October 27th, 2008 by Hafiz Noor Shams
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.