Monday, May 24, 2010

May 26 : Proposals to reduce subsidies

fr May 26 : this will be the day all Malaysians will be affected economically.

From the Government Transformation Program website :

"Our subsidy bill is not sustainable, especially with a rising budget deficit and government debt."
We may not realize it, but our lives are surrounded by subsidies. Most Malaysians know that we have a fuel subsidy, but many of us don’t know that essential items such as cooking oil, flour, sugar, education, toll, healthcare and electricity are all subsidized. Although subsidies are a form of financial assistance given by the Government to help lower our cost of living, they have their negative consequences.
Malaysia’s total subsidy for 2009 amounted to RM74 billion which is equivalent to RM12,900 per household, and these include aid not only for the poor but the wealthier segments of society. Besides benefiting the wrong target groups, subsidies also result in leakage and abuse, and leads to over-consumption and over-production.
Malaysia is also one of the most subsidized nations in the world. We have more subsidies than countries such as Philippines, India, China and even Somalia! As a result of this continuing trend, it has resulted with Government bearing an enormous subsidy bill, which contributes to a rising national debt and creating long-term sustainability issue for our economy.
Subsidies have to be reviewed and rationalized in order to develop a more targeted plan so that they benefit the right demographics such as the poor and the vulnerable and not burden the future generation of Malaysians. This is integral to help move Malaysia forward and improve our quality of life, as we move towards Vision 2020.

The cabinet will meet on May 26 to discuss  proposals to reduce the country's hefty subsidy bill. The cost of subsidies has more than doubled since 2006 and had push the country to its biggest budget deficit in over 20 years. Official government figures showed subsidy spending rose to RM24.5 billion in 2009 ( 15.3 percent of total federal government spending ) which is more than double the RM10.1 billion it spent in 2006.  

Previous efforts to reduce the subsidy bill (  covering a wide range of goods from petrol to electricity and cooking oil ) that accounted for 15.3 percent of federal government operating expenditure in 2009 was rejected by the cabinet fearing a backlash from voters.  Plans to cut subsidy spending to RM20.9 billion this year were dealt a blow by the government's failure to implement planned petrol price hikes in May.

Najib has assigned Idris Jala to head the government taskforce to come up with a series of reforms and proposals to reduce Malaysia's bill from food, petrol, electricity and gas subsidies. Those proposals will be presented on 26 May with  envisaged cuts starting in June, with price rises every six months over a five-year timeframe. The fact that Najib has outsourced all of his economic reforms to independent bodies shows that there is little support within the government for painful decisions. Failure to implement two electricity price hikes have hit credibility. The thinktank has put the total cost of subsidies at RM74 billion (US$22.4 billion) annually, although that includes social welfare, health and education.

 Following are the options the government may consider:

- Complete withdrawal of subsidies in one go :
Unlikely and will be hotly condemn by all voters including those pro BN. Such an approach would also cause inflation to spike and could prompt Bank Negara  to hike rates. If this happened there would likely be a big rally in Malaysian bonds. Still smarting from a by-election loss in Sibu,   Najib  is unlikely to opt for this choice, especially with Sarawak state polls looming this year.

- A gradual approach
This is far more likely. It would reassure markets - Prices could be hiked over a credible period of years on a regular basis.
Savings from raising petrol prices alone in mid-year could be as much as RM1.4 billion in 2010, based on a RM0.15 hike. If electricity was hiked by RM0.024 per kilowatt-hour, that could save RM800 million in 2010.
The risk is that regular price hikes on a semi-annual or annual basis could cause a continual feeling of discontent with the government.
Inflation could spike up to 4.5 percent at the start of 2011 if petrol, gas, electricity and toll road prices were hiked.

Najib said - "The next day, there will be a forum open to the public to discuss these subsidy proposals. All the cabinet ministers have been invited for this as well" . I was disappointed with this Open Day event as it will be held on 27 May for only few hours from 9 am to 2 pm at KLCC. I wonder how much feedback and opinion the government can get in such a short period. Most probably most users visiting the booths will be tourist as in that period of time most people are working. If the government is serious in obtaining any feedback - this "open day" should be held over at least 3 days over the weekend from Friday to Sunday and not only limit to KL but in at least one major town in every state of the country. Such half heart-ed initiatives only gives an impression the decisions on the subsidies cut is already made and this is just a "wayang" to show government openness to public concerns and opinions.

With Malaysia's economy rebounding strongly, tax receipts will grow and the need for government stimulus measures will fall so the budget gap will narrow more quickly than the government's forecast of 5.6 percent of gross domestic product this year. 

Any proposed cuts and subsequent hikes in prices will affect more the lower to middle income earners . With the general elections coming up in 2013,  this is a challenge Najib will have to face both politically and economically.

Update comments  from the STAR 25 May :

- Savings from government subsidies can be used to spur Malaysia’s goal of becoming a high-income nation.
AmResearch senior economist Manokaran Mottain said that by reducing subsidies, the country would also appear more attractive to investors.
“It is the Government’s intention to reduce subsidies so the funds can be allocated to development. We have to move towards being a market-oriented economy. Investors think our economy is distorted,” he told The Star.
Manokaran said the money saved could be diverted to fund development projects, which would have a multiplier effect around the country.
“This will result in stronger growth as the country moves at a faster rate,” he said.
The current subsidy mechanism is no longer sustainable, as Government debt stood at RM362bil last year, or 54% of the GDP.
That is much higher than Indonesia’s 28%, and is approaching the Philippines 62%, he said in reference to Monday’s frontpage report in The Star of the Government’s plan to cut subsidies.

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