Why Malaysia Reduced Its Fuel Subsidy

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Why Malaysia Reduced Its Fuel Subsidy

Budgetary concerns could exacerbate wealth gap issues.

Malaysia’s decision to slash fuel subsidies has led to an increase in the price of petrol products, which in turn angered many consumers but was applauded by economists and credit rating agencies.

Prime Minister Najib Razak defended the government action by citing the need to balance the budget. He said the subsidies for petrol, diesel and liquefied petroleum gas had already reached 24 billion ringgit ($7.4 billion) in 2012. He argued that a substantial amount of these funds could have been used to finance education, health, and other needs of the vulnerable segments of the population.

Najib echoed the assertion of economists, who insist that general fuel subsidies provide more incentive to the rich than the poor. “Currently, our subsidy system benefits everyone, including the higher income group and foreigners. Thus, we need to move to a more targeted subsidy system that caters to vulnerable groups,” Najib said.

The International Monetary Fund has published a paper which dismissed the fuel subsidy as a funding program that “aggravates fiscal imbalances” while “depressing private investments and reinforcing inequality” by benefiting higher-income households instead of protecting the low-income consumers.

But some experts and opposition leaders have voiced concern over the sudden fuel price hike. They noted that this is the first time the government has reduced subsidies without consulting the public first. They fear that it will trigger inflation in other commodities, to the detriment of the poor.

Chong Zhemin, the economic development bureau chief of the Democratic Action Party in Perak, described the price hike as a “betrayal to the people’s trust” and a “huge burden” on them.

Star Sabah (State Reform Party) Chief Jeffrey Kitingan is puzzled why Malaysia is raising petrol prices when the international oil price has fallen to its lowest in nearly three years. “When other countries are reducing petrol prices, the petrol hike shows that the Prime Minister and his fiscal team must have run out of ideas how to address the economic problems and fails to consider the inflationary and drastic burdens that will be imposed on the ordinary rakyat (people) particularly the lower income groups.”

Yin Shao Loong of the Institut Rakyat accused the government of failing to provide options for citizens. “Before cutting fuel subsidies the government should have ensured that public transportation was adequate and Malaysian wages were healthy enough to withstand a jump in prices.”

Political analyst Khoo Kay Peng shared that sentiment when he wrote that “any unilateral action to simply reduce subsidies without looking at other interventions e.g. improving public transport systems is not going to work either.” He agreed that the government has to implement some drastic measures to optimize the use of public funds, but he disagreed about the timing of the subsidy reduction.

In response, Najib assured critics that the higher fuel price would not disrupt the local economy. He also pledged to provide cash transfers known as 1Malaysia People’s Aid (BR1M) to the affected segments of the population.

While economists lauded Malaysia’s decision, consumers, especially car owners, were displeased to learn about the higher petrol prices. However those opposing the subsidy withdrawal today are fewer than those who protested higher petrol prices last year. Perhaps Malaysian authorities should take this cue to quickly fulfill their promise to the public, by re-channeling the fuel subsidy to basic social services intended for the poor. Otherwise, the higher petrol prices could further alienate the government from struggling middle-class and working-class citizens.