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Removing the Gas Subsidy Crutch – Can Malaysia Do It?

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malaysia gas subsidy

With the next general elections due by April 2013, and in light of recent political uncertainties, one crucial subject is relatively missing from public discussion: gas subsidies.

Gas is heavily subsidized in Malaysia, to the tune of $14 billion in 2008. [1] That keeps fuel prices in Malaysia at about USD$0.60 per liter for RON95[2], the regular unleaded fuel, while the premium RON97 goes at USD$0.91 per liter[3]. Diesel is priced at USD$0.56 per liter.[3]

“We started the subsidies after the Asian financial crisis, and we should not have continued doing that. We should have weaned ourselves off it and gone back to market prices after the economy picked up again.” [4]

The Asian financial crisis in 1997 led to gas subsidization to help Malaysians cope with living costs and keep consumer goods prices down. Since then the subsidization cost continued rising.

As of 2012, reports indicate that Malaysia’s fuel prices are the 10th cheapest in the world and the second cheapest in Asia.[5] However, as gas prices worldwide kept rising since 1997, the subsidization burden on the government had also risen, and in 2010 fuel subsidization alone amounted to 4.7% of government spending.[6]




Problems From Gas Subsidization

“The country cannot rely on fuel subsidy-driven consumption to prop up the economy in the long run.” [7]

Economists have long warned that subsidization is unsustainable, especially since rising energy prices means the subsidy bill will also continue rising and eat up more of the government budget.

In addition to the huge bill for the government, inadequate targeting means that most of the subsidies are not going to the poor that the subsidies are intended to aid; instead the ones benefitting most from subsidies are regular consumers and companies. [8]

Benefiting from and reliance on subsidies has lead to inefficiencies in the industry sector.

“The subsidies have not only distorted the market but also created an economic system where people do not look at opportunities to enhance energy efficiency,” International Gas Union president Datuk (Dr) Abdul Rahim Hashim commented in June 2012 [9], after commenting earlier that:

“The current gas prices do not benefit the guys with the small cars and kapcai, but people who have two or three cars in their garage. You have to be specific with subsidies and not cover the whole spectrum of customers.”

Due to subsidized prices, Malaysia has also faced the problem of gas smuggling and illegal re-sales. [10] While Malaysia has already started to narrow down its subsidy targeting for fuel, for instance banning the sale of subsidized petrol to foreign-registered vehicles within a 50km radius from borders with Thailand and Singapore [10], eventually Malaysia needs to cut gas subsidies entirely in order to survive.

malaysia gas subsidy

Removing Subsidies: Not Easy

When gasoline prices doubled to USD $0.84 per liter in 2008, then-prime minister Abdullah Ahmad Badawi’s approval rating fell drastically from 91% to less than 50%. [11]

Despite numerous price cuts, he never recovered the angry public’s support.

The main issue with removing gas subsidies is that price increases in the past have always seen prices of basic goods rise as well. With that in mind the current prime minister, Najib Razak, has been careful to follow each of the three price increases during his time with measures to counter the impact on those with lower income.

The recent salary increase of lower-ranking civil servants is one such measure.

At the World Gas Conference in June 2012, Najib claimed that his administration is on track to removing gas subsidies completely by 2015. [12] Bearing in mind that he froze subsidy cut plans a year after introducing them in 2011, so far there has been no clear plan on achieving zero-subsidy gas market explained to the public.

Surprisingly, this issue has not seen as many questions as it should have from the opposition.

malaysia gas subsidy

No Real Plan to Scrap Subsidies

Either side which can come up with a plan of scrapping the unsustainable subsidies without letting mass inflation follow would be favorites come the next election.

Yet, with relative silence from both the government and the opposition while they bring up other less significant issues to fish for votes, the frightening possibility playing on the back of the public’s collective mind now is that neither side has any clear idea how to do it.

The potential backlash in a major price increase due to subsidy reduction is potentially career-ending (as evidenced by Badawi’s early retirement) and Najib faces a huge problem: subsidies have to go, but can he do it while maintaining his political position?


References & Image Credits:
(1) USA Today
(2) The Star
(3) The Malaysian Insider
(4) The Star
(5) The Sun Daily
(6)(8) The Malaysian Insider
(7) The Star
(9) Web Crunch
(10) The Malaysian Insider
(11) Reuters
(12) Mayalsian Digest
(13) sxc.hu

Originally published on TopSecretWriters.com

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Ryan is the founder of Top Secret Writers. He is an IT analyst, blogger, journalist, and a researcher for the truth behind strange stories.
 
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Mark R. Whittington, from Houston, Texas, frequently writes on space, science, political commentary and political culture.

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