Fuel Subsidy Rationalisation Can Elevate Everybody’s Woes

Reeling from the pandemic, the country is faced with another crisis on the horizon, the Russian invasion of Ukraine and the effect on the global economy including Malaysia. The Omicron Covid-19 variant in Malaysia is not expected to pose a major threat to GDP growth if the country does not resort to imposing a nationwide total lockdown as it did in the middle of last year.

However, as of March 5, 2022, it was announced that a total of 32, of 209 cases were reported with active cases standing at 305,01, up 25.4% compared to 14 days ago. Health experts say that with large numbers of people vaccinated, the risks that the pandemic will have on the people and the economy is minimal.

It would however be hard to tell if the government would resort to a shutdown if the hospitalisation rates continued to increase as the average occupancy rates of the intensive care units in the hospitals now stand at about 40%. Going forward if the present rates can be maintained, there would not be any need for a lock-down.

Economists in think-tank have projected Malaysia’s economic growth rates this year to be between 5.2% and 5.5% and private consumption to be between 5.9% to about 6.5% which is lower than the government’s forecast of 7.3% after taking into consideration of inflationary factors and the war in Ukraine. The government had also reiterated its stand that it would not resort to a total lock-down but would only resort to a targeted lock-down.

If the problem of the pandemic is not enough, we have another man-made crisis, the war in Ukraine which is accelerating at almost insane speed posing greater risks to the world economy.

The global supply disruption in oil and other essential commodities is expected to exacerbate the inflationary pressures on the Malaysian economy although economists have chimed in to say that in short-term Malaysia being the next exporter of crude oil is likely to benefit the economy with the additional revenues of RM 10.4 billion into the coffers.

But this has to be largely offset with additional fuel subsidies. The total amount of subsidy that was announced in the 2022 budget was RM31 billion of which approximately RM18 billion was on fuel subsidy.

Going by the increase in oil prices from an average of US$66 per barrel last year to US$100 per barrel, the government would have to spend a conservative additional RM12 billion on oil subsidies despite raking in an additional $10 billion in oil revenues from the increase in crude oil prices.

At a time when businesses are faced with increasing cost pressures, it would not be prudent for the government to pass on these additional costs to the business, but it can have a subsidy rationalisation plan.

This would give the government sufficient fiscal space to build its resources and subsidy reforms could be part of a broader fiscal consolidation although its implementation may be fraught with challenges considering the present economic and political climate.

A fuel subsidy rationalisation plan would not hurt the government’s coffers and at the same would not bite into the wallets of businesses and the ordinary people

The government should consider reducing fuel subsidies in stages to allow for a gradual increase in pump price although, the current cost increases for businesses and high inflation pressure on consumers could have restrained the government from adjusting the fuel prices at this juncture.

The government should consider the rationalisation plan and execute it while we hope the war in Ukraine would not linger for a long period.

Previous articleTrading In O&G Sector Is Expected  As Oil Price Shoots Above US$120
Next articleDIA2022 Organized In Segamat


Please enter your comment!
Please enter your name here