KUCHING: An economic think tank proposes providing vouchers to lower-income groups as a temporary measure while gradually phasing out fuel and essential item subsidies over the next two years.
According to the Centre for Market Education (CME) economist Carmelo Ferlito, this proposal aims to alleviate the financial strain of heavy subsidy costs and transitioned to a more targeted system.
“We need to be careful with targeted subsidies, ensuring they’re worth the effort and cost, and implemented gradually,” said Ferlito.
He added that it is important not to get caught up in debates like rich vs. poor or big vs. small businesses, but to focus on a long-term, forward-thinking solution.
He acknowledged that long-lasting subsidies have created problems that cannot be resolved overnight.
“People who rely on them might resist change and it’s hard to know the fair price for things due to market distortions,” he said. The long-term goal should be to open up the market, allowing for more choices and potentially lower prices.
As an intermediate solution, Ferlito proposed giving lower-income individuals vouchers to help them afford essentials at market prices. Vouchers can also be applied to petrol, although this becomes more complex when businesses, rather than individuals, receive subsidies.
“It’s challenging to decide who should continue to receive subsidies as someone will always be unhappy,” Ferlito said.
He cited an estimated market price of RM3.50 per litre for petrol if all subsidies were removed, illustrating the difficulty in finding a perfect solution.
At the moment, RON95 fuel is capped at RM2.05 per litre and diesel at RM2.15 per litre, while RON97 is RM3.35 per litre at market price.
Targeted subsidies can be complex and costly, so he urged the need to develop the best system for the country rather than simply replicating models from other nations.
“It’s hard to pinpoint a single country as a role model as each has its own unique experiences,” Ferlito said, citing Saudi Arabia and Mexico as examples of countries that attempted to change their subsidies but were not very successful. Instead, he urged the policymakers to look inward and develop the best solution tailored to its specific needs.
Meanwhile, Petronas Dagangan Bhd’s (PetDag) petrol stations are likely to be the channel through which the government will implement its targeted fuel subsidy should the cut materialise.
Its managing director, Azrul Osman Rani, told New Sarawak Tribune that the group had been working closely with the government on implementing the targeted subsidy mechanisms for RON95 fuel and expected it to be introduced in the next one to two years.
“It’s not just us (PetDag). Everyone in the industry has been consulted by the government regarding its intention to implement the targeted subsidy. We have shared our views with the government in terms of our recommended implementation,” he said.
Azrul suggested that several methods could be used, including digital solutions such as e-wallets or through national identity cards (IC).
“Setel (Petronas’ payment app) could be one, and there could be others. I don’t think it will be a single point of solution. Our stance is that we are fully supportive because the intent behind the government doing this has sound economics. The subsidy burden for the government is huge, and we are recovering as a nation from the pandemic,” he said.
Last year, it was reported that the government began a pilot project to test the targeted subsidy mechanism. A potential method for deployment was indicated last week by top officials at the Ministry of Finance.
When asked if the government had communicated with PetDag about potential savings from targeted subsidies, Azrul said, “That depends very much on how the government wants to implement this. Because they have to consider who and what segment of the market they want to subsidise.”
In 2022, the Malaysian government spent RM50.8 billion to subsidize petrol, diesel, and LPG, with the M40 income group benefiting the most at 46 per cent, followed by the T20 income group at 32 per cent, and the B40 group at 20 per cent. Eliminating subsidies for the T20 group could result in savings of up to RM17 billion.
Without government subsidies, RON95 could be priced at RM3.22 per litre, which is 57 per cent or RM1.17 per litremore than the current price. A rough calculation shows that a person who spends about RM400 per month on fuel could end up paying up to RM626 without subsidies, an extra RM228 per month.
