THERE must be a clear strategy and roadmap to ensure that consumers and businesses will not be caught off guard should the government decide to implement a more targeted fuel subsidies programme amid rising world crude oil prices. 

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said communication is extremely important in order to gain the public’s support and acceptance.

“Timing is key, the exact or the right time to implement will remain unknown. At present, I do not think it is wise to cut fuel subsidies. It will do more harm than good as economic recovery is still at its nascent stage. 

“The government should indicate a plan to reduce fuel subsidies so that everyone would know what to expect going forward,” he told Bernama.

In the Dewan Rakyat sitting today, Finance Minister Tengku Zafrul Tengku Aziz said the government would review the fuel and cooking oil subsidy mechanism so that it will be better targeted towards aiding vulnerable groups.

The minister added that the implementation of targeted subsidies was expected to optimise the government’s financial resources and the savings achieved can be redistributed for more effective programmes to contribute to the well-being of the people. 

Afzanizam said if fuel subsidies are removed, it would have a significant impact on inflation.

“Our baseline forecast (for inflation) is 2.5% with no adjustment for fuel prices. If there is a reduction in subsidies to the tune of 10 sen to 20 sen, inflation rate could go higher to between 2.7% to 3.0% (this year),” he added. 

Global oil price hike to take greater toll on expenditure 

In a research note recently, CGS-CIMB Securities Sdn Bhd said the increase in global oil prices would impose a greater toll on expenditure than the gain in revenue. 

On a net basis, the brokerage firm said for every RM4 per barrel average increase in Brent oil above RM251 per barrel, the government would lose about RM410 million in net income, assuming the retail fuel prices remain unchanged. 

“Fiscal balance would be worse if we consider the impact from other subsidies as well. For instance, the government has kept the prices of liquefied petroleum gas (LPG) and cooking oil unchanged despite a sharp price increase in the global market. 

“The government can offset rising spending as elevated oil and gas prices would also mean that it could demand higher dividend payments from Petronas, as it has done before. In addition, revenue enhancement measures in Budget 2022, including a one-off windfall tax, could provide an offset,” it added. 

At the time of writing, Brent crude advanced 2.39% to RM476 per barrel.

Tengku Zafrul said the government has to cover a significant increase in subsidies for petrol, diesel, and liquefied natural gas (LNG) up to 10 times more than the RM2 billion for January 2022 from RM200 million the year earlier, amid a spike in world crude oil prices.

In January, the benchmark Brent crude rose to RM355 per barrel from RM233 per barrel a year earlier.  

Crude oil prices continued to climb on the back of the spiralling Russia-Ukraine conflict, driving the commodity’s price up sharply to more than RM418 per barrel, the highest level since 2014, that would lead to total petrol, diesel, and LPG subsidies to exceed RM2.5 billion a month, the minister said.

CGS-CIMB said the government’s decision to adjust fuel subsidies will go beyond fiscal factors, as the economic, political, and social impact would need to be taken into consideration. 

“Our main concern is inflation, as it tends to rise post fuel adjustments. In the past, there has been limited adverse impact on consumption and growth,” said the brokerage firm, adding that there were mechanisms for the removal of subsidies without severely affecting consumption.

“For instance, the government can increase targeted cash handouts while lowering subsidies thus mitigating the impact of higher prices on the most vulnerable (groups),” it added. – Bernama, March 10, 2022.