Tuesday, July 20, 2010

Is Malaysia's Subsidy Rationalisation Program Justified?

The long awaited subsidy-rationalisation programme in Malaysia has finally kicked in on 16th July after several years of empty words. Although painful and of course an unpopular move, it is deemed as necessary since Malaysia has been facing the worst ever fiscal deficit in 22 years. It was standing at 7% of GDP last year. The no-nonsense Datuk Seri Najib, revealed recently in its ambitious plan of reducing the current budget deficit to 5.3% this year, before halving it by 2015

Although this move has began to attract political football, survey shows that most Malaysians welcome such policy with open arms. The announced decision is an increase in price of essential items like sugar by 25 cents (5 pence), petrol and diesel by 5 cents (1 pence) and LPG (liquefied petroleum gas) by 10 cents (2 pence)

It is applauded since the people are insignificantly affected, unlike the previous hike of 50 cents in petrol (10 pence per litre) few years ago. On top of that the Cabinet promises to monitor the prices of all related items

Why subsidy rationalisation is justified?

(1) Improve government finances. Malaysia has one of the largest ratios in the world in terms of subsidies to government spending. This explains why the nation’s balance sheet has deteriorated significantly in recent years. With rising budget deficit (G>T) hence growing national debt, it is of no surprise international rating agency like Fitch Ratings downgraded us from ‘A plus’ to ‘A’. It may affect Malaysia’s ability to raise funds from overseas shall the need arises

(2) Improve development. So far we have been doing fine. Malaysia is classified as a country with high HDI of 0.829. To improve the ranking much more need to be done. We must further improve our education system. More schools need to be built especially in rural areas. Healthcare is equally important too. With the savings of subsidies by an estimated amount of RM750 million (£ 150 million) from now to end of year, number of hospitals in most needed areas in Sabah and Sarawak (East Malaysia) can be doubled. With ease of access to healthcare, gradual increase in life expectancy should materialise. Others like infrastructures, roads and bridges can be constructed to smoothen and increase the efficiency of business transaction by reducing time of travelling. These are the benefits that will last permanently

(3) Low inflation. Most of the research house has predicted a fairly low level of inflation in Malaysia. The CPI forecast for June 2010 is all below 2%, showing that rise in prices of goods and services are within the reasonable range. Although the rise in oil price might cause cost-push inflation (with AS shifting backward) due to higher cost of transportation, it is expected to have a negligible effect onto the growth in third quarter and throughout the year. Furthermore we have registered a robust 10.1% in the first quarter

(4) Not effective in distributing income. By definition, subsidy means reduction in price so that certain quarters can benefit from the low price, in this case the lower income group. In Malaysian context, government intervention to close income gap through such measure has shown an ‘epic failure’. An owner with garage-full of Ferraris gets equal price of petrol as someone who rides a motorcycle. The rich benefit since their expenditure onto petrol as a percentage of total income is so insignificant. This holds true even for some low-profile millionaires or billionaires who drive an average car

(5) Further discourage smuggling. It happens due to large price differential between countries. As such it creates the incentive for profiteers to practice arbitrage. In Thailand, the price of sugar is RM2.60 (52 pence) while in Malaysia RM1.90 (38 pence). In Singapore, price of sugar is RM3.70 (74 pence). As the price of sugar is expected to increase gradually in Malaysia, arguably smuggling activities will reduce since there will be lesser profits. Don’t forget they still have to bribe officers to get their goods through

(6) Reduce chronic disease. It is an established fact that Malaysians craze for sweetness in their daily diet. We normally have everything coated with sugar, from a simple doughnut to ‘teh tarik’ (name for tea in Malaysia). No wonder we have one of the highest diabetes case in the world. The number has doubled ever since 2000. Also sugar leads to other problems like overweight and this may subsequently develop related illnesses like heart attack

(7) Increase efficiency. Bus operators and cabs will have to be more efficient in order to maintain their profits. To bus firms, certain trips may need to be created while some others slashed. Salary to bus drivers and other maintenance charges will also need to be adjusted. To owners of private vehicle, they may need to plan their journey ahead to avoid travelling unnecessarily and caught in congestion which should cost them more

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