PUTRAJAYA cannot leave it to the last minute to reveal how the diesel subsidy, on which small- and medium-sized enterprises (SMEs) are heavily reliant, will be rationalised, a trade group said.

SME Association of Malaysia secretary-general Chin Chee Seong said targeted subsidies will have a cascading effect on the transport and logistical costs of SMEs.

“There will also be inflationary pressures, as higher transport costs will be passed on to consumers, potentially reducing demand and affecting SME revenues,” he told The Malaysian Insight.

He added that higher diesel costs could reduce competitiveness as local SMEs may struggle to absorb higher operational costs and be forced to downscale.

“There will be cash flow issues as SMEs may face difficulty managing their finances and investing in growth and innovation,” he added.

Chin said the government could provide targeted support for SMEs in the form of grants, low-interest loans, and subsidies for energy-efficient technologies.

He said SMEs should be encouraged to adopt more energy-efficient practices and technologies that will result in long-term cost savings and sustainability.

Chin foresees obstacles and early problems for the diesel rationalisation plan.

“Designing a system to accurately target beneficiaries is difficult, requiring robust data handling and complex algorithms. Integrating this new system with existing infrastructure can be time-consuming,” he said.

Chin said a failure to plug leakages could harm the rationalisation plan. He emphasised the need for strong safeguards to prevent fraud and misuse, as subsidised fuel could be diverted to the black market.

He noted the importance of managing resistance as the public and businesses could resist the changes due to cost concerns. He said awareness, education, and stakeholder buy-in are essential for smooth implementation ofthe plan

Chin said the government must make sure to keep accurate data with reliable technology infrastructure, especially in rural areas. 

“A robust framework for oversight and enforcement is needed to deter misuse and ensure compliance with regulations,” he said.

Economic stability

Chin said diesel rationalisation could play a vital role in creating economic stability while reallocating resources to essential sectors such as healthcare, education, and infrastructure, indirectly benefiting the SME sector.

He added that excluding Sabah and Sarawak from diesel subsidy rationalisation will significantly benefit users in these regions, especially the rural and remote communities.

“The government aims to protect these vulnerable populations from sudden price increases and maintain their access to essential transport and services.

“Additionally, the government may want to observe the effects of subsidy rationalisation in Peninsular Malaysia before extending similar measures to East Malaysia,” he said.

Last week, Prime Minister Anwar Ibrahim announced that diesel subsidies will be rationalised in the peninsula, a move that could save the government around RM4 billion annually. To prevent any drastic increase in the prices of goods and services, subsidies will be given to traders using diesel vehicles.

World Bank lead economist for Malaysia Apurva Sanghi said the diesel subsidy rationalisation sets the stage for subsequent reforms of the RON95 petrol subsidy. He said the success of RON95 reforms depended on factors such as timing, how ensuing price increases were handled, and how the matter was communicated to the middle class.

“Diesel reforms come on top of other recent reforms such as the rationalisation of electricity subsidies for large-scale users and water tariff reforms. It sets the stage for addressing the elephant in the room – RON95 subsidies, but what will help it stick?” he said in a series of posts on X.

Apurva said petrol reforms can lead to one-time increases in prices, adding that prices could rise by between 5% and 9%, depending on global energy prices. “Timing becomes more important. Introduce RON95 reforms when energy prices are relatively low,” he said.

He said RON95 reforms would affect the middle class the most.

“Using some subsidy savings to help them while other complementary reforms will secure their buy-in and ensure overall success 

“Malaysia is getting serious about subsidy reform and RON95 is the litmus test.” – May 27, 2024.