Insight - Subsidies in place of mega projects?

The government has to consider current trends and undertake due diligence for the maximum benefits, said Bank Islam Malaysia Bhd chief economist Afzanizam Mohamed Rashid.

IN times of rising inflation, funding the hefty RM77.3bil subsidy bill has become so important that mega projects which carry substantial spin-off effects, may be delayed to make way for the subsidies.

Would it be a big loss if we postpone some of these mega projects which may be delayed, anyway, by rising costs of building materials and labour shortages?

Is it a sustainable solution – just shelving some big projects to channel the money to subsidies?

This may also be a time to review the feasibility of some of the big projects, especially considering current trends such as flexible working arrangements which already involve less travelling.

For instance, between public transport and Internet connectivity, which should we prioritise?

The government has to weigh its options as:

> Infrastructure investment can facilitate growth, improve living standards and generate higher income opportunities.

> Subsidies will immediately help to alleviate the financial burden of the rakyat but do not have recurring benefits.

It is a delicate balancing act.

The largest contributor to rising inflation – food prices – had posted the biggest increase since 2011, at 5.3% year-on-year in May, 2022.

The government has to consider current trends and undertake due diligence for the maximum benefits, said Bank Islam Malaysia Bhd chief economist Afzanizam Mohamed Rashid.

Besides delaying spending on mega projects, some allocation could be diverted from the sizeable allocation of RM75.6bil for development expenditure, compared to the average of RM48bil since 2010.

A core area to note is that the growth rate of government spending especially on salaries and emoluments, has greatly outstripped government revenue from all sources.

All eyes are on how the government proposes to bring the growth rate of spending on salaries and emoluments, under some semblance of control.

Managing inflation is necessary from a social and economic context, as protests can erupt over rising inflation and food prices.

The largest contributor to rising inflation – food prices – had posted the biggest increase since 2011, at 5.3% year-on-year in May, 2022.

From this perspective, it would justify diverting more funds towards subsidies when cost pressures are exacerbated by the Russia-Ukraine conflict and supply disruptions, said United Overseas Bank (M) Bhd senior economist Julia Goh.

Even with subsidies, inflation is already rising; the government estimates that without the subsidies, inflation could be much higher at above 11%.

Against surging inflation in South Korea, Thailand and the Philippines in June, Malaysia’s consumer price index for June, expected to be released on July 22, is expected to show headline inflation (a measure of total inflation) at above 3%, said Goh.

From this perspective, it would justify diverting more funds towards subsidies when cost pressures are exacerbated by the Russia-Ukraine conflict and supply disruptions, said United Overseas Bank (M) Bhd senior economist Julia Goh.

The negative spillovers will be magnified if subsidies are removed at the same time as interest rates may have to be raised aggressively, in line with actions by other central banks.

Given that this is not demand-driven inflation, it does make sense to subsidise fuel and food costs, as the surge in prices may be temporary, said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.

Malaysia, as a net exporter of oil, is able to manage inflation better by chanelling its oil revenue into subsidies.

In August, 2021, Petroliam Nasional Bhd (PETRONAS) had declared an additional RM7bil in dividend payout to the government, on top of its initial target of RM18bil.

CGS-CIMB Research believes PETRONAS is able to surpass its initial commitment of RM25bil in dividend payment in 2022, as the government expects an additional RM30bil in subsidy spending.

Revenue from commodity earnings is not enough to fund the entire subsidy bill.

However, delaying mega projects to fund subsidies is clearly not sustainable; buying reprieve from short term pain may be politically expedient but giving scant thought to the longer term costs.

Possibly for the first time, the government is faced with the reality of allocating finite resources to unlimited wants; previously, it had appeared as if the limits of economic constraints were only of a passing concern, said former Inter-Pacific Securities head of research Pong Teng Siew.

“We now have a problem of over-subsidising the nation.

“This is a reality that we must face with a low wage workforce that has been kept ‘satisfied’ with so many subsidies,” said Tricor Malaysia non-executive chairman Veerinderjit Singh.

Subsidies already exist; due to the current crisis, there are no other options but to use any additional revenue (from taxes collected on increased profits from certain commodity suppliers), to fund the increasing subsidies.

Malaysia needs a serious reform mindset, instead of just taking funds from the right hand and placing it into the left.

However, the timing for enacting these reforms has to be right, otherwise, it could lead to further inflationary pressure if the subsidies are removed immediately, or at short notice.

With limited government resources, subsidies have become a major concern as many struggle with the rising cost of living.

If the situation does not improve soon, the challenge to upkeep these subsidies, mainly from commodities revenue, will be very challenging as commodity prices fluctuate and drop.

Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.