Targeted fuel subsidy will help consolidate govt’s fiscal position – economists

KUALA LUMPUR: Malaysia’s targeted diesel subsidy mechanism which began on Monday will strengthen the country’s fiscal position, economists said.

Juwai IQI global chief economist Shan Saeed said more countries are now removing subsidies and moving to a more market-driven approach to consolidate the fiscal side of the balance sheet.

“The government can save on the cost and utilise the funds for infrastructure or development investment. An infrastructure investment has a direct correlation with the country’s gross domestic product growth rate.

“It is a timely decision as a blanket subsidy creates inefficiencies and is not productive at the macro level. Prices should be driven by market forces as per the consumption outlook,” he told BK.

On Sunday, Finance Minister II Datuk Seri Amir Hamzah Azizan announced the implementation of targeted subsidies for diesel effective June 10, which would see the government likely to save around RM4bil per year, strengthening the country’s financial position.

The Malaysian Economic Association deputy president Professor Dr Yeah Kim Leng said the completion of the fuel subsidy rationalisation this year will greatly strengthen the country’s fiscal soundness and economic efficiency.

He noted that the diesel subsidy rationalisation is being implemented at a time when inflation has remained low and stable at 1.8 per cent in the three months to April this year.

Nevertheless, he reckons that any increase in inflation is expected to be marginal and one-off due to the continuing subsidies being provided to targeted groups, such as via the Subsidised Diesel Regulation System (SKDS). “Headline inflation is projected to remain at or slightly higher than the 2.5 per cent last year, but it is projected to remain within the official forecast range of 2.0 to 3.5 per cent this year,” he added.

Commenting on the anticipated petrol subsidy rationalisation, Yeah said the shift from blanket to targeted subsidies should be extended to RON95, which accounts for the bulk of the unsustainable subsidy burden.

“A similar mechanism is expected to be in place to cushion the vulnerable and low income groups from the inflationary impact of the fuel subsidy rationalisation,” he said. – BK