The Socio-Economic Research Centre (SERC) has commented that subsidy reforms are necessary for Malaysia’s economic recovery. As such, it urged the government to progress steadily with its plan to carry out such reforms. 

The executive director of SERC, Lee Heng Guie acknowledged that reforming existing subsidies is not an easy task; many governments around the world that attempted this have found themselves met with public resistance. However, he stressed that it still needs to be done.

One of Lee’s suggestions is for the government to introduce a comprehensive and transparent subsidy mechanism as it shifts from a general blanket subsidy approach to targeted subsidies. This is in hopes that the mechanism will enable the government to better identify financially vulnerable households, and provide assistance to the targeted groups.

“The government should also introduce automatic pricing mechanisms and phased-in price increases to smoothen adjustment,” Lee also suggested, adding that transparency and clarity of the objectives for these reforms can help ease public resistance.

Lee further emphasised that the people must be made aware of the misconception that the financial burden of specific income groups can be eased by controlling the price of certain goods. Instead, they should realise that the provision of subsidies actually comes with high economic and fiscal costs. 

“Unsustainable subsidies can deepen the budget deficit, forcing the government to borrow more and increase debt,” Lee explained, adding that Malaysia’s share of subsidies to total revenue has been increasing annually since 2012. In fact, the total amount of government subsidies for 2022 is projected to reach almost RM80 billion – estimated to make up 31.2% of the country’s total revenue and 4.6% of its gross domestic product (GDP).

On top of that, the executive director of SERC also pointed out that the current subsidies are regressive in nature as most of the subsidies benefit higher-income households. He cited Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz, who revealed that a substantial portion of the subsidies is actually enjoyed by the T20 income group.

Lee further said that the massive expense of subsidies has caused the government to divert annual budget allocations from key sectors, such as education, healthcare, infrastructure, and housing. Additionally, the provision of subsidies may even cause wasteful spending, and adversely impact economic activities as well as the environment. “When the product prices are cheap and heavily subsidised below (the) market prices, it encourages excessive consumption and wastage as demand shifts toward subsidised products,” he explained.

Lee further remarked that the subsidies provided may encourage arbitrage – which is essentially a simultaneous act of buying a specific item in one market, and then selling it in another market to take advantage of the differing prices and earn a profit. Ultimately, this may lead to hoarding, black market, and smuggling activities across the national borders. 

Finally, Lee shared that the provision of subsidies and implementation of price controls also mean that the prices borne by consumers are below the real market prices and producers’ costs. This will negatively affect the producers’ profit margin, and in turn, drive away investors from the country as they seek a better return elsewhere. “There will be less investment, production, and supply of products made available to consumers,” he added. 

To date, several ministers had already hinted that the government is looking to change the country’s approach in providing subsidies. For instance, Tengku Datuk Seri Zafrul had said that Malaysia may adopt a targeted fuel subsidy mechanism so that it will benefit those who truly need it. International Trade and Industry Minister, Datuk Seri Mohamed Azmin Ali, and Minister in the Prime Minister’s Department for Economic Affairs, Datuk Seri Mustapa Mohamed have also shared similar comments. 

(Source: Malay Mail) 

• TAGS:
• Blanket Subsidies
• Datuk Seri Mohamed Azmin Ali
• Datuk Seri Mustapa Mohamed
• Government Subsidies
• Lee Heng Guie
• Socio-Economic Research Centre (SERC)
• Subsidy Reforms
• Targeted Fuel Subsidy
• Targeted Subsidies
• Tengku Datuk Seri Zafrul Tengku Abdul Aziz