10-fold spike in diesel subsidy cause for rationalisation

PUTRAJAYA: The decision to rationalise the diesel subsidy was based on a staggering 10-fold increase in subsidy for the fuel in just five years.

With the government paying RM14.3bil for diesel subsidy in 2023 from RM1.4bil in 2019, the government said the increase in the subsidy amount was not just due to the increase in price.

It felt leakages was the main culprit for the huge jump in subsidy payments as the amount of subsidised diesel grew from 6.1 billion litres to 10.8 billion litres over the same period.

The commercial segment that does not receive subsidised diesel, such as contractors and property developers, buy two billion litres of diesel a year.

“One of the reasons to proceed with the subsidy rationalisation is to plug the fiscal holes,” said Finance Minister II Datuk Seri Amir Hamzah Azizan.

“The focus now is on subsidy rationalisation so that the government can run effectively. A well-run government helps the people in other forms.”

The government hopes it will save RM4bil a year from the subsidy rationalisation programme. That savings can then be channelled to other means such a improving healthcare services in the country.

The main reason for the leakage has been the huge price difference between the retail prices in Malaysia and neighbouring countries such as Thailand, Indonesia and Singapore.

While the subsidised price of diesel is RM2.15 a litre in Malaysia, the price of a litre of diesel in Thailand is RM4.12, RM4.73 a litre in Indonesia and RM8.87 a litre in Singapore.

The market price of diesel in Malaysia without the subsidy would be around RM3.50 a litre.

The restructuring of the diesel subsidy will see a fleet card being issued to the logistics sector that will see delivery lorries and trucks pay RM2.15 a litre of diesel. That is to ensure the impact on inflation is negligible.

Eligible citizens would be given cash aid of RM200 a month and smallholder farmers and fishermen will also be given the same cash aid to reduce the impact from high diesel prices.

For individuals, they need to register using their identity card number and have a valid road tax.

Only owners of luxury vehicles less than 10 years of age will not be eligible to get the cash aid.

Citizens will need to register between May 28 and June 3 to receive cash aid by the middle of the month.

The calculation of cash aid was based on the fact that 70% of recipients will be neutral or better with the RM200 in cash aid.

That is because 70% of people travel a distance below 60km a day and 30% travel a greater distance.

Amir Hamzah said the subsidy rationalisation would eventually apply to Sabah and Sarawak but not at the moment because the logistical mechanism there was more complicated.

“There are a lot more diesel vehicles there,” he said.

Under the Subsidised Diesel Control System (SKDS 1.0), around 20,000 public transportation vehicles enjoy subsidised diesel.

With SKDS 2.0, which is part of the latest scheme, it would encompass around 400,000 logistics vehicles in 23 segments.

They will use a fleet card, which allows them to buy diesel at RM2.15 a litre just like with SKDS 1.0. One other condition is that each truck or lorry has to have a valid road tax to receive the cash aid.

The government is looking at imposing a quota for subsidised diesel per month for SKDS 2.0, like it did for SKDS 1.0.

“At the moment, it is important to allow them to have the fleet card and subsidised prices,” he said.

As the subsidy rationalisation was expected to eliminate the price difference between retail and commercial at some point, Amir Hamzah said leakages were expected to get smaller over time.

This should happen at the borders too.

“The government will look at more creative ideas of stopping that apart from enforcement,” he said on stopping cross-border leakages.

Through the diesel subsidy rationalisation, around 15,000 fishermen would receive cash aid, and roughly 300,000 citizens, with another 300,000 smallholder farmers getting cash aid.

The cash aid would be RM200 per individual.

For small scale farmers, only those making a revenue of between RM50,000 and RM300,000 a year will be able to receive the monthly cash aid.

They will need to register with the Agriculture and Food Security Ministry (KPKM) and GeoAgro Registration System. The subsidy rationalisation programme will be overseen by five government departments.

The new diesel subsidy plan is not expected to impact inflation much.

“Some companies have announced the subsidy rationalisation will not have an impact on their operations,” he said.

The official inflation forecast for this year is between 2% and 3.5%.