Time to let go of subsidy crutch


  • Nation
  • Tuesday, 10 May 2005

BY MUSTAPA MOHAMED

Mustapa: Minister in the PrimeMinister’s Department

LAST Thursday, the Prime Minister advised us to keep clear of three bad habits.  

He said we have become too dependent on foreign labour, subsidies and special privileges. There is a lot of sense in that criticism.  

His remarks came a day after the Government announced the reduction of subsidies for petrol and diesel with the slight increase in the retail prices of the two items. 

The Government spends a hefty amount to subsidise petrol, diesel and cooking oil. With the subsidies, consumers need not have to pay a high price. 

The Government gave the subsidies so that consumers were able to buy petrol, diesel and gas at a retail price that is much lower than the actual cost. 

Subsidies mean that the Government bears part of the cost of the goods or products. In other words, when more goods are bought, the bigger the subsidy, or financial burden, that the Government has to bear. 

For example, the retail price per kg of cooking gas in peninsular Malaysia is RM1.40, of which RM1.05 is subsidised by the Government. 

This means, when you buy a 12kg tank of gas that costs RM16.80, the Government had subsidised RM12.60 for the distributor/supplier on behalf of the consumer. 

So, with more consumers buying gas, more subsidies are required to be borne by the Government. 

For diesel, at the time when it was retailing at 88 sen, the Government subsidy was 61 sen. Now, at its new retail price of RM1.081, the subsidised amount is 66 sen.  

It is the same with petrol. For each litre of premium petrol RON97 and regular petrol RON92, which retail respectively at RM1.42 and RM1.38, the subsidy borne is 24 sen. Although the price has been increased to RM1.52 and RM1.48, the Government subsidy has also increased to 31 sen and 30 sen respectively because the increment is lower than the increased product cost. 

In the past 18 months, petrol prices had increased tremendously in the world market. The increase is due to several factors, including: 

  • The increase in demand, from 82.4 million barrels a day last year to an expected 90 million barrels by 2010. A large part of the additional demand is expected to come from China and India 

  • The geo-political problems of certain oil producing countries had affected oil production 

  • Demand that is almost equal to supply, causing more pressure on the market.  

    Malaysia is among the countries that gives the most subsidies to its people. Other than subsidies on petrol, diesel and LPG, the Government gives subsidies for padi, fertilisers, homes and food. 

    Scholarships and allowances for students abroad and in the country are also a form of subsidy. 

    In short, almost every group of people gets some form of subsidy, whether they are fishermen, farmers, students, patients, smallholders, house buyers, vehicle owners or factory operators and producers. 

    In the Malaysian context, subsidies fulfil important socio-economic functions.  

    However, there are subsidies whose effectiveness needs to be reviewed.  

    If subsidies make us less competent and not capable of competing with other nations, this surely warrants a serious review. 

    As an example, Thailand is among the countries that does not provide oil subsidies for its people.  

    Nevertheless, industries in Thailand are able to compete with that of other countries in various products, including agriculture, food products and textiles.  

    I have brought this up because many of our manufacturers, entrepreneurs and traders are using oil as the excuse to increase the prices of their goods and products. 

    What is clear is that the increasing subsidies offered by the Government are putting a lot of pressure on the country’s financial state.  

    The Government has come out with too much money to cover the oil subsidies. The Government had to bear subsidies amounting to RM4,788mil last year and this rate is expected to increase up to RM8,959mil this year, if current retail prices are maintained. 

    Besides subsidies, the Government does not impose any sales tax on petroleum products.  

    In the event that the oil prices are not revised, the tax that had been sacrificed, together with the subsidies, would result in the doubling of costs.  

    This is an enormous figure that is expected to go up each year due to the increasing use of petroleum products. If this continues, our country will face a serious financial problem.  

    Imagine, the overall development expenditure for the country for this year is estimated to be RM28,300mil. If RM16,807mil is used for just oil subsidies, the country’s planning and development would be adversely affected. It would mean we need to defer or stop altogether many school projects, hospitals, roads and other public amenities. 

    So, with the new price structure for petrol and diesel, the Government expects to save RM2,200mil this year. 

    There are also several other things that need to be given due attention: 

  • The Government is forced to sacrifice incomes gained from other sources, merely to cover the subsidies for petrol and diesel. These sources of income include that from taxpayers from both corporate and Government employees 

  • If the Government has to use RM16,807mil for the purpose of subsidies this year, it would find it difficult to finance development projects and pay out salaries and bonuses to its employees 

  • Subsidies can bring about market distortions, as they do not reflect the real worth of a product. If a product is obtained cheaply, there is a possibility that it could result in wastage or inefficient use of resources  

  • Other than this, subsidies tend to encourage abuse by profiteers and smugglers. Cheap oil in our country could result in foreigners trying to smuggle it out to their countries and benefit immensely by selling our oil in their country or just for their own use 

  • The Government estimates that 10% of diesel and petrol is smuggled out of the country and bought by people in Thailand, Singapore and the Philippines 

    This has led to losses of RM4,800mil for the country last year. We hope that with the revised oil price structure for petrol, diesel and gas, the margin of price difference between Malaysia and the neighbouring countries would narrow and reduce smuggling. 

    With regards to inflation, traders have to be responsible and not increase their prices indiscriminately. For this, the Government will monitor any price increase and act against irresponsible traders. The inflation rate at the moment is 2.5% and it should not increase abruptly as the price of oil is only a marginal part of production costs. 

    Many people question why petroleum prices in Malaysia are increased as we are an oil-producing nation. Today, our production is around 700,000 barrels per day while we use an estimated 520,000 barrels a day. Following current trends, the demand in four years' time will exceed production. At that time, Malaysia will be an oil-importing country. 

    The public should know that Petronas is a major contributor to the national economy, including paying taxes, royalties and dividends. 

    Petronas has paid out royalties to the Government amounting to RM9,100mil last year.  

    However, if there are parties disputing the role of Petronas and want all its revenue to be used as subsidies, there could be two major effects: 

  • First, the country could lose about 25% of its national revenue today that is contributed by the oil and gas sector totalling RM25,000mil. If this contribution is used for subsidies to maintain the low prices, the Government will lose a hefty revenue that would also affect national development 

  • Second, the company would no longer be in a position to invest in new sources of income.  

    To summarise, we – that is, the Government and the people – now face three options that have their advantages and risks. We have to decide to: 

  •       First, continue with the subsidies; 

  •       Second, scrap the subsidies; or 

  •        Thirdly, take a middle approach. 

    On the first option, with the excuse of helping the people, the Government can continue to fund the oil subsidies but the country would face acute financial difficulty. 

    If we choose the second option, the Government can make immense savings to finance development projects. 

    But this would mean that the people would have to pay for the full cost of any product and take the full impact of any change in the international market.  

    For Malaysians who are used to getting subsidies, this option is quite extreme. 

    At this juncture, the Government feels that a middle way is the best approach. 

    Subsidies can be continued, but the people have to share part of the burden with the Government.  

    We can consider ourselves blessed as the oil prices in Malaysia is far lower than most of the neighbouring countries. 

    The people must be prepared for the possibility that the subsidies will be reduced. 

    Therefore, everyone should learn to be more thrifty and prudent in using our petroleum products.  

    The Government needs to be more courageous to make decisions that are not popular to safeguard the country and the long-term well being of our nation and our grandchildren, 

    We cannot continue giving out subsidies as those who will eventually bear the brunt are our grandchildren.  

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