Now not the right time to implement targeted subsidy, no need for it in the future if oil price is low – Zafrul Leave a comment

Malaysians have, for some time now, been told that targeted subsidies is the way forward and that this more efficient method of subsidy (over the current blanket form) will happen sooner rather than later, as the government prepares the mechanism. When exactly?

Finance minister Datuk Seri Tengku Zafrul Abdul Aziz stressed that now is not the right time to implement targeted subsidies as the country’s economy is still in the recovery phase while inflation remains low compared with other countries.

“What we do not want is to have targeted subsidies, but the execution is not right. The implementation approach for the targeted petrol subsidy is also under review,” he said on the sidelines of the Wild Digital SEA 2022 event in KL yesterday, reported by Bernama.

So, it won’t happen “now” but “soon”? Not necessarily. “However, (in the future), it (subsidy implementation) would also depend on the economic condition and crude oil prices. If the (market) price of oil at that time is low, maybe there’s no need for targeted subsidy as the government can continue to give the subsidy,” the senator and former banker said.

Tengku Zafrul also said that the additional dividend of RM25 billion recently announced by Petronas will be used for government expenditure and subsidy costs. The latter is expected to go up to RM80 billion this year.

This comes as analysts predict that Malaysian motorists will be paying market price for RON 95 petrol and diesel soon, as there’s a high possibility that targeted subsidies will be implemented next year.

“We expect higher prices for RON 95 petrol and diesel next year with the revision of fuel subsidy. We understand that the test for the targeted subsidy mechanism started last month and will go on for three to six months. Therefore, we predict that fuel subsidy will be revised again next year as part of the Budget 2023 agenda, which is scheduled for October 7,” Maybank Investment Bank said in a research note last month.

In July, Tengku Zafrul said the T20 group, which is the top 20% of earners in the country, is enjoying some RM8 billion in fuel subsidies compared to the RM6 billion enjoyed by the bottom 40% (B40).

He was repeating what he said in May, that Malaysia’s rich are enjoying the lion’s share of government subsidies. “For every RM1 of fuel subsidy, 53 cents go to the T20, while 15 cents benefit the B40. So, for example if the subsidy bill this year is expected to top RM30 billion, over RM15 billion is subsidy to the T20,” the minister said then.

If you’re wondering why, the affluent have more cars, their cars consume more fuel and have larger fuel tanks. It’s as simple as that. While the need for targeted subsidy is clear, it’s much harder to find good way to implement a system that will that benefit the intended recipients with minimal leakage, and is universal.

In July, Tengku Zafrul, in a written parliamentary reply, said that a mechanism for targeted subsidy is being tested. “The (initial) testing will be followed by more extensive testing,” he said, adding that the government wants to ensure the feasibility of the mechanism in both urban and rural areas.

“It (testing) is expected to take between three and six months before the new system is implemented nationwide,” he said, adding that the implementation of the targeted fuel subsidy mechanism will be implemented in stages to ensure it does not cause inflation or affect economic growth.

So, we won’t have to pay market price for petrol “now” (RON 97 is currently going for RM4.30 per litre) but when is anyone’s guess. As is always the case in Malaysia, there are political factors in play too, and a general election has to be called by September 2023.

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