Lessons for Anwar from diesel subsidy cut

Subsidy rationalisation is central to Prime Minister Anwar Ibrahim’s economic agenda. – The Malaysian Insight file pic, June 19, 2024.

By Ooi Tze Howe

SUBSIDY rationalisation is central to Prime Minister Anwar Ibrahim’s economic agenda. The reason being simple as over the years, government tax revenue is at a historically low point as to the percentage of GDP. 

While the income of the government is declining, the government spending on subsidies increased tremendously from the range of RM40 billion in 2015 to RM60 billion during the Covid-19 pandemic period. 

The subsidy system, no doubt, is at the verge of collapse if subsidy rationalisation does not take place as soon as possible.

Yet, rationalising the universal subsidy system that has been implemented for decades is a complex maneuver, much more complicated than most people’s imagination. Many think that it is a simple policy move that removes subsidies from high-income groups and gives them to low-income groups. 

But in reality, subsidy rationalisation is a change of the nation’s economic ideology and principles, which will see Malaysia undergoing a drastic systematic switch, from an aggressive government intervention system to a full market economy.

Concurrently, Malaysia’s social security system will also undergo landscape changes under the new subsidy system as all the blanket subsidies that we enjoy thus far: fuel, electricity, goods and even our public healthcare, are a form of social safety net provided by the government to ensure a minimum quality of life. 

Changes to the subsidy system would mean changes to the social safety net framework that many have relied on to survive thus far.

Moving forward, Malaysians would no longer be protected under the economic shield and hallucination created by the government for decades, ie; stable fuel price, affordable essential goods and reasonable living expenses, as well as universal social safety net. 

We will be facing a new economic norm: the always-fluctuating fuel prices (and essential goods later) due to geopolitical influences; inflation spike decreasing the rakyat’s buying power and a deteriorating lifestyle.

Like it or not, the structural fiscal crisis leaves the government with no choice but to pursue subsidy rationalisation to curb unnecessary government expenses, to uphold social equality and to return the fiscal planning to a healthy status. 

But certainly Anwar’s government must take great due diligence and cautionary methodology to cope with the short-term negative socioeconomic impact following the subsidy rationalisation roll-out. 

The inaugural subsidy rationalisation plan on diesel reveals on June 10 has provided a good slate of lessons for the government.

In terms of timeline, the diesel subsidy rationalisation was implemented in less than one month after it was first announced by Prime Minister Anwar Ibrahim via a nationwide live telecast. 

Done in haste

This rapid implementation mode might help to deter diesel smuggling, which will be very aggressive ahead of the price hike, but it has put the general diesel user in shock, both economically and emotionally. 

Ironically, confidence and sentiment are the core to a successful implementation of subsidy rationalisation. 

You want the rakyat to remain calm and genuinely be confident that the government will take away your benefits and interest in a logical, fashionable and calm manner, with reasonable compensation. 

Clearly, the diesel subsidy removal has defied this core principle.

Economically, the diesel price increased more than 50% on the day the blanket subsidy ended. 

It left no room for the people, especially those in small medium enterprises, to make necessary adjustments to their costing structure and mitigate the losses incurred. 

Hence, the natural choice for those SMEs would be transferring the additional cost to the end customer, ultimately causing high inflation in the consumer market. 

The government would argue that the main diesel user has been given specific subsidies to curb the price hike under subsidised diesel control system (SKDS) 1.0 and 2.0, so there should be no reason for a price hike. 

Yet the list will always miss out on some secondary diesel users, such as tourism or construction companies that operate diesel transport to support their business operations. 

The spill-over effect of the price increase will still flow to the end consumers, regardless.

In a more robust approach, the government should have taken an incremental approach by adjusting the diesel price incrementally, 10% to 20% each time across at least a three-month time frame.

At the same time, it should have ensured that the promised targeted subsidy has been effectively delivered to the entitled people. 

This is crucial in building strong confidence towards the government subsidy rationalisation framework and it also buys time for the rakyat and business entities to adjust their operating model and lifestyles. 

It could also buy time for the government to debug the subsidy modus operandi in order to increase the diesel subsidy inclusivity, and refine the targeting mechanism throughout this period of time.

The government should also proactively organise consultation sessions with industries that are excluded under the targeted subsidy system to ensure they are added to the inclusion list.

Moreover, an appeal system should also be in place in order to let individuals refused the RM200 monthly subsidy to have the opportunities to further rectify and reconsider their subsidy application.

Be ready for RON95 float

All in all, the diesel subsidy rationalisation is a prototype and pre-simulation for the RON95 fuel subsidy rationalisation that will definitely happen in the near future. 

It also serves as the observation window of the rakyat to gauge the prime minister’s capability in driving critical policy changes. 

Should the government spend great effort and successfully rectify the policy error and system flaws, it will create a more positive public sentiment and social confidence when the RON95 fuel subsidy rationalisation finally lands. 

If not, it will cause more hardship for Malaysians if the RON95 subsidy rationalisation is done the same reckless way, and it will certainly deal a fatal blow to the prime minister’s political fate. – June 19, 2024.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.

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