular Malaysia would have limited impact on government finances.

She said while saving RM4 billion in government spending, it would only narrow the fiscal deficit by about 0.2 per cent of gross domestic product (GDP).

“Also, it only had a limited impact on inflation (+0.1 ppt) due to diesel’s negligible share in the consumer price index basket.

“The government will have to implement more subsidy cuts to narrow the fiscal deficit to 4.3 per cent of GDP,” she added.

Malaysia began its targeted fuel subsidy rationalisation, starting with diesel, in Peninsular Malaysia on June 10 with the retail price set at RM3.35 per litre from RM2.15 previously.