Subsidies - Fact or fiction


The Prime Minister, Datuk Seri Najib Tun Razak, tabled the 2017 Budget in Parliament recently. Save for the usual antics of the opposition parties, which makes a complete mockery of this august event, the budget was balanced and appropriate given the prevailing economic situation and challenges faced by policy makers due to the drop in the price of crude oil and commodities.

However, a part of the budget that has received undue attention and been subject to much speculation and subterfuge is the rationalisation of cooking oil subsidies and the subsequent increase in the price of petrol and diesel.

I have written about subsidies before so I will be succinct in my elaboration of what actually subsidies are all about.

Subsidies are a sum of money granted by the government or a public body to assist an industry, business or individuals so that the price of a commodity or service may remain low or competitive. Subsidies, from the government, keep prices of food products low.

In 2009, about 22% of the government expenditure was on subsidies, with petrol subsidies alone taking up 12% of the total.

And in 2013, the subsidy bill was RM30bil with fuel subsidies alone amounting to RM24bil, the largest component in the provision.

Hence in 2013, the government launched the subsidy rationalisation programme to ensure Malaysia’s subsidy program was targeted and market orientated and too further stem wastages and leakages.

Subsidies on sugar, flour and rice were also removed and in lieu of subsidies all those who were part of the lowest 40% income group were given the 1Malaysia People’s Aid or BR1M.

However, the one remaining subsidy was for cooking oil.

In 2015, the government subsidised 85,300 tonnes of cooking oil a month (1,023,600 tonnes a year) and it costed the government RM1.2bil.

Hence the average Malaysia consumed 2.84 kg of oil a month totaling up to 34.12 kg a year. And all of this was palm oil and blended palm oil based cooking oils not taking into account that some Malaysians may be partial to groundnut, canola, corn or soybean oil.

According to the OECD, the global average oil consumption between 2012 and 2014 was 19.8 kg per capita of food use.

With consumption expected to grow 1.75 % per annum between 2015 and 2024. Hence, Malaysia’s consumption of palm oil alone in 2015 (taking into account the increase in global consumption of per capita of food use) was still close to 14 kg above the global consumption.

Hence, there was a surplus of oil in our markets and there were also suspicions that subsidised oil was also exported by unscrupulous parties to regional countries where cooking oil is more expensive.

Hence, rationalising the cooking oil stabilisation scheme (COSS) was a right move and ensuring that the 1 kg plastic packs of oil remain subsidised at 60,000 tonnes a month ensures there is enough supply of cooking oil in the market for deserving households especially the B40 group.

Restaurant operators also should not use the increase as a licence to increase prices because unlike items like flour, rice, meat and vegetables; oil only forms a small component of cooked food. One does not need to use a kilogram of oil for a simple roti canai or thosai hence there is no justification whatsoever for traders to hike prices wantonly.

For example, according to the United States Department of Agriculture (USDA), women age 19 to 30 years who exercise for less than 30 minutes each day should consume about six (30 g) teaspoons of oils each day, and women above age 30 years need five (25 g) teaspoons.

These recommendations might be a bit higher for women who exercise more on a daily basis. Hence, the Malaysian daily per capita consumption based on the old COSS scheme is close to 20 teaspoons (100 g) of oil per day.

This is also an opportunity for us to live healthily and cut down our oil and trans – fat intake. 41% of Malaysians are either overweight or obese according to a recent Ministry of Health study hence this is an opportunity to cut our waistlines by consuming less oil especially fried foods.

Second, the rationalisation of the COSS will ensure cooking oil subsidies are targeted and not abused.

Now, on the increase in the price of petrol and diesel, half-truths and untruths are being purveyed about how the price of petrol and diesel is calculated in Malaysia.

One cannot simple rely on the price of Brent or Sweet Crude prices per barrel and extrapolate that to calculate the price of petrol and diesel in Malaysia.

Petrol and diesel prices are regulated by the Ministry of Domestic Trade, Cooperatives and Consumerism (KPDNKK). Crude oil needs to be processed before it becomes petrol and obviously this costs money.

Petrol and diesel prices are determined at the start of each month taking into account the average price of the previous month.

Hence one cannot rely on the price of crude oil on the last day of the previous month and use that as a barometer on what the price of petrol or diesel should be.

Beyond that, other costs included as determined by KPDNKK under the Automated Pricing Mechanism, include cost of product, operational cost, oil companies' margin, station dealers' margin and taxes (if any).

Hence, one must fully understand this before sharing screen shots of the price of crude oil and using that to justify why the price of petrol and diesel should be unchanged.

I believe it is important for the truth to surface because there is a lot of misconceptions and quite easily the government is faulted for measures beyond its control.

The government cannot control prices ad infinitum but does provide relief via BR1M for those affected by the gyrations in the price of commodities. 
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