SINCE February 2020, domestic fuel prices were set to be determined by a managed float price setting mechanism. After a year of implementation, the rising global crude oil prices had led the government to cap the RON95 and diesel at RM2.05 and RM2.15 per litre respectively.
The price cap is being maintained until today, notwithstanding the higher volatility in global crude oil prices.
The global crude oil price has surged to a high of US$120 (RM507) per barrel, almost double the price before Russia initiated the invasion of Ukraine.
With the global oil price skyrocketing, the government estimates that the actual cost of RON95 to have reached RM4 per litre by end-March. This means that the government has to subsidise the huge gap between the retail price and the actual market price. If the global oil price were to stay above US$100 (RM422) per barrel, the fuel subsidy is expected to reach RM28bil in 2022 compared with RM11bil in 2021.
Between 2012 and 2014, when Brent crude oil averaged at nearly US$100 (RM422) per barrel, the cost of subsidies and social assistance doubled to an average of RM42.4bil per annum from RM23.1bil in 2010. However, this was partly offset by the increase in petroleum-related revenues.
Taking a cue from this, we may now need to allocate an additional RM25bil for subsidies and social assistance compared with RM17.4bil initially allocated under Budget 2022.
Although the government is expected to collect additional revenue from the rising oil price, it also needs to spend a considerable sum in the form of fuel subsidy. In this regard, providing blanket subsidies is not the viable solution especially at a crucial time when the country is gradually recovering from the pandemic-induced downturn.With the already widening fiscal deficit, the government is now under pressure to achieve its variety of goals with limited resources.
Every ringgit spent on one particular cause is a ringgit less for another. As such, the government should be more careful in choosing between objectives or balance them.
Targeted subsidies towards a prudent budget
Efforts to rebrand the fuel subsidy are still proceeding, especially after the recent announcement that the government will review the mechanism so that it will be targeted to aiding and subsiding the vulnerable groups.
As such, the implementation of subsidy should be by way of a secure system that accurately identifies the B40/50 group. This is to ensure that the subsidies are channelled to those in need to achieve the maximum impact.
In early 2019 when the oil price was hovering between US$60 and US$75 (RM253.56 and RM316.95) per barrel, the then government considered adopting a cash hand-out method to the lower income households.
However, this did not come into effect as the RON95 was capped at RM2.08 per litre and maintained until the Covid-19 pandemic hit, the global oil price was below US$50 (RM211.30) per barrel in early 2020.
Under the purview of the government, the petrol subsidy disbursement via a cash hand-out method will go through an improved database, one that has updated information extracted from the Bantuan Prihatin Rakyat (BPR) and road transport department.
For now, the government may reconsider the cash hand-out mechanism and introduce an increment of RM50 into the BPR to account for the petrol subsidy in the short run to simplify the implementation, as BPR’s mechanism is already in place and operating well.
However, in the long run, it is prudent for the government to adapt an improved instrument to distribute petrol subsidy points via eligible recipients’ MyKad.
Ideally, this should come with an automatic renewal at the end of every month instead of cash disbursement to ensure it reaches those who need it the most.
With the system, misconduct is mitigated as no one would lend his or her MyKad to another person at the risk of losing subsidy points.
For petrol station employees to verify the recipients, a MyKad reader integrated with software designed to accommodate such redemptions should be installed.
Despite the announcement of a targeted fuel subsidy, the government has yet to reach a final decision on the removal of the price cap of RON95 and diesel once the targeted subsidy comes into effect.
If the government does adopt the “MyKad-petrol” system, the price cap on the retail pump prices may be removed.
Instead, the price of petrol will be determined by the managed float price setting mechanism, leaving those who are entitled to the subsidies to enjoy the benefits of a lower price cap.
However, the government may also want to consider increasing the price cap for fuel subsidy if the oil prices continue to increase in the upcoming weeks.
Perhaps, the cap can be raised to RM2.20 per litre for RON95 and RM2.30 per litre for diesel. Raising the ceiling will also partly mitigate the government’s fiscal burden in the near term.
Need tweaking
Malaysia used to have one of the largest fuel subsidy bill in the world. Fundamentally, fuel subsidy are not sustainable in the long run as the economic impacts are severe. This includes market distortions, smuggling, fiscal burden, poverty, and income inequality.
At this juncture, it is worth stressing that the MyKad-petrol mechanism would potentially eliminate the smuggling of subsidised fuel or other leakages as it is a consumption-monitoring system that would be linked with the government body managing the subsidy.Cash disbursement can be a good policy. But in the long run, it has to be assessed in the context of other budgetary expenses, and should be within the bounds of what Malaysia can afford as a whole.Nevertheless, the fuel subsidy reformation is not merely about removing the subsidy, but to ensure the effectiveness and long- term sustainability as it must follow a comprehensive strategy that includes fiscal relief.
According to the Finance Ministry, the RM2.05 per litre retail price of RON95 in Malaysia is relatively low compared with oil-producing countries such as Saudi Arabia, where it is RM2.59 per litre, and Indonesia at RM3.74, Thailand at RM5.63 and Singapore at RM9.16 per litre. The significant price differential is also due to the imposition of fuel taxes by the respective governments. This is to reduce fuel consumption and encourage people to switch to more affordable public transportation.
In Malaysia, the taxation is only set for RON97 of which price is determined by managed float price setting mechanism. While thinking of a targeted subsidy for vulnerable groups, the government may also consider imposing fuel tax for the people from the higher income bracket given that the consumption rate is higher among the high-income individuals compared with those earning less.
To put it simply, “subsidy for the needy, tax for the rich” approach should be thought through to save the government from the ballooning fiscal deficit as well as to channel the additional revenue for other purposes.
In the long run, there is a better way to reduce dependencies on fuel subsidies. The government is already undertaking huge transport expansion projects. In effect, investing in public transport could be a viable way to benefit the B40/50 households directly. This reduces traffic congestion, and it is also a cost-of-living relief.
Today, commuting via public transport has become relatively cheaper than owning a car, especially if one takes into account the cost of ownership, insurance, road tax, maintenance and related expenses including fuel, parking, and toll.
Manokaran Mottain has been an economist for over 30 years and he is currently the director of Rising Success Consultancy Sdn Bhd. He has been appointed as the industrial expert to Universiti Kebangsaan Malaysia. The views expressed here are the writer’s own.