RISING fuel prices is tempting Putrajaya to increase fuel subsidies, but this is counterproductive to Malaysia’s goal of having net zero carbon emissions by 2050, economists say.

The best way is to give the subsidies in a targeted manner, with focus on the B40 lower income group and the M40 group.

The budget that is allocated for the subsidy should instead be used to develop the public transport system, in line with Malaysia’s effort to go green, they said.

Their comments follow Finance Minister Tengku Zafrul Tengku Abdul Aziz’s reply in Parliament last week that fuel subsidies are expected to increase to RM28 billion this year, compared to RM11 billion last year, due to Russia’s war in Ukraine.

Dr Yeah Kim Leng of Sunway University said that while Malaysia is enjoying increased revenue as an oil producing nation, it would not be prudent to use this revenue to subsidise non-renewable resources.

“The subsidy can be used for more productive purposes such as upgrading public transportation and education,” Yeah told The Malaysian Insight.

“Malaysia’s fuel price is still very cheap due to subsidies. In other countries the prices adjust daily.

“We have to adapt to green growth and reduction of pollution, in line with the net zero emissions goal.”

Malaysia announced its carbon neutral by 2050 goal last September, after Ismail Sabri Yaakob became prime minister, and has made it part of the 12th Malaysia Plan.

Recently, Transport Minister Wee Ka Siong announced that Kuala Lumpur may start charging congestion fees for entering the city centre, the likes of London, once the Mass Rapid Transit Line 3 (MRT3) is completed in 2030.

Fuel prices have remained high, bolstered by the price of crude oil which has remained above RM419 per barrel.

The war in Ukraine has pushed prices up for fear of global shortage.

Zafrul told Parliament that at RM28 billion a year, Malaysia will spend RM2.5 billion a month on fuel subsidies.

At the moment, consumers only pay RM2.05 for RON95, but the market price for March is RM3.70 per litre, meaning the government is subsidising the difference of RM1.65 per litre.

For diesel, consumers only pay RM2.15 per litre, while the actual cost has exceeded RM4 per litre.

RON97 which is not subsidised, costs RM4 per litre this week.

Prof Rajah Rasiah of University Malaysia said that surplus should be used to alleviate poverty and agreed with the targeted subsidy approach.

“Given that Malaysia is a net oil and gas exporter, rising prices means that the country should enjoy a further expansion in trade surpluses.

“But using the surplus to increase subsidies will not see change in consumers’ conduct to shift from fossil fuels to renewable energy sources, which may slow down Malaysia’s initiatives to become carbon neutral by 2050.”

Targeted subsidies

Rajah said a better mechanism is for the government to implement targeted subsidies as the rich can afford to pay market rate for their fuel.

“That is the argument for efficiency and equitability. The rich consume more, they pay more.”

“That is the more equitable use of resources. No need to allocate such a huge amount for wasteful spending.”

Rajah said one way to provide targeted subsidies is by providing fuel vouchers.

“Targeted groups in Malaysia should be given fuel vouchers to purchase RON95 and diesel.

“Giving too much subsidies may lead to economic leakages that will be detrimental to the country,” Rajah said.

“The downside of such subsidies can be harmful to the economy as it will expand further economic leakage through smuggling, free riders, foreign tourists and those not targeted.

“Attempts to check economic leakage would mean that fuel prices in the country should reflect international prices, while taking into account the lower income group.”

While fuel prices in Malaysia are among the cheapest in the world, it is even cheaper in many other countries, Rajah added.

“Diesel prices on March 14, 2022 in Iran, Venezuela, Libya, Syria, Saudi Arabia, Russia, Algeria, Angola, Kazakhstan, and Turkmenistan were way cheaper than in Malaysia.  

“Diesel was, however, cheapest in Malaysia among the Southeast Asian countries, which is the relevant comparison to consider on smuggling effects from economic leakage,” he said.

The government said that the huge gap between the retail price and the market price of fuel may cause a much higher subsidy leakage risk caused by the smuggling of petroleum products. – March 19, 2022.