Malaysia: Malaysia scraps fuel subsidies in push to strengthen fiscal position
December 15, 2014
The Malaysian government pushed ahead with its subsidy rationalization program by completely removing decades-old fuel subsidies. Starting on 1 December, the retail prices of widely-used RON95 petrol and diesel were fixed on a managed float system that adjusts prices according to market rates. The move is expected to save the government up to USD 6 billion annually, which represents more than 6.5% of the expenditure outlined in the 2015 budget and roughly 1.5% of GDP.
Malaysian Prime Minister Najib Razak embarked on an aggressive subsidy reform agenda in July 2010, introducing progressive cuts to subsidies for products such as fuel, sugar and cooking gas. While the most recent move was facilitated by the drop in global oil prices, it is a big step on the path to reducing the fiscal deficit. Moreover, it comes just a few months before a new 6.0% goods and services tax is introduced in April 2015. With these measures, Najib’s goal is to trim the fiscal deficit from 3.9% of GDP in 2013 to 3.5% this year, 3.0% in 2015, and ultimately position the country for a balanced budget by 2020. FocusEconomics Consensus Forecast panelists project a fiscal deficit of 3.5% of GDP in 2014 and 3.1% of GDP in 2015.
Analysts generally consider that the government’s short-term targets are more realistic given the latest subsidy removal, and also expect long-term economic benefits. Reducing the budget deficit now could be crucial if a fiscal stimulus is needed to counteract headwinds in the years to come. Moreover, the decision to remove subsidies signals the government’s intention to channel funds to areas of the economy that can drive growth. Finally, the savings generated will help offset the loss in oil-related export revenues as the price for oil reaches a multi-year low.
Author: Carl Kelly, Economist