Subsidy cuts to boost economy

PETALING JAYA: Savings from government subsidies can be used to spur Malaysia’s goal of becoming a high-income nation.

AmResearch senior economist Manokaran Mottain said that by reducing subsidies, the country would also appear more attractive to investors.

“It is the Government’s intention to reduce subsidies so the funds can be allocated to development. We have to move towards being a market-oriented economy. Investors think our economy is distorted,” he told The Star.

Manokaran said the money saved could be diverted to fund development projects, which would have a multiplier effect around the country.

“This will result in stronger growth as the country moves at a faster rate,” he said.

The current subsidy mechanism is no longer sustainable, as Government debt stood at RM362bil last year, or 54% of the GDP.

That is much higher than Indonesia’s 28%, and is approaching the Philippines 62%, he said in reference to Monday’s frontpage report in The Star of the Government’s plan to cut subsidies.

An open day on subsidy rationalisation will be held at the Kuala Lumpur Convention Centre on Thursday to get feedback on the proposal.

The savings would also reduce the national debt, he said, as the Government would not have to borrow as much for operational and development projects.

“If there are no reforms, we cannot move up the competitiveness rankings,” said Manokaran.

He said for people to accept the reduction, the Government would have to find a way to relieve their burden, such as reducing corporate or individual income tax.

The fuel subsidy takes up a huge chunk of government subsidies. “The subsidy is now 20 to 30 sen a litre, and I think it will be reduced gradually, not at one go,” he said.

According to a high-ranking source, one of the proposals from the Performance Management and Delivery Unit (Pemandu) subsidy rationalisation lab is to reduce the subsidy bill over five years by 30%.

A fixed date would be set for subsidy cuts to take place each year, which may mitigate panic buying and sudden price hikes.

According to a forecast on fuel prices by the Finance Ministry, the market price of fuel is around RM2.20 now and is expected to hit RM2.60 by 2016.

According to a GTZ International (Deutsche Gesellschaft für Technische Zusammenarbeit) fuel report last year, even the Somalians were paying more for fuel.

The average price of fuel in Somalia was US$0. 91 (RM3) per litre.

Idris Jala: M’sia must cut subsidies, debt by 2019 or risk bankruptcy

KUALA LUMPUR: Malaysia will be bankrupt by 2019 if it does not cut subsidies and rein in borrowings, said Minister in the Prime Minister’s Department Datuk Seri Idris Jala on Thursday.

He said that Malaysia's debt would rise to 100 percent of GDP by 2019 from the current 54% if it did not cut subsidies.

“We do not want to be another Greece,” he said when officiating the Subsidy Lab Open Day here to receive feedback from the public on subsidies.

Some of the recommendations of the subsidy rationalisation lab:

- Reduction of gas subsidy, resulting in an increase in electricity tariffs. However, most households will not be affected as the move will only affect those consuming more than 200kWh.

- Toll rates to increase in mid-2010 as per concession agreement except for highways without alternative toll-free routes.

-Outpatient treatment at public hospitals to be increased from RM1 to RM3. In-patient treatment will also increase, depending on the wards (Class One, Two or Three), from between RM3 and RM80, to between RM6 to RM160.

-Text book loan scheme and tuition subsidy aid to be abolished. Students will also have to pay for public examination fees.

-Foreign students will pay full fees at public universities.

-Local undergraduates and postgraduates to pay more in student fees, ranging from RM300 to RM800.

Meanwhile, Bernama reported Idris as saying that Malaysia was likely to become an oil importer as early as next year at the current rate it was consuming petroleum,

Malaysians continue to be among the highest fuel consumers per capita in the world fuel consumption habits pattern which generally has remained relatively unchanged despite increased oil prices in 2008.

He also said that approximately 70% of the government's liquid petroleum gas (LPG) subsidy went to commercial concerns and not the intended households.

About 30% of the cooking oil subsidy was also abused, he said.

He said the government is proposing to phase out the petrol subsidy gradually in line with its move to strategically position Malaysia's economy on a stronger footing to realise the aspirations of Vision 2020, which is to achieve a developed, high-income nation status.

"Subsidies are an inaccurate representation of trade," Idris said when officiating the Subsidy Lab Open Day here to receive feedback from the public on subsidies.

"In addition, they pose a fiscal burden that emerging economies such as Malaysia should move away from. As such, we desperately need an exit strategy for subsidies, as they are unsustainable," he said.

"In order to save the country, we need to increase our GDP, Malaysians need to be aware we are giving the highest subsidies - 4.6 per cent of GDP even higher than Indonesia (2.7 per cent) & Philippines (0.2 per cent)," said Idris, who is also the Chief Executive Officer of the Performance Management and Delivery Unit (PEMANDU).

Malaysia is one of the most subsidised nations in the world. Its total subsidy of RM74 billion in 2009 is equivalent to RM12,900 per household.

This covers the areas of Social (RM42.8bil), Fuel (RM23.5bil), Infrastructure (RM4.6bil) and Food amounting to RM3.1bil.

"All savings to reduce these savings are intended to reduce our deficit and debt of RM103bil in five years," he said.

Meanwhile, studies by Bank Negara have shown that inflation will rise to four per cent (2011-2012) and three per cent post 2013.

Subsidies only result in market distortion and they drain the government of much needed funds that could be better used for more strategic and pressing development projects for the rakyat, Idris said.

"The time for subsidy rationalisation is now," he said.

"We are reviewing the possibility of introducing a floating price mechanism, mitigation measures and assistance needed to put in place."

"We do not want to end up like Greece with a total debt of EUR300 billion. Our deficit rose to record high of RM47 billion last year."

"If the government continues at the rate of 12 per cent per annum, Malaysia could go bankrupt in 2019 with total debts amounting to RM1,158 billion," he cautioned.

Malaysians consume more fuel

PETALING JAYA: Malaysians are one of the highest fuel consumers in the region where even price increases have not deterred motorists.

Since 2004, they have consumed more than 400 litres per capita annually, which is much more than Singapore, Thailand, Indonesia, China and India. Singapore, which was ranked second among the list of six countries, only consumed 250 litres per capita in 2007.

India and China consumed under 50 litres per capita in 2007, according to data collated from the Finance Ministry, Domestic Trade, Cooperatives and Consumerism Ministry, International Energy Agency and Global Insight.

Even with fuel prices at its highest in mid-2008, when petrol was at RM2.70 and diesel at RM2.58 per litre, consumption still grew by 8% annually and almost 20 billion litres are expected to be consumed by the end of 2010.

As Malaysia practises a blanket subsidy on fuel, data made available to the Performance Management and Delivery Unit (Pemandu) subsidy rationalisation lab showed that 71% of fuel subsidy was enjoyed by the middle to high-income level groups.

Some 28% of those enjoying fuel subsidy earn more than RM5,000 per month, while 43% earned between RM2,500 and RM5,000.

Abuse of liquid petroleum gas (LPG), or cooking gas, has also contributed to an inflated subsidy bill. Some RM1.71bil was spent on subsidising LPG, to which only RM397mil or 30% are used by households.

It is believed that the rest of the LPG had been misused for commercial purposes or smuggled abroad.

The same issue affects cooking oil, where 70,000 tonnes are subsidised monthly but only about 70% are consumed by households.