Monday, October 9, 2023

Can Malaysia still afford petrol and diesel subsidy?

This October 13rd, Prime Minister and Minister of Finance, Dato Seri Anwar Ibrahim will be presenting the budget for 2024. 

Politically explosive issue will be the rising cost of food and the shortage of certain food items. However, the bigger challenge for Malaysia and the opposition will likely evade or detour the issue is the current fiscal situation and inherited RM1.2 trillion debt from the previous PN governments. 

It limits Anwar's spending options and raise the urgent need to cut current subsidy spending of RM81 billion. That is equivalent to almost 20% of the RM388.1 billion revised government expenditure for 2023 budget and 28% of the operating expenditure

If the subsidy allocated could ideally be reallocated for development, it means the expenditure to expand existing facilities, infrastructure and new initiatives could be raised by more than 80%. 

Some 60% of the subsidy is for energy

The depressing global economic prospect, and tense geo-global security situation in Europe and Middle East could push oil prices higher. 

The government coffer will be more challenging because Malaysia export its Tapis blend and import lower quality crude for retail petrol.

Energy subsidy need to make way to improve public education and healthcare. 

Unstable oil market

For this blogger, this is a position change from the critical political economic view expressed in the 2008 posting (use VPN for access) at the time then Minister for Domestic Trade, Tan Sri Shahrir Samad announced a 70 sen hike in pump price. 

The fiscal situation is critical and the international economic environment is far from rosy. The interest of the country must come first before ideological or partisan interest.  

The Shahrir Samad pump hike in 2008 occurred at the time crude oil prices begin to increase in volatility, trending up and shooting the roof. Over 20 years, crude oil prices remain high (temporary drop during lockdown) and the market continue to be volatile. 

The gut feel from looking at the chart is a bullish Elliot Third wave in the making for 2024.  

In the past, subsidy was the instrument used to maintain stability and affordability of retail energy prices. However, money is a scarce commodity, more so during these trying times, and worsen with the number accumulated over the years.   

Elephant in the room

An extract taken from Dr Yeah Kim Leng gives a good picture of the current cost of energy to the government. 

The biggest chunk of our subsidy expenditure comes from fuel and electricity subsidies. Together, these two items accounted for RM60.6 billion, or over 90%, of the total subsidy bill. Our subsidies for fuel (diesel, petrol and cooking gas) alone came up to about RM50.8 billion (or 77%), while our electricity subsidy amounted to RM9.8 billion (or 14.8%). What does this mean for the rakyat?

Put it this way: with RM60.6 billion, the government could potentially have built the equivalent of 700 schools or 120 hospitals per year. Try to imagine what a difference that would have to the country – especially those in rural areas.

To further highlight the comparable size of energy subsidy is the chart below from BNM statistics:

For 2022, government paid 6 times more for energy than education and 14 times more than for healthcare

Fuel for transportation takes up almost one third of the energy bill, thus is the convenience for private vehicle use more important than education and healthcare? 

There will be the argument that cheap petrol is the way the nation's wealth is being shared with the citizen. Its true, but only partially. 

Before answering it, one need to compare petrol prices in Malaysia with other countries. It is fair to do so because there exist an international market for oil thus exist benchmark for comparison. 

From the above chart, it is immediately noticeable that other than small population Brunei, Malaysia offers the cheapest petrol price in South East Asia

More glaring, petrol prices in Malaysia is cheaper than the world's biggest petroleum producer, Saudi Arabia and another OPEC country Indonesia.  

Are we not out of step with the rest of the world? Indeed, we are. 

Misdirected subsidy 

Malaysia is one out of 29 countries still giving petrol subsidy

Not only that, it is unbelievably the 3rd highest spending for oil subsidy per capita in the world, behind major OPEC producers Iran and Saudi Arabia. 

In the case of diesel, it is the 7th highest.   

Malaysia is out of step with conventional economic management. Even the socialist argument of sharing its wealth with the people through petrol subsidy is not accurate.   

From the above chart, it is obvious that the main beneficiary of petrol subsidy is not the people but the elite

The top 20% or the T20 takes up a disproportionately higher percentage of subsidy at 35%. The middle and upper class consume three quarter of the fuel subsidy. Where is the "for-the-people" socialism?

The disturbing aspect is that the RM60.6 billion energy subsidy is almost equivalent to the development budget. Instead of investing for future productivity, government is spending more on consumption

This is a similar economic phenomenon that devastated the cheap oil economy of once prosperous Venuezela. 

The cheap petrol and bad economic management resulted in a consumption driven economy lacking saving/investment, highly inflation, and dependent on imported goods. 

Oil and gas are non-renewable resources. Instead of preserving them for future generation, the excessive spending for energy subsidy is somewhat spending away nation's wealth. 

That is another answer to the socialistic argument.  

The 30% of operating expenditure spent on subsidy and misallocated 60% of subsidy on energy could be used for more beneficial purpose, improve the quality of people's live, and spent for a more productive future.  

The economic model of the Mahathir days for "cheap and subsidised petrol, privatised toll roads, and  car ownership largely Proton as measure of wealth" is no more sustainable. 

It contributed to congestion, pollution, and climate change which is estimated to cost RM230 billion, equivalent to 2.5x petrol subsidy and 4.4 times diesel subsidy

This does not include the billions leaked through smuggling. Where the growth in the volume of petrol is flat or in line with growth in vehicle sales, growth of diesel is at an accelerated pace beyond the rate of economic growth. 

Enforcement have been poor and laden with corruption.  To make matter worse, the PH 1.0 government, disbanded the established special task force NRRET to address the fiscal leakages and replaced with the 1MDB politically motivated NFCC. 

Tankers returned and visually seen lining up off the Johor coast for their turn to fill up with smuggled subsidised diesel. Conveniently APMM is no where near to be seen. 

Political will

There are justification to do away with energy subsidy, but the more politically viable option is for targeted subsidy cut from the T20 and find its way to benefit the B40. 

It need be planned properly because the immediate impact of targeted subsidy will be inflation. Nothing can be more damaging to the economy than artificial self-triggered inflation from policy change. 

Operationally, the challenge ahead is to make available a mode of transportation that help reduce fuel subsidy and overdependence on private vehicle ownership. 

The problem is a decent public transportion only exist in major cities such as in the Klang Valley. Despite that it is still not extensive and relatively inefficient for the greater Klang Valley. 

Bus and taxi services are sparsely available even in the smaller state capitals. 

In the interiors of Sabah and Sarawak, public transportation is non existent and rely on private mode. It is very expensive and the cost will be unthinkable should energy subsidy be removed or even reduced. 

A delicate situation lies ahead for the economic planners. For the ruling party, it could be a political suicide. 

Shahrir's fuel hike of 2008 cost BN a two third majority. PAS has started dreaming of Dr Samsuri as the next Prime Minister. If a wrong plan put forward, even Hadi could dare dream of a Putrajaya official residence. 

Unfortunately for the Unity Government, it cannot be postphoned any longer or a repeat of Sri Lanka is not an impossibility. 

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