Datametrics Research and Information Centre managing director B Pankajkumar said by increasing petrol prices to align with the market price, the government can significantly reduce its petrol subsidy and use that to provide direct cash transfers to the bottom 50% of society.
“The approach involves gradually increasing petrol prices every quarter by 20 sen per litre, or to reach RM1 above the market price within the next two years,” he said during a panel discussion on Malaysia’s long story of fiscal consolidation organised by Malaysian Rating Corp Bhd (MARC) today.
“That’s your answer in terms of tackling your budget deficit. Imagine the amount of savings you can make by putting petrol price back to where it should be.
“To me, why bother going to a different system (of targeted subsidies for petrol). It’s not proven, it takes a lot of effort, and there will be leakages,” he said, adding the government will likely need to spend more in terms of administration.
Regional comparisons also reveal a startling reality as fuel prices in some neighbouring countries have soared past the RM5 per litre mark. In Singapore, the price of 95-octane petrol (equivalent to RON95) is S$2.88 or a mind-blowing RM10 per litre compared to Malaysia’s RM2.05.
Pankajkumar pointed out Malaysia is listed as the country with the 9th lowest fuel price globally.
“Prime Minister Anwar Ibrahim mentioned Malaysia is expected to spend RM81 billion for subsidies this year. Last year’s figure was RM62 billion — of which RM45 billion was related to fuel subsidy,” he added.
Tightening the fiscal screws
Anwar is set to tighten the fiscal screws in his second annual budget this week as he seeks to reduce public debt by weaning the economy away from decades of blanket subsidies.
Anwar, who doubles as the finance minister, is likely to target narrowing the fiscal deficit – the gap between revenue and expenditure – to 4.28% of gross domestic product (GDP) from an estimated 5% this year.
The government is also likely to rely on dividend payouts from state oil company Petroliam Nasional Bhd (Petronas) and measures to boost tax compliance to bridge the gap.
MARC chief economist Ray Choy said Malaysia’s subsidies bill constituted 23% of the federal government’s operating expenditure in 2022, versus an average of 10% over the previous five years.
Fiscal consolidation is defined as policies and plans aimed at reducing government deficits and debt accumulation.