World Bank: Targeted subsidies good idea

KUALA LUMPUR: The World Bank reckons that subsidies should be targeted and hence welcomes the Malaysian government’s move to review the fuel and cooking oil assistance mechanisms.

Senior country economist Shakira Teh Sharifuddin said at present, fuel subsidies benefit households in the high-income segment more than those in the low-income group.

A study by Bank Negara Malaysia previously estimated that 40% of fuel subsidies went to high-income households and only 4% went to the low-income segment.

“So, broadly, our view is that subsidies should be targeted at those who are more in need.

“The government is thinking about moving towards a more targeted system rather than a blanket subsidy system and this is very much welcome,” she told reporters after launching the World Bank East Asia and Pacific Economic Update – April 2022 report yesterday.

Shakira said about 40% of government subsidy spending is channelled towards fuel and cooking oil.

Although the Russia-Ukraine war had a positive spillover effect on Malaysia in terms of government revenue, it would still have a negative impact on food prices, she said.

“We have already seen some impact on food prices. In terms of financial exposure, it is small at the current juncture. It will create uncertainty and volatility in the financial market, of course, depending on how the situation evolves,” she added, reported Bernama.

Shakira said rising inflation would increase the vulnerability of the low-income group because they spend a bigger portion of their income on food and utilities.

A World Bank High-Frequency phone survey found that even after receiving government assistance, more than 60% of lower income households with a monthly income of RM4,000 or below had inadequate financial resources to cover their basic needs in late 2021.

Meanwhile, one-quarter of households reported having savings that would last only for three months or less, while 16% did not have savings at all.

According to its April 2022 Update, the current shocks are likely to magnify existing difficulties stemming from the Covid-19 pandemic.

About eight million households fell back into poverty during the pandemic, while regional firms continued to struggle, with more than 50% reporting payment arrears in 2021.

The report said that indebted governments, which saw their debt as a share of gross domestic product (GDP) increase by 10 percentage points since 2019, will struggle to provide economic support.

“Financial tightening and increased inflation, at least one percentage point above previous expectations due to the oil price shock alone, will shrink room for monetary easing.

“And overexposed banks, with credit as a share of GDP about 10% higher than before the pandemic, will have to cope with new financial stresses and increased risks to loans,” said the report.

In Malaysia, fiscal space too is expected to remain constrained, limiting the room for fiscal policy to play a bigger redistributive role.

“Gaps in the social protection system remain or persist, leaving out several vulnerable groups such as youth and informal workers.

“In addition, the triple shocks of Covid-19, food inflation and floods may deplete poor and vulnerable Malaysians’ resilience toward future shocks, and in turn, widen socioeconomic inequalities among Malaysians,” the World Bank said.

In recognising this, the government’s top priorities are to ensure effective fiscal policies and develop inclusive social protection as stated in the 12th Malaysia Plan (2021-2025) and Budget 2022, it added.