RON95 petrol subsidies need to be reduced in stages to avoid burdening the rakyat, says analyst

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The Malaysian government’s decision to reduce fuel subsidies this year has obviously been a source of debate, as it has sparked fears it may lead to a drastic increase in petrol prices. To that end, an analyst has urged authorities to float the price of RON95 fuel in stages to prevent a price shock that sends consumers and businesses panicking.

Bank Muamalat Malaysia’s head of economy and social finance Dr Mohd Afzanizam Abdul Rashid told Berita Harian that when the fixed price of RM2.05 per litre for RON95 was enacted in September 2021, the gap between it and unsubsidised RON97 was only around 30 sen per litre. That gap has grown to a chasm of RM1.42 per litre, with RON97 now retailing at RM3.47 per litre.

“If we take this figure to be an indicator for adjusting the price of RON95, then the big gap to RON97 needs to be closed. However, it needs to be done in stages so that it does not cause sudden inflation,” he said.

RON95 petrol subsidies need to be reduced in stages to avoid burdening the rakyat, says analyst

Mohd Afzanizam added that Malaysia last experienced a sudden jump in fuel prices on June 5, 2008 when the price of RON97 was floated, bumping the price up by 78 sen per litre. This caused inflation to surge to 7.7% that month, compared to 3.8% in the previous month.

“There are a few things that need to be monitored with the reduction in subsidies. The first is the quantum of fuel price increase that is needed to reduce the cost of subsidies, which ideally should not be drastic. The second is the frequency of price increases.

“Therefore, the use of an Automatic Pricing Mechanism (APM), in which a new price of RON95 petrol is announced every week [as it is currently], could be the solution. With this approach, the rakyat can better plan their finances,” Mohd Afzanizam said, adding that enforcement needs to be stepped up to prevent business from raising prices of goods drastically.

RON95 petrol subsidies need to be reduced in stages to avoid burdening the rakyat, says analyst

Not everyone is on board with the idea of a managed float. Prof Madya Dr Aimi Zukhazmi Abdul Rashid, an economic analyst at the UniKL Business School, opined that the gradual increase in fuel prices will not resolve the issue of rising inflation rates.

According to him, there will be businesses that will take advantage of the situation and raise the price of goods several times, using the gradual fuel price increases as an excuse. There’s also the issue of enforcement, as there is not enough government agency staff to oversee every station across the country, especially when it comes to the control of purchasing and mechanisms at the stations.

As such, Aimi Zukhazmi said the price of RON95 petrol should immediately be floated to match market rates, not in stages. “Having just one price increase would make it easier to coordinate the price increase of other products, as certain goods like sugar are still subsidised by the government.

RON95 petrol subsidies need to be reduced in stages to avoid burdening the rakyat, says analyst

“Such a sudden rise [in fuel prices] will be a cause for concern, as the price of crude oil has been increasing due to the crisis in the Middle East. Even so, a staggered price increase will not be enough to achieve the government’s goal in reducing the country’s fiscal deficit and national debt,” he added.

Separately, the Consumers Association of Kedah has warned the government that the withdrawal of fuel subsidies could have a domino effect on the economy and the rakyat‘s livelihood, the New Straits Times reported. President Yusrizal Yusoff said that rising fuel prices could cause high-income business operators to raise prices for goods and services, which will be passed to the consumer.

He also asked if the government had any actual data on how much fuel Malaysians use in order to ensure a more equitable channeling of subsidies. Yusrizal said that as part of an oil-producing country, Malaysians have the right to enjoy fuel subsidies, adding that the government should focus on revitalising the economy to counter the effects of the COVID-19 pandemic, rather than withdrawing subsidies.

RON95 petrol subsidies need to be reduced in stages to avoid burdening the rakyat, says analyst

This comes after economy minister Rafizi Ramli confirmed to Bloomberg this week that the government plans to reduce fuel subsidies this year to address its fiscal deficit. As part of this plan, blanket subsidies for RON95 petrol, which formed the bulk of the RM81 billion in subsidies borne by country, will be phased out.

A look at the website of Double, an unsubsidised fuel station in Padang Besar, Perlis to serve Thai motorists, shows the floated price of RON95 petrol to be RM3.47 per litre today, which is exactly the same as RON97. Diesel fuel, meanwhile, retails at RM3.46 per litre.

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