The fuel subsidy plan and inflation

PETALING JAYA: The proposed subsidy rationalisation programme for fuel will help government finances, but concerns remain about its inflationary impact.

The programme will start with diesel fuel, which will be rationalised in Peninsular Malaysia first and is estimated to save RM4bil annually or 0.2% of the gross domestic product (GDP).

The plan will help Putrajaya edge closer to the goal of the Fiscal Responsibility Act (FRA) to reduce the debt level to not exceed 60% of the GDP and a fiscal deficit of between 3.5% and 3% by 2025, as stipulated by the 12Malaysia Plan Mid-Term Review.

“By rationalising subsidies and raising service taxes, the government should be able to meet its fiscal deficit goal of 4.3% of GDP in 2024 (TA Research forecast: 4.2% of GDP), improving from the 5% recorded in 2023,” TA Research said in a report.

There was no announcement on the implementation date or the quantum but the removal of the diesel subsidy will only affect T20 users and 3.8 million foreigners.

That aside, all eyes are on the targeted RON95 subsidy programme, which is the most widely used by motorists and constituted the majority of the RM81bil subsidies the government spent last year, the research outfit added. “We anticipate the rollout to commence soon,” it said.

How this is undertaken will be key. A controlled increase in the price of the petrol will ensure inflation does not spike, while a free float to market rates could lead to a spike in inflation in the economy, analysts said.

The concern is understandable. RON95 is now retailing at RM2.05 per litre and diesel at RM2.15 per litre. At non-subsidised petrol stations, the RON95 is sold at a market price of RM3.35 per litre, while Diesel Euro 5 is priced at RM3.33 per litre.

Affin Hwang Investment Bank believes the reduced diesel subsidy will increase the transportation cost, likely leading to higher inflation as the higher cost is passed on to consumers through price hikes of goods and services.

“We believe the impact will remain manageable, as the government pledges to constantly improve its Subsidised Diesel Control System 2.0 programme to ensure inflation is stable.

“We maintain our projection that Malaysia’s inflation rate will trend higher to 3% to 3.5% in 2024 (from 2.5% in 2023), anticipating the gradual removal of the RON95 subsidy,” the bank noted in a report, adding this was so because some diesel subsidies will remain to traders and public transportation.

TA Research also saw limited impact from the proposed diesel subsidy cut plan.

“We foresee the direct impact on inflation may be small and negligible as the consumer price index (CPI) weightage of fuel has been reduced from 8.5% in 2018 to 5.9% in 2024.

“The Transport CPI now contributes 11.3% to the overall inflation, as compared to 14% six years ago,” it stated.

TA Research anticipated the simple average fuel price (including RON95, RON97, and diesel) will rise by 20 sen to RM2.73 per litre compared to the 2023 average of RM2.53 per litre.

This served as the base-case scenario for an average inflation rate of 2.9% year-on-year in 2024 but warned if Putrajaya increased the ceiling price for diesel higher than its expectations or even float the prices, the inflation rate could surge higher.