Analysts expect subsidy cut in August
Analysts expect the subsidy rationalisation plan is on track and scheduled to take place in August although several research reports have expressed uncertainty over its implementation.
Most analysts expect the first subsidy cuts to be related to petrol prices, specifically the RON 97 fuel.
This is not surprising, as the Performance Management and Delivery Unit (Pemandu) had proposed a 15 sen increase in petrol and diesel prices between June and December 2010. Thereafter, an increase of 10 sen for every six month intervals has been proposed for the January to December 2012 period.
“The Government is quite determined to remove subsidies. They will do it on a gradual basis. The implementation part is crucial,” said MIMB Investment Bank research head Chan Ken Yew.
AmInvest head economist Manokaran Mottain said that the removal of subsidies had to be very carefully implemented as a drastic move would cause a spike in the country’s inflation, and hence a higher cost of living while salaries are not increasing.
“However the Government has no choice but to do it. Malaysia needs to move away from subsidies, The most important thing is that the Government must not be seen as burdening the public,” said Manokaran.
On May 27, Pemandu chief executive officer Datuk Sri Idris Jala, presented a proposed subsidy rationalisation roadmap to the Government.
Malaysia is one of the most subsidised nations in the world. Its total subsidy of RM74bil last year was equivalent to RM12,900 per household.
Fuel and food make up 32% and 4% of Malaysia’s RM74bil subsidy in 2009. Other areas such as welfare, education and healthcare, account for some 58%.
The current subsidy system is also on a blanket basis, and is given to everyone. Hence, about 70% of fuel subsidies go to mid-to high-income groups.
“The implementation part is very important. If the subsidies are removed and the proceeds go to the right people, like the poor, then it is okay. In some countries for instance, they give food coupons to the needy, so you know these subsidies are directly channelled to those who need it,” said Chan.
He added that the upper income people would not be affected by the removal. The middle income may feel the pinch, but more so on petrol prices rather food prices.
Nonetheless, consumers will have to prepare for higher inflation after the subsidy removal. Chan expects the consumer price index could rise 4% in 2011 and 2012 each, and 3% in 2013. “This could complicate our overnight policy rate estimates. A high inflationary pressure by a cost-push factor could see a dilemma in increasing interest rate as a hike in interest is not associated with the improvement in the economy. To a certain extent, it could also dampen demand due to lower disposable income,” he said.
As such, Chan believes an expansionary fiscal policy, such as lower personal income tax or raising consumer’s personal tax relief bracket, could act as a remedial measure.
Meanwhile, HwangDBS Vickers Research analyst Chong Tjen-San said that there are 19 highways scheduled for toll rate increases over the next 4 years.
“If the Government were to maintain toll rates at current levels, it would have to fork out RM3.19bil in subsidies over the next 4 years,” he said
By TEE LIN SAY
linsay@thestar.com.my
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