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Experts say fuel subsidy unsustainable
The Star - 14 Jan 2008
WITH the end of the era of cheap oil, many experts see Malaysia’s current oil and gas subsidies as unsustainable and inefficient. A high subsidy level is not efficient from a welfare perspective because those who can afford to pay for higher fuel prices are also benefiting from the subsidy that is aimed at alleviating the burden faced by the low-income groups. It is also not efficient from a distributional perspective because of leakages, hoarding and smuggling to countries with higher fuel prices. In addition, given that oil is a scarce and non-renewable resource, it would not be wise to encourage high consumption by keeping domestic prices way below the international level through subsidies. During the 2000 to 2003 period, average pump prices rose 4.6% annually while petroleum consumption increased 5.2% a year. When the average pump price rose 12.5% annually from 2004 to 2006, the consumption growth of petroleum products slowed to 3.7% per annum. Therefore, economists believe there is a strong case to gradually reduce and ultimately remove the subsidy altogether, and align domestic prices closer to world prices. The Government could lessen the negative effects arising from higher inflation and impact on the lower income groups by some form of tax relief or direct financial assistance. There has been much speculation that an increase in fuel price can be expected soon – most probably after the general elections – thus helping the Government to reduce or at least maintain the fuel subsidy and enhance its fiscal flexibility, which is an increasingly important factor to tide over a global downturn. A review of the fuel subsidy seems imminent as the Government and national oil company Petroliam Nasional Bhd (Petronas) have said fuel and gas subsidies now cost a combined total of RM40bil a year due to the surge in crude oil and natural gas price globally. To note, subsidies account for 14% of the Government's total operating expenditure in 2005 from the average 2% to 3% in the 1990s, before coming down to 10% last year as a result of a string of fuel price adjustments in recent years. Aseambankers Malaysia Bhd chief economist Suhaimi Ilias estimates the market price for petrol to be around RM3.50 per litre at current crude oil price level, while gas price is close to RM30 per mmbtu (million British thermal unit). “We estimate that every 10 sen hike in fuel prices could save the Government between RM1bil and RM1.5bil in subsidies.
“The issue now is how to reduce the fuel subsidies in such a way that the lower income groups are not excessively hurt by it while ensuring a fair system that will result in the higher income groups paying more given their affordability factor,” he said. According to Suhaimi, several options can be considered: ·Higher road taxes for larger capacity and luxury cars and lower road taxes for lower capacity cars, on top of the previous measures to cut or abolish road taxes on diesel-powered commercial vehicles and small motorcycles. ·Two-tier pricing at petrol pumps – subsidised price for, say, the first 20 to 25 litres of petrol/diesel and market price for the additional litres. ·Gradually removing fuel subsidies to allow fuel price to approach market price but deregulate/free up competition among oil companies/petrol retailers for them to independently set prices so that motorists/vehicle owners can look for the
cheapest fuel around. However, the measures must also be enhanced by stricter controls and checks at the country's land and water borders to eliminate smuggling activities. Suhaimi stressed that it was vital that the savings from the subsidy cuts were directly channelled into: ·Improving the efficiency and quality of the country's road public transportation. ·Expanding the light rail transit/monorail network.
·Compensating/offsetting the burden of the higher cost of living for low-income groups as the result of inflationary pressures from the fuel price increases. ·Incentives for the usage of alternative fuels in the country; for example, Petronas encouraging natural gas vehicles (NGV) by using the savings from any gas price hike to expand the infrastructure (NGV pump stations) and the Government subsidising the costs and installation of NGV tanks and lower road taxes for NGV vehicles. RAm Holdings Bhd group chief economist Dr Yeah Kim Leng expects the Government to continue its gradual, middle-ofthe-road approach to subsidy reduction. As such, Yeah foresees a 15% to 20% rise, equivalent to upping the price of premium petrol by 30 sen to 40 sen from the current RM1.92 per litre. The last increase of 30 sen to RM1.92 per litre for premium grade petrol in 2006 amounted to an 18.5% rise. He estimates this would enable the Government to save RM5bil to RM7bil in subsidies. These savings could either contribute to lowering the fiscal deficit or allocated for development projects. “What is perhaps needed is a form of cost-sharing formulae between the Government and consumers whereby the government fixes a gradually reducing subsidy rate over a fixed time frame of, say, three to five years to either remove the subsidy altogether or reduce it to a more manageable and sustainable level,” Yeah said. Once set, any increase in world oil price above the subsidy rate will then be passed on automatically at specified monthly, quarterly or half-year periods to consumers. “We estimate that savings of RM10bil channelled to development spending will contribute about a one percentage point increase in gross domestic product in nominal terms,” Yeah said. However, he cautioned that the key to realising the full economic benefits of development spending was to ensure effective project planning and implementation whereby the entire process of project identification, cost-benefit evaluation and awarding of projects were carried out in an open and transparent manner so that opportunities for corruption and excessive price mark-ups were minimised. The Malaysian Institute of Economic Research expects fuel price to increase 30 to 50 sen per litre this year. “Subsidies are good politics but bad economics. The Government will need to strike a balance in terms of fuel subsidy. If the subsidy is cut too much, inflation will go through the roof and the people will suffer,” executive director Professor Datuk Dr mohamed Ariff Abdul Kareem said. AmInvestment Bank Bhd senior economist Manokaran Mottain sees fuel price increasing 30 to 40 sen per litre this year. “ThIs would not cause the amount of subsidy to jump too substantially,” he said. He feels that toll concessionaires such as Plus Expressways Bhd, which is benefiting from an increase in the number of cars using its highways, and Petronas, which is making substantial profits due to higher oil price, should contribute to the subsidy as part of their corporate social responsibility programme. Tax rebates could then be offered to these companies, he said.
Malaysia's government spent about 35 billion ringgit ($11 billion) on fuel subsidies in 2007 as the price of crude oil approached $100 a barrel, Second Finance Minister Nor Mohamed Yakcop told reporters today in Putrajaya, near Kuala Lumpur. The government will devise a formula to curb the gasoline and diesel price subsidy, Deputy Prime Minister Najib Razak said on Nov. 9. A government pledge not to increase fuel prices expired in 2007.