Economists: Implementing targeted subsidies is a challenge

PETALING JAYA: Using a tiered pricing system and direct cash distribution would be a more efficient way of implementing the targeted fuel subsidy mechanism, say economists.

While they said the government is right to address the subsidy issue as it currently benefits the rich more than the poor, finding the right mechanism to implement it is a huge a challenge.

Prof Dr Geoffrey Williams of the Malaysia University of Science and Technology suggested that for utilities and petrol, a tiered pricing system, similar with electricity charges, be implemented.

“Those who use more pay more, and the subsidies are focused on those who use less, namely households and small-medium enterprises (SMEs),” he said.

He, however, said that the tiered system should be based on the amount of fuel purchased, and not the size of a person’s car.

“Those buying small amounts for their motorbike or small car should get the full subsidy, those buying large amounts should get less subsidy.“This will also encourage them to economise and lower their carbon footprint,” he added.

Yesterday, Domestic Trade and Cost of Living Minister Datuk Seri Salahuddin Ayub said his ministry had received vehicle data from the Road Transport Department to be used for the distribution of targeted subsidies for RON95 petrol.

He said that the detailed data on vehicle users can be used to determine the recipient of the subsidies.

However, Prof Williams said if the subsidies were based on engine size, those in low-income groups with big second-hand cars would need to pay more.

“Those with big cars because they have big families will pay more even if they are poor. Rich people with small cars will still get the subsidised price. Poorer people with no car will not benefit at all so it is not targeted at the poor,” he said.

He suggested a cash transfer support system that subsidises incomes as being more effective in targeting low-income groups.

“This is why a Universal Basic Income model which subsidises incomes is better,” he added.

Prof Williams said removing subsidies will likely raise the price of fuel, which will cause inflation as costs are passed on to products and services.

“Tiered pricing will reduce this effect because the average price rise will be lower. Targeting engine size will not have the same effect.

“So, it is a delicate balance that requires good data to get the pricing right, especially for businesses that use petrol and diesel,” he said.

Economics expert Prof Dr Chung Tin Fah of HELP University said the government can use income data available from previous aid programmes such as Bantuan Prihatin Rakyat to implement targeted subsidies.

“Those eligible can receive cash transfers to their bank accounts. Even if they do not use it for fuel, they can use it for food,” he said, adding that cash vouchers can be the easiest method of distribution of fuel subsidies.

Sunway University economics professor Yeah Kim Leng said the targeted fuel subsidy initiative is welcome as oil prices are expected to remain high globally in the coming year.

“Keeping the general subsidy scheme could jeopardise the country’s fiscal position in 2023.”

He said that as long as the system is based on comprehensive and accurate data, transparent and verifiable, the targeted subsidies will enable substantial cost savings for the government.

“A lower subsidy burden will also strengthen public finance and enhance fiscal sustainability while shielding low-income consumers from the impact of high fuel costs.

“The effectiveness of the subsidy mechanism and implementation problems will not be known until it is rolled out,” said Prof Yeah.

SME Association national president Ding Hong Sing said he hopes the government would consider SMEs when implementing targeted subsidies.

“We are facing issues such as a shortage of workers, more overtime payments, and higher minimum wage.

“We hope that the implementation of targeted fuel subsidies will not burden us further,” he said. Meanwhile, the Domestic Trade and Cost of Living Ministry is in the final stages of discussions to introduce regulations to manage the sale of non-subsidised fuel at border areas.

Its secretary-general Datuk Azman Mohd Yusof said the programme, called “Border Economy - Supply of RON95 Petrol and Diesel without subsidy”, allows the purchase of these fuel by foreign-registered vehicles in states bordering neighbouring countries.

“This step was taken to curb the issue (leakage) faced and does not have a negative impact on foreign vehicles that fill up on (Malaysian) fuel. The price of fuel without the subsidy is still cheaper than those sold in neighbouring countries,” he told Bernama after launching the first bumiputra-produced Halipah Cooking Oil Packaging Factory by Adam AMG Trading in Perlis at Kompleks Wakaf Behor Lalang, Perlis yesterday.

According to Azman, the move to allow the purchase of unsubsidised fuel was made as there were cases where foreign vehicles were detected filling up with subsidised diesel in limited quantities, but at multiple fuel stations.

The pilot programme is expected to start in January and will be carried out within three months before a decision is made to roll it out in other border states.