A TARGETED fuel subsidy programme cannot be implemented now, as the people will pay a high cost for it, the Petroleum Dealers Association of Malaysia said.

Although a targeted programme is better than allowing subsidy leakages, the timing – if introduced now – will cause a ripple effect that will see prices of goods across the board rise even further, said its president Khairul Annuar Abdul Aziz.

Government spending on fuel subsidy will have to increase but if the amount is too large, pump prices would still have to be adjusted upward according to market rate, he added.

“The B40 will need the targeted subsidy, hopefully the government can cope. But everything will also go up because of petrol, so they can’t do it now,” he told The Malaysian Insight.

Putrajaya spent RM11 billion on petrol subsidies last year, and this year, the amount is expected to increase by more than 170% – to up to RM30 billion, according to Minister in the Prime Minister’s Department Mustapa Mohamed.

Khairul said a leap in the fuel subsidy budget from RM11 billion to RM30 billion or even higher would be too much for the government to bear. 

Mustapa, who was speaking at the closing of the Sarawak Oil & Gas, Services and Equipment roadshow in Kuching, said the 2022 budget was presented on the assumption that the average Brent crude oil price would be US$66 per barrel. 

But the war in Ukraine and the subsequent sanctions on Russia by the West have led to much uncertainty and volatility in the commodities market, he said.

Mustapa said despite the hike, the fuel subsidy will continue as oil and gas remain essential drivers of growth and a key pillar of Malaysia’s development agenda. 

In recent months, there have been suggestions of a tiered subsidy as the government struggles to bear the cost.

International Trade and Industry Senior Minister Azmin Ali, in pushing for a targeted fuel subsidy system, said the owner of a BMW vehicle should not get the same subsidy as someone driving a Kancil car.

RON95 petrol is currently capped at RM2.05 per litre, RON97 is floated, presently at RM4.84, and diesel is capped at RM2.15. Pump prices are set weekly and the current prices are until June 29. 

Dealers will also suffer 

Petrol dealers, meanwhile, will have to suffer a quadruple whammy in the form of a smaller sales volume, higher merchant discount rate charges, higher overdraft and higher losses, Khairul said.

“Volume (of petrol sold) will go down because like it or not, people will reduce their purchase. They can’t suddenly pay double for fuel,” he said.

The merchant discount rate of 1% applicable to credit cards, which is absorbed by the dealers, will also now have to be adjusted upwards, meaning it will eat into their profits, Khairul said.

“Previously the 1% was based on RM2.05, now it will be double that price. That 1% is eating into 2-3 sen of the dealer’s margin.”

Dealers only make 15 sen in profit per litre of petrol and 10 sen for diesel, he said.

“We also have to buy fuel at more than double the cost. Our financing facility will now go up exponentially, overdraft will be more than double.

“This means that a lot of the dealers will not be able to sell fuel anymore. Mid- to low-volume stations will have problems surviving.”

Cash is best 

If and when the government decides to implement the targeted fuel subsidy, the best method will be via direct cash transfer, economist Calvin Cheng said.

He said this would be an effective mechanism as the government already has a database of B40 households through the Bantuan Keluarga Malaysia (BKM) initiative.

“The best way to implement a targeted fuel subsidy would be through the national cash transfer programme, Bantuan Keluarga Malaysia,” Cheng said.

“This targeted subsidy would be paid primarily through bank or financial account transfers to BKM recipients. 

“I think that this should be in the form of additional top-ups to the BKM benefit amounts that scale with global oil price benchmarks.”

Using the BKM for this purpose is also a good opportunity to upgrade the system, he said.

“It is important that the implementation of this targeted subsidy through BKM should also be an opportunity to revisit BKM targeting mechanisms and reduce targeting inclusion and exclusion errors that exist in the current system.”

The implementation of targeted subsidy is also not something new and has been implemented by numerous countries, Cheng added.

According to an International Monetary Fund report, countries like Armenia, Indonesia, as well as numerous African nations such as Ghana and Nigeria that have implemented targeted spending programmes to offset the costs of subsidy removals on vulnerable or lower-income populations. – June 26, 2022.