Multi-tiered fuel subsidy good for Malaysia in revamp, says economist

  • Economy
  • Wednesday, 20 Aug 2014

PETALING JAYA: As the current fuel-subsidy scheme in Malaysia undergoes a possible revamp, one economist has voiced his support for introducing a multi-tiered mechanism, which could presumably help optimise the Government’s Budget.

According to Alliance Research chief economist Manokaran Mottain, a tiered fuel subsidy structure would serve the twin objectives of budget consolidation and plugging subsidy leakages. “The Government can provide targeted subsidies in the form of a percentage rebate off the market fuel price to eligible individuals according to their household income classes,” Manokaran said in his report yesterday.

“The lower-income group should be given higher subsidy rates and a monthly subsidised fuel quota, relative to the higher-income group,” he argued.

In Malaysia, household income groups are differentiated according to the bottom 40%, middle 40% and top 20%.

“The tiered structure will be an ideal mechanism as long as the subsidy spending for the low-income group does not exceed the subsidy-cut savings from the high-income group,” Manokaran said.

According to Manokaran, a revamp of the current subsidy mechanism is timely to overcome the pockets of weaknesses in the country’s fiscal resilience.

He pointed out that Malaysia’s fiscal health was currently exposed to the risks of crude oil price volatilities amid dwindling local production that could eventually turn the country into a net oil importer.

The Government’s fuel subsidy has been rising over the years.

Last year, fuel subsidy cost the Government RM28.9bil, up from RM27.9bil in 2012.

As of July 2014, the actual price of RON95 petrol was RM2.85 and diesel RM2.71. The flat rate subsidies of 75 sen per litre for RON95 and 71 sen per litre for diesel are extended to all private and commercial vehicles.

Manokaran said under the current blanket subsidy approach, leakages appeared due to inefficiencies in the system that benefit all consumers irrespective of their income levels and incidences of smuggling of subsidised fuel.

“Instead of providing subsidies at the point of sale, we think that subsidies in the form of reimbursements or claims will be more efficient to deter arbitrage opportunities of price differences,” Manokaran said, adding that the use of a secure verification system such as the MyKad or petrol card should also be considered to prevent abuse.

In addition, Manokaran suggested that commercial vehicles be subject to a different subsidy rate from passenger vehicles to ease inflationary pressure arising from the change in fuel prices upon the revamp of the subsidy scheme.

“The new commercial subsidy rate should ideally be on par with the current blanket rate,” he said.

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