What happens if the government pulls all petrol subsidies?

People may face challenges due to the immediate impact of higher costs.

28 Mar 2024 07:30am
Economists emphasised that petrol functions as a vital intermediary in the economy, and any price hike will inevitably have ripple effects across sectors, impacting the overall cost of living. Illustrative picture.
Economists emphasised that petrol functions as a vital intermediary in the economy, and any price hike will inevitably have ripple effects across sectors, impacting the overall cost of living. Illustrative picture.

SHAH ALAM – In 2018, Pakatan Harapan in its manifesto vowed to wield the reins of governance with a pledge to reduce the price of petrol, a promise that resonated deeply with the populace.

With pointed questions and aggressive rhetoric, they challenged the incumbent government, tauntingly insinuating that they held the elusive solution to alleviate the burden of soaring fuel costs.

Fast forward to the year 2022, and the political landscape of Malaysia underwent a seismic shift as this once-upstart party ascended to power as part of a new coalition government.

However, conspicuously absent from their manifesto this time around was any mention of lowering petrol prices.

While it's fair to acknowledge the evolving circumstances between 2018 and 2022, it is equally undeniable that the reins of power now firmly rested in their hands, granting them the authority to influence the trajectory of petrol prices.

Yet, since assuming office, not only has the promised reduction failed to materialise, but petrol prices have surged, stoking fears of complete subsidy abolishment or targeted subsidies only for the lower income group.

As speculation mounts and concerns deepen, the burning question arises: What lies in store for Malaysia should this pivotal shift come to pass?

Sinar Daily spoke to economists who emphasised that petrol functions as a vital intermediary in the economy and any price hike would inevitably have ripple effects across sectors, impacting the overall cost of living.

Related Articles:

Malaysian Institute of Economic Research (MIER) senior research fellow Dr Shankaran Nambiar emphasised that petrol is not just a fuel; it serves as a crucial intermediary in our economy.

“Any increase in its price will inevitably ripple through various sectors, impacting the cost of living. With transportation costs on the rise, everything from groceries like fruits and vegetables to manufactured goods is bound to become more expensive.

“While rationalising subsidies is essential, devising the appropriate mechanisms presents a considerable challenge. Ensuring that only the B40 group benefits from subsidised petrol is no simple task.

“Even if petrol subsidies are removed universally and the B40 receive cash handouts or transfers instead, they may still perceive life as more costly,” he said.

Nambiar also highlighted that addressing the subjective perception of being burdened by increased expenses poses a significant challenge.

“Increasing the price of petrol can easily contribute to social discontent, considering its widespread impact on daily life.

“However, it is equally challenging to envision how the government can sustain the cost of subsidies indefinitely, especially considering that petrol constitutes a significant portion of the subsidy expenditure,” he added.

Nambiar also believed that the government was proceeding cautiously, particularly regarding the National Central Database System (Padu).

“While the aim is to establish a comprehensive database, there is a risk of overlooking the fatigue and concerns people may have regarding providing extensive personal information and data security.

“These apprehensions need to be addressed, and the government must work to earn the trust of the public. As for the withdrawal of petrol subsidies, while it may seem straightforward in theory, the actual implementation demands meticulous planning.

“Mishandling this process could lead to public discontent and a surge in price levels, highlighting the need for careful execution,” he said.

Concurring with Nambiar’s perspectives, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said that the adjustment to subsidised fuel prices could lead to a surge in the inflation rate due to the abrupt nature of the change.

“Consequently, this increase would likely spill over into other sectors as logistic costs rise, potentially prompting businesses to transfer the additional expenses to consumers through higher prices.

“The crux of the issue lies in allocating limited resources to areas that foster greater productivity. While fuel subsidies have historically stabilised prices, their benefits predominantly favour higher-income individuals who consume more fuel.

“Moreover, allocating a larger portion of resources to subsidies could hinder investment in critical areas like education, healthcare, and infrastructure, which are essential for enhancing economic productivity. Therefore, striking a delicate balance is crucial,” he said.

Afzanizam said that gradual implementation of subsidy rationalisation was necessary to navigate this complex terrain effectively.

“In 2022, Indonesia implemented a 30 per cent increase in fuel prices as part of its efforts to reduce fuel subsidies. To mitigate the impact on citizens, the government provided cash handouts.

“Increasing fuel prices can have several benefits, including redirecting funds towards crucial sectors like education, healthcare, and infrastructure.

“Additionally, higher fuel prices may deter smuggling activities due to increased costs, thus enhancing law enforcement efforts.

“Moreover, increased investment in education and healthcare can lead to higher productivity and a skilled workforce, ultimately resulting in rising incomes and price stability,” he said.

However, in the short term, Afzanizam believes the people may face challenges due to the immediate impact of higher costs.

On March 6, it was reported that Perikatan Nasional (PN) chairman Tan Sri Muhyiddin Yassin had urged the government to postpone the implementation of petrol and diesel subsidy rationalisation, citing concerns over tax hikes and the rising cost of living.

He emphasised that such a move could exacerbate price increases across all goods and services, urging careful consideration of its implications.

Muhyiddin questioned the feasibility of implementing the rationalisation amidst ongoing economic challenges, highlighting the need to alleviate financial burdens on Malaysians.

Additionally, the Pagoh MP also scrutinised the depreciation of the Malaysian Ringgit and its impact on import costs, highlighting the urgency of addressing economic issues and safeguarding citizens' welfare.

Prior to that, on Jan 5, PN Secretary-General Datuk Seri Hamzah Zainudin criticised the government's handling of the Padu, highlighting the need for thorough preparation before its public launch.

He emphasised the importance of addressing criticisms from both supporters and non-governmental organisations (NGOs) regarding Padu's functionality.

The call for caution follows concerns raised by Investment, Trade and Industry (Miti) Ministry former deputy minister Dr Ong Kian Ming about security flaws in the system, suggesting a postponement of the registration process.

Padu, launched by Prime Minister Datuk Seri Anwar Ibrahim, aimed to establish a secure national database for data analytics and policy formulation, integrating administrative data from various sources.