With global crude oil prices having more than halved since it peaked at about USD150 per barrel just months ago, this is definitely one of those rare opportunities to make a permanent structural change to our economy by effectively eliminating the fuel subsidy for once and for all.

The growth rate of subsidy size at the current prices must be relatively small compared to months ago. Back in June, Malaysians saw retail prices for gasoline jumped by approximately 40%. Since then, somewhat in tandem with falling global prices of crude oil, the Malaysian government has decided to significantly reduce the retail prices though we have yet to see the levels seen prior to the hike in June.

Why does the current environment offer the best time to execute this?

With decreasing subsidy quantum, the government could just maintain the current prices until the quantum of subsidy becomes zero. This happens when market prices equalize with the current subsidized prices. In doing so, elimination of subsidy does not require a hike in retail prices. When that happens, the government could immediately float it.

This strategy significantly reduces political opposition to the idea of subsidy removal. I suspect what was protested in the past was prices hike, not subsidy removal per se.

So, this is the political sustainability required for economic sustainability.

Unfortunately, there is little chance for this little maneuvering to see daylight. The government has already hinted for further reduction of RM0.15 by the end of this month.[1]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — JOHOR BARU, MALAYSIA: The petrol price may fall by up to 15 sen when it is reviewed at the end of the month. [Petrol cheaper by 15 sen?. Satiman Jamin. New Straits Times. October 26 2008]

6 Responses to “[1817] Of the best time to kill off the fuel subsidy”

  1. on 27 Oct 2008 at 23:24 khensthoth

    I agree with you completely, and I share your disappointment about the likelihood of that ever happening. This is, still, Malaysia after all.

  2. on 28 Oct 2008 at 17:50 moo_t

    Are Malaysia government ready for it?

    I suspect little research is done, since Malaysia government always take the convenience path of easy work.

    In fact, many large conglomerate are benefit from the subsidies, especially those cry fouls on the windfall tax : the IPP.
    Not to forget, fishery also depends heavily on subsidies. And transportation industry also chain to the subsidies.

    And for more than 1 years of talking, all Malaysia big cities public transportation are still SNAFU, thanks to the control of bloated Malaysia federal government.

  3. on 28 Oct 2008 at 21:41 Samuel Sing

    Yes, I agree that subsidies are bad for the economy, as it reflects poor costing for goods & services sold.True cost will not be obtained.
    The problem however is that Purchasing Power is not in tandem cost of price increase. Gov’t has failed to introduce minimum wage, failed to control/reduce importing of cheap labor, thus creating an inefficient workforce.
    Creating a value based workforce will increase productivity & reduce operating cost by operational means.Even countries like India, China, Singapore do not have oil subsidies.

  4. on 28 Oct 2008 at 21:53 Hafiz Noor Shams

    Firstly, India and China have fuel subsidies.

    Secondly, introduction of minimum wage may not affect purchasing power positively. It increases cost, apart from the fact it reduces employment opportunities. Furthermore, if it does increases purchasing power, the effect is probably negligible on the average people because I doubt average Malaysia wages in the free market would fall under a set minimum wage. IIRC, average income for Malaysia is about RM2,000 per month. How high do you want the minimum wage to be?

    Thirdly, reduction of cheap labor hurt purchasing power by making cost higher. And I don’t see how importing cheap labor creates inefficient workforce. Competition is key in creating efficient workforce and this cheap labor offers competition.

  5. […] removal. I suspect what was protested in the past was prices hike, not subsidy removal per se. [Of the best time to kill off the fuel subsidy. The __earthinc October 27 […]

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