Ron95 Blanket Subsidy May Backfire

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A politically heavy solution to the problem of RON95 subsidies is a double-edged sword - not only has the concept of targeted subsidy been hacked to pieces and leakage left unaddressed, but new procedures will likely cause queues and irritations at the pump.
It is impossible to understand why the government complicated a simple issue of everyone paying the market price, and those eligible, whether it is the bottom 20 percent or others, receiving an offsetting grant based on projected usage to lessen their burden.
The only possible explanation is political - but before you accuse me of bias, unfairness and naivete, hear me out, there is a relevant, strong basis for what I say.
Finance Minister II Amir Hamzah Azizan said the decision to use MyKad as the main method to claim RON95 petrol subsidies will allow Malaysians to be reminded of the privileges of citizenship.
ADS“Every time Malaysians go to fill up gas now, they will look at their IC (identification card) and remember that they are getting benefits because they are citizens.
“The MyKad as a mechanism is important (as it highlights) the perks of having an IC (and) the privileges of being a Malaysian,” he told a press briefing in Shah Alam two days ago.
Finance Minister II Amir Hamzah AzizanHow crass is that! Just because this Madani government wants to remind all Malaysians of their privilege as citizens and the perks of having an IC, we have to bear inconveniences, poor economics and be grateful to the government. Is the constant reminder to curry favour with voters?
It’s the politicians who have to be reminded of their sworn duty to always act in the interest of the nation and the rakyat. That includes not raiding the national coffers to reward voters as and when they please, and when it is not in the national interest.
Let’s break it down together to show unambiguously that there are far better solutions than what the government has suggested, which address the quadruple problems of targeted subsidy, government finances, leakage and conservation of resources.
Not targeted, but blanket subsidy
The government announced the price of RON95 petrol will be reduced to RM1.99 per litre, from RM2.05 per litre, effective Sept 30, through targeted subsidies under the so-called Budi Madani RON95 scheme. Don’t you agree that the name itself is political sloganeering?
“Starting Sept 30, non-citizens and large companies will no longer be eligible for the subsidy, as it is meant solely for personal use. They will have to pay the non-subsidised price of about RM2.60 per litre, while Malaysian citizens will continue to enjoy the subsidised price of RM1.99 per litre,” Prime Minister Anwar Ibrahim said.
This perishes the notion that this is a targeted subsidy - all Malaysians get it irrespective of income levels and affordability. The only ones exempted are large companies and foreigners - it is nothing but a blanket subsidy.
Malaysians get no additional privilege than the current arrangement, where they don’t have to produce their ICs - except for a small reduction of three percent in price to RM1.99 a litre for RON95 from RM2.05.
This costs the government about RM1 billion a year, according to my calculations based on usage of about 1.4 billion litres a month, but has insignificant consequences on most people.
In fact, such an unnecessary reduction tends to increase petrol consumption rather than reduce it, and is negative on conservation and environmental considerations. It should be avoided scrupulously.
ADSGovernment finances poorer
Former economy minister Rafizi Ramli estimates that the subsidy rationalisation will cost the government RM15 billion at current prices and exchange rates, lower than previous estimates of RM20 billion a year because of the drop in oil prices in US dollars and the rise of the ringgit against the dollar.
Former economy minister Rafizi RamliGovernment finances improve, but that is due to lower oil prices. However, that is overall negative because, as a net energy exporter, the government gets less from exports of oil and gas. That’s something which must be offset against the gain from lower subsidies caused by lower oil prices.
However, much of the populace can afford to pay unsubsidised prices. You get an exemption of 300 litres per month if you are Malaysian. Assuming you use that much - most don’t - that amounts to a saving of RM180 per month (subsidy of 60 sen per litre multiplied by 300).
Government figures show 99 percent don’t use more than 300 litres per month. If the average person uses 150 litres, the subsidy goes down to RM90 a month. And if they pay the full price, they will probably use less petrol, bringing that down further.
If the subsidy is targeted to just the 20 percent of the bottom earners and assuming they consume only half the amount of the average consumption, they will consume just 10 percent of RON95. Hence, the subsidy will be only 10 percent of the RM15 billion now or RM1.5 billion, a savings of RM13.5 billion for the government a year.
If this is used to provide cheaper, eco-friendly alternative transport and help the poor, then the government will be doing something for the more unfortunate in the country - far better than a needless blanket subsidy that helps mostly those who don’t need it.
The problem of leakage
If you have a subsidised price, there will be leakage through arbitrage - to large companies, to foreigners, on the high seas and through the porous borders to countries where prices are higher. It has always happened.
The only solution is unsubsidised prices at the pump to stop that leakage. It worked well with diesel, but regrettably, the government seems to have unlearned that very important and useful lesson.
RON95 leakage is estimated to be around RM7.5 billion a year. Together with a potential savings in subsidy through targeting only the bottom 20 percent of earners, which saves RM13.5 billion, it gives total extra spending money of RM21 billion a year.
When pump prices reflect market prices, they discourage petrol consumption, which is the right policy in terms of national economic resilience as well as taking care of the environment, with transport pollution being a major problem in the country.
So why does the government do something as silly as this - forgoes RM21 billion and reminds people needlessly that they are fortunate to be a citizen of this country? You guessed it - currying all voters’ favour for elections - through an RM21 billion bonus.
In effect, it is worse than money politics. But Malaysians have shown that they are not stupid when they threw out a corrupt Najib Abdul Razak in 2018. That blanket subsidy might just backfire badly, causing an explosion of massive proportions. - Mkini
P GUNASEGARAM wonders who is giving the prime minister such bad advice.
The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.

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