Malaysia cuts diesel subsidies, with hopes that handouts will cushion inflation impact (2024)

KUALA LUMPUR – Malaysia will cut diesel subsidies and float retail prices to the market rate of RM3.35 per litre, an increase of about 55 per cent from RM2.15, starting from June 10.

The move, however, will not have much impact on the country’s inflation rate – although it may have adverse political ramifications for Prime Minister Anwar Ibrahim’s ruling Pakatan Harapan coalition, said experts.

Announcing the rationalisation on June 9, Minister of Finance II Amir Hamzah Azizan said: “Malaysia can ill afford to continue losing billions of ringgit to smuggling, which could otherwise be better spent to benefit Malaysians and develop our nation.”

The previous price for diesel, which was announced on June 5, was RM2.15 per litre.

On May 24, Datuk Seri Amir said diesel subsidies cost the country RM1 billion (S$288.2 million) a month, while losses from leakages amount to RM4.5 million a day.

In 2023, RM14.5 billion was spent on diesel subsidies. With the rationalisation, the government is expected to save around RM4 billion annually.

Senior economist Yeah Kim Leng told The Straits Times that he does not expect Malaysia’s inflation rate to increase, and even if it does, it will be a marginal increase on certain products instead of all goods and services.

He said Datuk Seri Anwar’s RM200 Budi Madani cash handouts for the lower-income group, as well as farmers and smallholders, can tide them over the price increase.

At the same time, subsidies will still be given to traders using diesel-powered commercial vehicles, which consist of 10 types of public transportation vehicles and 23 categories of goods transport vehicles. These businesses include bus and taxi operators under the Subsidised Diesel Control System (SKDS) 1.0 and SKDS 2.0.

Under SKDS 2.0, users of logistics vehicles entitled to fleet cards – a card for subsidised diesel to be used at petrol stations, instead of paying cash or using credit/debit cards – will pay RM2.15 per litre, while the price under SKDS 1.0, which is targeted at school buses, express buses, ambulances and fire engines, remains at RM1.88 per litre.

There is no change for subsidised diesel for fishermen at RM1.65 per litre, and the price for Sabah and Sarawak remains at RM2.15 per litre as the majority of families there use diesel, unlike in Peninsular Malaysia.

“What is important is the need for enforcement to ensure that people do not take advantage of the price increase to raise the prices of their products. Those in the transport industry should not raise their fares, given their entitled subsidies. This will help keep inflation unchanged,” said Professor Yeah, a director of the Economic Studies Programme at Sunway University’s Jeffrey Cheah Institute on South-east Asia.

“There should be no reason for any inflation as a result of higher fuel prices, from a business perspective.”

Mr Anwar on May 21 announced the decision to cut fuel subsidies and strengthen Malaysia’s fiscal position, as part of his plan to move away from blanket subsidies and to focus aid for low-income groups. Fuel, cooking oil and rice are among the subsidised items, but rising commodity prices in recent years have put a strain on the coffers.

“Lower- and middle-income groups who use diesel for their businesses will not be affected by the rationalisation. The ones who will not benefit are the higher-income group and foreigners,” said the Prime Minister on May 21.

Malaysia’s central bank projects headline inflation to range between 2 per cent and 3.5 per cent in 2024, compared with 2.5 per cent in 2023, after taking into account the planned subsidy and price-control adjustments.

Kenanga Investment Bank economist Muhammad Saifuddin Sapuan said the government’s inflation target stays at 2.7 per cent for 2024, slightly above 2023’s 2.5 per cent, as inflation remained broadly stable in the early part of 2024.

Nevertheless, he added that even though the cash handouts and subsidies will help absorb the impact of higher prices, consumer reaction will still play a role in stabilising the prices of goods.

“Demand could slow if there is a shift in consumption patterns. People might be cautious in their spending, and that will result in lower demand and subsequently retain the price level,” said Mr Saifuddin.

He estimated that with the monthly RM200 cash handouts, recipients will be able to purchase 59.7 litres of diesel each month, fully subsidised by the government.

However, political analyst Oh Ei Sun told ST that the cuts will most likely have an adverse political impact on the ruling coalition – similar to the unpopular goods and services tax (GST) that was implemented under convicted former prime minister Najib Razak.

Malaysians’ overall unhappiness with the GST, which saw prices increase across the board, was among the main reasons why the undefeated Barisan Nasional was toppled in the 2018 General Election.

Dr Oh, a senior fellow at the Singapore Institute of International Affairs, added that the upcoming Sungai Bakap state by-election in Penang on July 6 will be a litmus test for Mr Anwar’s popularity in the constituency held by opposition coalition Perikatan Nasional.

“The by-election will be one barometer to gauge such impact on the government’s popularity. If Parti Keadilan Rakyat fares worse than last year, then it could be partially attributed to such unpopular measures,” he said.

“The major impact would be seen in the next general election in 2027, as cuts sink in and affect livelihoods over prolonged periods.”