Economists: Hasty Removal Of Blanket Subsidies Will Increase Inflationary Pressures

Nur Adilah Ramli

28th June 2022 - 3 min read

Some economists have warned that the hasty removal of blanket subsidies by the government will further increase inflationary pressures in the country.

The precautionary messages came after the Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed remarked that Malaysia’s inflation rate could reach 11.4% if all subsidies were removed. As such, the government had decided to bear the RM77.3 billion of subsidies expected for this year, said to be the highest amount of subsidies in history ever borne by any government.

In this regard, the chief economist of Bank Islam, Dr Mohd Afzanizam Abdul Rashid emphasised that if the government were to hastily remove the subsidies, this will cause inflationary pressures to soar. In fact, the country’s headline inflation has already shot up to 2.8% in May 2022 from 2.3% in the previous month, he said.

That said, Dr Mohd Afzanizam stressed that the government must also alert the public to the fact that the current subsidies are not sustainable in the long run. “So the changes have to happen at some point in the future. Given that, the government would need to tell the public the rationale for the eventual removal of subsidies,” Dr Mohd Afzanizam said, adding that sharing the statistics on the subsidies provided will be a good start.

Meanwhile, Kenanga Research noted that the domestic food inflation may increase up to nearly 7% in July this year if the subsidies and ceiling prices for certain food items were removed, on top of the rising global food prices. The situation may also be worsened by other factors, including the uncertainty of China’s zero-Covid policy and the ongoing Russia-Ukraine crisis.

Shopping at a wet market (Image by Bernama) — (Image: Bernama)

Associate professor from Putra Business School, Dr Ahmed Razman Abdul Latiff, on the other hand, believes that the government will not remove all subsidies due to the consequences of the move. “What [Datuk Seri] Mustapa said was a hypothetical situation which is not going to happen as the abolishment of all subsidies will cause huge social, economical, and political instabilities for the country,” he said, adding that Malaysia will not be in the danger of experiencing such a high inflation rate.

To note, the government had announced earlier last week that it will remove the ceiling prices for chicken and chicken eggs, as well as discontinue the subsidies for bottled cooking oil from 1 July 2022. However, the decision to remove the ceiling prices for chicken and chicken eggs was reversed two days after the announcement, with new ceiling prices to be announced at a later date.

The government had also said that it is looking to switch the existing blanket fuel subsidy for a targeted fuel subsidy so that it will help those who truly need it. Among the ministers who had raised this issue include Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz, International Trade and Industry Minister Datuk Seri Mohamed Azmin Ali, as well as Datuk Seri Mustapa.

(Source: New Straits Times)

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