Analyst Views & Opinions
Impact of subsidies realisation on diesel – would an experiment or pilot testing save cost and unwanted impact to Malaysians?
On 1st June 2024 and without prior announcement, the Malaysian government announced the removal of diesel subsidies which has previously cost the Government up to RM14.3 billion in 2023 (up from RM1.4 billion in 2019). The rationalisation of subsidies is seen as a significant policy decision and is long overdue. With the Ringgit doing poorly in recent times, the Government has had to splash out more for subsidies. Following this, the Malaysian government’s decision to rationalise diesel subsidies is projected to save RM4 billion annually or 0.2% of the gross domestic product (GDP). This programme will begin in Peninsular Malaysia, with diesel being the first to undergo rationalisation. However, potential consequences of this move necessitate a closer examination, particularly regarding its impact on the cost of living, inflation, and the overall well-being of Malaysians.
Affin Hwang Investment Bank has highlighted that the reduced diesel subsidy is likely to increase transportation costs, which in turn could lead to higher inflation as the increased costs are passed on to consumers through price hikes of goods and services.1 This decision has already set off a causal chain effect, contributing to rising prices across various sectors. Malaysians, who are already grappling with higher living costs post-Covid, a weak Ringgit making imports more expensive, and an increase in the sales and services tax from 6% to 8%, are feeling the pinch even more acutely.
The reality on the ground often differs significantly from policy intentions. For instance, roadside food stalls in Johor have increased the price of drinking ice by 50 cents. Seafood markets in Gelang Patah can no longer purchase flake-ice from Pontian, 40 km away, as their supplier cannot afford to deliver without increasing the volume of purchases. This supplier is not currently eligible for the diesel subsidy, forcing seafood markets to use regular drinking ice, which costs three times more.2
Besides the rise in prices to cover subsidy costs, it is anticipated that there will also be elements of profiteering. A clear-cut example is the imposition of the Low Value Good (LVG) Tax in January this year for imported items below RM500. A check by The Star found that prices of LVG below RM500 offered by overseas sellers on some ecommerce platforms have generally gone up by RM2 to RM20, depending on the product. However, some sellers have decided to take advantage of the situation and even doubled the price.3 In many cases, it was found that the rise in prices for these items far exceeds the tax rate imposed. The Government has tried to mitigate these price increases with the use of the Price Control and Anti-Profiteering Act however, enforcement remains a challenge. To date, ten companies have been penalised for unfairly raising prices. Among those charged was a school bus company that had been receiving the diesel subsidy.
From a behavioural perspective, human tendencies such as loss aversion play a critical role in how people react to policy changes. The removal of subsidies and the increase in taxes negatively impact citizens, causing significant distress. Governments and policymakers are expected to make unbiased decisions to protect citizens. However, expedience bias, the tendency to act quickly without fully considering all the facts, can lead to rushed decisions that adversely affect the population. Had the government taken a more measured approach, such as conducting pilot testing or randomized controlled trials (RCTs), it could have identified the impact and devised better ways to roll out the initiative. For example, before releasing to the whole nation, the Government could test out the removal of subsidies within a smaller population first or alternatively rolled out the initiative within a period to first observe the impact of the implementation followed by a projection analysis. This would give the government a better understanding of the impact and mitigation plans before officially implementing it nationwide.
Equally important, the Government should have rolled out an improved cash transfer programme alongside the subsidy rationalisation in order to mitigate impact on prices. Today, our current cash transfer programme remains fragmented with over 120 programmes administered by 21 Ministries and Agencies.4 This leaves a lot to be desired and a big exclusion error as well. If not mitigated, things will get worse for households particularly in this economic climate.
The lack of proper planning and studies by the government before introducing the subsidy rationalisation programme may also result in more costs and efforts in conflict management. The BUDI program, designed to support diesel vehicle owners eligible based on specific criteria, also faces challenges. Diesel vehicle owners who qualify can apply under the BUDI Individual category, while agriculture and commodity smallholders can apply under the BUDI Agri-Komoditi category. To be eligible for BUDI, applicants must be Malaysians, own diesel-based personal vehicles registered with the JPJ that are not luxury vehicles under ten years of age, have active road tax, and an annual individual or joint income of RM100,000 or below.
However, the BUDI system, without adequate testing, may miss out on lower-income individuals who purchase second-hand vehicles over ten years old or NGOs that do not qualify for the subsidy under the BUDI category. This oversight underscores the importance of careful planning and testing before implementing such significant policy changes.
In conclusion, it would not be wise to rush into the rationalisation of RON95 subsidies without learning from the lessons of diesel subsidy removal and testing for the impact beforehand. The multiplier effect of such decisions could be far more significant than anticipated, causing widespread economic and social repercussions. A more cautious and data-driven approach, including pilot testing and RCTs, could help mitigate adverse impacts and ensure that policy measures achieve their intended objectives without disproportionately burdening the population.
The rationalisation of subsidies is indeed a complex and challenging process. Still, with careful planning, foresight, and a willingness to adapt based on empirical evidence, it is possible to achieve the desired outcomes while minimising unintended consequences. As Malaysia moves forward with its subsidy rationalisation program, it is crucial to prioritize the well-being of its citizens and take proactive steps to manage the transition effectively.
References:
1 The Star (2024) : The Fuel subsidy plan and inflation (https://www.thestar.com.my/business/business-news/2024/05/24/the-fuel-subsidy-plan-and-inflation)
2 Fulcrum Singapore (2024): Malaysia has Removed Diesel Subsidies – Now Must Manage the Fallout (https://fulcrum.sg/malaysia-has-removed-diesel-subsidies-now-must-manage-the-fallout/)
3 The Star (2024): Malaysian online shoppers feel the pinch with new tax (https://www.thestar.com.my/news/nation/2024/01/03/malaysian-online-shoppers-feel-the-pinch-with-new-tax )
4New Straits Times (2020): The compelling case for social protection (https://www.nst.com.my/opinion/columnists/2020/09/625966/compelling-case-social-protection )
Author’s Profile
Nadhirah Ibrahim
Senior Analyst, ICMR