ECONOMIC experts are urging Putrajaya to tread slowly when rolling out its social assistance mechanism based on net disposable income slated for next year.

They all agreed that the removal of subsidies should be made gradually over a predetermined transition period to cushion the economic pains that could trigger public anger.

Universiti Utara Malaysia’s (UUM) Lim Hock Eam said the transition period is a necessity.

“There are still a lot of uncertainties in the country and the world economy,” he said.

“If the removal of subsidies is a must, then there should be a series of exit packages implemented gradually,” he told The Malaysian Insight.

Lim said for example, the removal of the subsidy could start next month at only 10%, then another 10% at another determined period and so on until it is completely removed.

“A phased elimination of subsidies would be a better option,” he added, alluding to the difficulties many governments the world over had experienced in subsidy reform.

Their worst fear is a political backlash as consumers will feel the pinch of rising prices, which often leads to widespread public protests.

Lim said in Malaysia, the backlash is real “because the subsidies have been going on for too long”.

He gave the example of a smoker who has been puffing for so long that when he has to quit, he finds it rather difficult to do so.

Economic analyst Koong Lin Loong agreed on the government’s proposal to tweak the subsidy policy under a new targeted subsidies approach.

He said to him, the one area of interest in this new approach should be in fuel subsidy.

Like Lim, Koong also said any new mechanism must be rolled out gradually.

“There should be a soft landing. It should not be removed all at once.”

Koong said the government should also learn from past experiences, such as when it suddenly raised the electricity tariff for large enterprises.

When the government did that, it caused the production cost of these large companies to skyrocket.

Similarly, he said, if the fuel subsidy is removed completely in one go, many small businesses will see their costs spike suddenly, and transport fees of haulage companies will also skyrocket.

“That, in turn, will exacerbate our inflation problem.”

UUM’s Lim said from an economic point of view, there must be justification for subsidies to continue.

He gave subsidies on education as an example.

“From primary school to university, our education is to a large extent greatly subsidised by the government.

“Education brings great benefits to the government in that its people are highly learned.

“As education brings tangible benefits, then the subsidy has to be continued.”

He said on the other hand, there are also things that are subsidised but have no returns.

Lim said the government would be taking a big step forward from unrestricted to targeted subsidy and making sure the subsidies only benefit the people who need them.

“The government says there are some data to rely on. I still believe it will be very difficult to implement.”

He said for one, it is difficult to determine who needs and who doesn’t need assistance.

“People’s economic fortune could change over time. Today, they might be in poverty and need help.

“Tomorrow they could be rich. So will the assistance that he’s getting all these while going to cease?”

One solution Lim has is to give cash subsidies to those who qualify for goods where subsidies are withdrawn.

In the long run, Lim said the government has to tackle the root of the problem – improving the income capacity of the poor.

He said the government could not go on forever giving subsidies to keep bringing prices down.

Lim said the cost of the cash subsidy approach would be relatively low.

On June 14, Economy Minister Rafizi Ramli disclosed that the government is embarking on different measures from the previous government, including policies in terms of financial aid and subsidies, to ensure better assistance to the people.

Rafizi said the government must first ensure that all infrastructure is ready and tested before deciding on the level of income eligible for assistance.

He said the government is currently trying to reduce the errors in subsidies caused by the separate salaries, but this all still needs to be implemented in phases.

Prime Minister Anwar Ibrahim said on June 15 that the government wants to implement a target-based subsidy mechanism as soon as possible, yet realises that developing mechanisms such as for diesel and RON95 is quite complicated.

He said the government is considering the relevant documents and proposals of the mechanism to ensure that the target-based subsidy mechanism can be implemented more effectively and quickly.

“We are working in that direction and there is actually a team now working on this and providing some advice, but we are not quite sure about the implementation.” – June 23, 2023.