Subsidy reforms a painful necessity for Malaysia’s economic recovery, says think tank

KUALA LUMPUR, July 12 — The Socio-Economic Research Centre (SERC) today urged the government to move steadily towards reforming subsidies as part of its ongoing plans for Malaysia’s economic recovery.

Its executive director Lee Heng Guie said it is not an easy task as many governments around the world usually face public resistance, but emphasised that these reforms need to be done.

“Many governments face difficulty reforming subsidies as they are afraid of disrupting the political equilibrium — political backlash.

“When subsidy reforms are made, consumers will feel the pinch of rising prices; this has often led to widespread public protests.

“Where there is a lack of public confidence in governance of fuel subsidy savings to implement programmes that compensate the lower- and middle-income households, the public will find the targeted spending less credible, and will resist subsidy reform,” he said in a media briefing this morning.

Among others, Lee suggested the government shift from a universal-access subsidy programme to a targeted one while coming up with a comprehensive and transparent mechanism to identify poor households and deliver benefits.

“The government should also introduce automatic pricing mechanisms and phased-in price increases to smoothen adjustment,” he suggested further.

He said great political courage is needed to implement subsidy reforms, emphasising that making the entire process transparent and its objectives clear can help ease the resistance.

“Transparency and stakeholder dialogue is the cornerstone of subsidy reform in determining its design, passage, and implementation.

“A well-handled removal of subsidies and be replaced by better targeted social spending for the poor and vulnerable households, plugging leakages and wastage, and productive investments can promote sustainable fiscal management and equitable outcomes,” he said.

The economist added that public needs to be made aware of the myth surrounding subsidies, that is controlling the prices of certain goods ease the financial burden for a certain demographic population, but that they come with economic and fiscal costs.

“Unsustainable subsidies can deepen the budget deficit, forcing the government to borrow more and increase debt,” he said.

Lee pointed out that the subsidies for 2022 total at least RM77.7 billion, which is estimated to make up 31.2 per cent of Malaysia’s total revenue and 4.6 per cent of its GDP.

The main reason is due to soaring energy and commodity prices, he added.

Lee pointed out that the share of subsidies to total revenue has been going up annually since 2012.

He warned that the intended benefit for the poor and lower-income households is typically regressive in nature as the bulk of subsidies benefits the high percentile of the income distribution.

Citing a study by the Finance Ministry, Lee said more than half of total subsidies in Malaysia have benefitted those in the top 20 percentile income group, also known as the T20.

He said subsidies have also reduced the country’s fiscal capacity as huge financial resources are spent on subsidies that divert the government’s annual Budget allocations from key sectors such as education, healthcare, infrastructure and housing.

He also said that subsidies can encourage wasteful spending and corruption.

“When the product prices are cheap and heavily subsidised below market prices, it encourages excessive consumption and wastage as demand shifts toward subsidised products.

“It perpetuates the misallocation of resources toward less productive economic activities and environmental impact,” he explained.

He said profiteering can take root as businesses take advantage of arbitrage on the price difference, which leads to hoarding, black market and smuggling activities across the border.

Arbitrage is a business term that refers to when an investor trades in the simultaneous buying and selling of a commodity in two different markets so as to make a profit.

Lee said that in a competitive market, when price subsidies and controls hold the prices below real market levels and below the producers’ costs, producers’ profit margin will be affected while investors’ capital would leave the industry to seek a better return.

“There will be less investment, production and supply of products made available to consumers,” he said.