Barjoyai Bardai of Universiti Tun Abdul Razak said there may never be a perfect moment to introduce targeted fuel subsidies, but the government must take incremental steps to test their impact on the population.
He said past governments had been planning to remove fuel subsidies for the last 16 years and had spent money on developing mechanisms. However, they always ended up abandoning such initiatives.
“Because they think the time is not right. When they say that the time is not right, it’s because the consumers and households are not ready,” he said.
Barjoyai said the ideal time for such initiatives would depend not on market conditions but on the behaviour of consumers and households.
“We are dealing with economics, and economics is the science of behaviour. So we are looking at the behaviour of the consumer and the household,” he told FMT.
He said the government is testing the market with its diesel initiative, “on a specific aspect that has minimal impact”. Excluding East Malaysia for now was a well-thought-out plan since diesel vehicles are more commonly used by the general population there.
Prime Minister Anwar Ibrahim announced on Tuesday that the Cabinet had agreed to implement a targeted subsidy for traders using commercial diesel vehicles in Peninsular Malaysia, estimating an annual saving of RM4 billion.
The diesel subsidy control system covers 10 types of public transport vehicles and 23 types of goods vehicles.
Information on when the targeted subsidies would come into effect would be announced by the relevant ministry, he said.
Previously, he was quoted by Bloomberg as saying that “we will do it at the right time”, when asked on the timing of subsidy reduction.
Opposition leader Hamzah Zainudin said Anwar had only increased the people’s mistrust in the government by failing to address when and how the targeted fuel subsidy would be implemented and enforced.
Barjoyai said it was important to measure the reaction of consumers or investors to the targeted subsidies, as Bank Negara did when revising the overnight policy rate from time to time.
“Then slowly once we are certain of the impact on the consumers, I’m sure they (the government) will start planning to implement the petrol subsidy,” he said.
Niaz Asadullah, an associate fellow at Universiti Malaya, said the right time for targeted subsidies is when economic headwinds are weaker, such as a fall in inflation and US interest rates.
“The good time to cut fuel subsidies is also about the right sequence,” he said. The rollout could be timed after minimum wages are raised to provide the necessary cushion against the rising cost of living that may follow.
Other factors to consider for timing the subsidy reduction include domestic inflation, stability in global energy, supply chain, as well as food prices.
Consumers should be ready to afford higher prices after subsidy reforms, he said.
However, Niaz warned that the policy space for “politically unpopular reforms” would narrow the closer the country approaches a new general election.