Subsidy reform a painful necessity for Malaysia’s economic recovery, think tank says

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The economist added that the public must be made aware of the myth surrounding subsidies, namely that controlling the prices of certain goods eases the financial burden of a certain demographic, but that they come with economic and fiscal costs. . — Photo by Sayuti Zainudin

By Soo Wern Jun

Tuesday, July 12, 2022 4:30 p.m. MYT

KUALA LUMPUR, July 12 – The Socio-Economic Research Center (SERC) today urged the government to make gradual progress towards subsidy reform as part of its ongoing plans for Malaysia’s economic recovery.

Its executive director, Lee Heng Guie, said it was not an easy task as many governments around the world usually face public resistance, but stressed that these reforms needed to be made.

“Many governments struggle with subsidy reform because they are afraid of upsetting the political balance – political backlash.

“When the subsidy reforms are made, consumers will feel the pinch of rising prices; this often led to widespread public protests.

“Where there is a lack of public confidence in the governance of fuel subsidy savings to implement programs that compensate low- and middle-income households, the public will find targeted spending less credible and resist subsidy reform,” he said in a statement. press briefing this morning.

Among other things, Lee suggested that the government move from a universal access subsidy program to a targeted program while providing a comprehensive and transparent mechanism to identify poor households and deliver benefits.

“The government should also introduce automatic pricing mechanisms and phased price increases to ease the adjustment,” he suggested.

He said great political courage is needed to implement subsidy reforms, noting that making the whole process transparent and its objectives clear can help ease resistance.

“Transparency and engagement with stakeholders is a cornerstone of subsidy reform to determine its design, adoption and implementation.

“Well-managed removal of subsidies and their replacement with better targeted social spending for poor and vulnerable households, plugging leakage and waste, and productive investments can promote sustainable fiscal management and equitable outcomes,” he said. -he declares.

The economist added that the public must be made aware of the myth surrounding subsidies, namely that controlling the prices of certain goods eases the financial burden of a certain demographic, but that they come with economic and fiscal costs. .

“Unsustainable subsidies can worsen the budget deficit, forcing the government to borrow more and increase debt,” he said.

Lee pointed out that the subsidies for 2022 total at least RM77.7 billion, which is expected to represent 31.2% of Malaysia’s total revenue and 4.6% of its GDP.

The main reason is due to soaring energy and commodity prices, he added.

Lee pointed out that the share of grants in total revenue has increased every year since 2012.

He warned that the expected benefits for poor and low-income households are generally regressive in nature, as the bulk of subsidies benefit the top percentile of the income distribution.

Citing a Ministry of Finance study, Lee said more than half of total subsidies in Malaysia benefited people in the upper 20 percentile income group, also known as T20.

He said the subsidies have also reduced the country’s fiscal capacity as huge financial resources are spent on subsidies which divert the government’s annual budget allocations from key sectors such as education, health, infrastructure and housing. .

He also said subsidies can encourage wasteful spending and corruption.

“When product prices are cheap and heavily subsidized below market prices, it encourages excessive consumption and waste, as demand shifts towards subsidized products.

“This perpetuates the misallocation of resources towards less productive economic activities and environmental impact,” he explained.

He said profit can take root when companies profit from price difference arbitrage, which leads to hoarding, black market and smuggling activities across the border.

Arbitrage is a trading term for when an investor negotiates the simultaneous buying and selling of a commodity in two different markets in order to make a profit.

Lee said that in a competitive market, when subsidies and price controls keep prices below actual market levels and below producers’ costs, producers’ profit margin will be affected while investors’ capital leaves the market. industry to seek better performance.

“There will be less investment, production and supply of products made available to consumers,” he said.

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