analysis Asia
Political backlash or lack of cash? Delicate balance confronting Malaysia PM Anwar in cutting diesel subsidies
A cut in fuel subsidies has been spoken about for almost two decades, but no government has had the political will to implement it. Experts say PM Anwar’s diesel plan, estimated to save the country around RM4 billion annually, should gain some urgency.
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KUALA LUMPUR: There was one main takeaway from prime minister Anwar Ibrahim’s recent special address, according to observers.
Speaking on May 22, Mr Anwar announced the move to cut diesel subsidies, which is expected to save the government around RM4 billion (US$ 847.8 million) a year.
He added that the reform will involve only consumers in Peninsular Malaysia and exclude Sabah and Sarawak as the use of diesel vehicles in the two Borneo states was widespread.
The air of caution as Mr Anwar stressed in a televised address that “any targeted subsidy should not burden the majority of the people” was not lost on analysts.
Research firm Merdeka Center’s executive director Ibrahim Suffian told CNA that he got the impression that there was a sense of reserve on the part of Mr Anwar and the government as the subsidy cuts could face potential backlash.
“Some people told me that his speech was long and defensive, but it highlights the caution within the government. It is not easy and there is no perfect way of doing it,” Mr Ibrahim said.
The issue of rationalising fuel subsidies in Malaysia has been spoken about for almost two decades, but no government has had the political will to implement the plan.
However, some experts are saying that Malaysia should kickstart it sooner rather than later, before it gets too close to the next general election, which the country has to call by February 2028.
MEASURED MOVES BY GOVERNMENT
Political observers have suggested the government has wanted to tread carefully when it came to implementing the subsidy cuts as it could hurt in terms of support from the public.
Former United Malays National Organisation (UMNO) information chief Shahril Hamdan said that Mr Anwar’s cautious address sounded like a budget speech.
“I am not sure if there was anything really new besides some details about targeted subsidies,” he said, speaking on an episode of his Keluar Sekejap podcast on Wednesday (May 22).
His co-host, former minister of health Khairy Jamaluddin said that Mr Anwar had tried to build a narrative that the restructuring of the subsidies system would be happening soon.
“It was to soften the ground and to get the people prepared that this was going to happen,” he said, adding that it was a fair address.
However, Mr Anwar did not disclose when the diesel subsidy rationalisation would be implemented but said that to avoid a dramatic increase in the price of goods and services, the government would provide diesel subsidies to businesses that utilise select commercial diesel vehicles.
This includes 10 types of public transport vehicles and 23 types of goods transport vehicles under the Subsidised Diesel Control System, including buses and taxis.
Mr Anwar also said that eligible individual owners of diesel vehicles would be supported with cash handouts.
He also claimed that the unity government’s move to introduce the targeting of diesel subsidies is a “brave” one, and certain quarters would question it.
Currently, diesel is sold at a price of RM2.15 per litre. RON 95 petrol, one of the most popular petrol types in Malaysia, meanwhile is sold for RM2.05 per liter.
Fuel prices in Malaysia are among the lowest in the world.
Anwar also said that blanket subsidies in Malaysia needed to stop, saying that they were among the highest globally.
“What for? Blanket subsidies are more beneficial to the ultra-rich because their consumption or spending on goods and services is greater. 3.5 million foreigners also benefit from … subsidies,” he had said in the same speech.
Mr Anwar said that the savings from giving blanket subsidies would then be channeled to those who really needed the assistance.
In the past, blanket subsidies have been given for electricity use, cooking oil and rice among other things.
However, recently the government has been making an effort to cut down on subsidies, with the country ending subsidies and price controls for chicken and for those who use more than 600kWh of electricity, since last year.
In his address, Mr Anwar also touched on corruption and the poor fiscal state of the country, with a need to increase tax revenue alongside rationalising subsidies.
Mr Anwar said that government debt totalled RM1.2 trillion or 64.3 per cent of the gross domestic product and if other liabilities were included, it totalled RM1.5 trillion or more than 80 per cent of the GDP.
“This ... debt is a waste of the people’s money because a lot of it is used to pay interest. This year, every one ringgit we collect in tax, 16 cents is used to pay interest: we haven’t even spoken about the principal,” he said during his May 22 address.
Opposition leader Hamzah Zainudin claimed that Anwar’s address had caused unease among the people as the fuel subsidies cuts would cause spikes across the entire economic chain at a time when people were burdened with the high cost of living.
He said that the elephant in the room was when the fuel subsidy rationalisation would come into effect and what was the government’s mechanism to channel aid to people.
"The people want to know when fuel prices will go up? How can they apply for aid? This was not spelt out. Even after months, the government is implementing the principle of announcing first and thinking later," he said in a statement on May 22.
The start date hinges on what functions are in place to ensure a smooth implementation, say analysts.
Domestic Trade and Cost of Living Minister Datuk Armizan Mohd Ali said on May 23 that discussions were ongoing on how the diesel plan would be implemented, specifically on how aid could be distributed to target groups.
“As long as the Cabinet is not pleased with the mechanism, especially how target groups will receive the aid, we will not set a date. Once the government finalises this aspect, an announcement will be made on the start date,” he was quoted as saying by The Star.
COSTS OF TACKLING A POLITICALLY SENSITIVE ISSUE
Wading into a politically sensitive issue such as fuel prices can sometimes come with costs.
Mr Ibrahim of the Merdeka Centre pointed out that the Barisan Nasional (BN) government led by the fifth prime minister Abdullah Mohd Badawi raised prices of fuel in 2006 because of rising international fuel prices.
As a result, it was punished in the 2008 elections.
For the first time in history, BN lost their two-thirds majority at the federal level as well as in the states of Selangor, Perak, Penang, and Kedah.
Mr Badawi’s successor Najib Razak introduced the Goods and Services Tax (GST) back in April 2015. This policy, and the 1MDB scandal, are said to have contributed to BN losing power at the federal level for the first time ever during the 2018 general elections.
The GST was scrapped by the Pakatan Harapan (PH) government, led by Dr Mahathir Mohamad, that came into power in 2018.
Mr Ibrahim opined that the government wanted to begin with diesel before moving on to petrol to prepare the public and to calibrate any teething issues.
“The discussion about subsidies has been there since they became government. It has taken quite a while for them to agree to commit to it. They are taking measured steps to see how it goes. The big one would be (the removal of) petrol (subsidies),” he said.
Petrol vehicles make up the majority of vehicles in Malaysia, while diesel vehicles are mainly used for commercial purposes.
Political analyst Sivamurugan Pandian of University Sains Malaysia (USM) also believed the government was proceeding with caution.
"They would not want to do something that would allow them to lose support. In the long run, he (Mr Anwar) will not be able to satisfy everyone, but this is something that he feels is necessary,” he said, adding that the gripe of cost of living was the main issue faced by people.
Economist Dr Yeah Kim Leng of Sunway University told CNA that the rationalisation of fuel subsidies has a larger impact on the public because it was a daily item that had a large consumer base.
He believed that the government did not want to introduce the targeted subsidies for diesel and petrol at the same time as it could create a big shock to consumers and businesses.
“There is a reason why the government is doubly cautious in implementing it all at one time because the shock could be quite strong. They are sequencing it properly to help avoid this.
“This allows consumers to gradually adapt to higher prices. We have been lulled into complacency since the fuel prices have been fixed for the past few years,” he said.
Malaysia’s second finance minister Amir Hamzah Azizan said that Malaysia spends up to RM1 billion monthly for diesel subsidies.
He said that the disparity from market price has incentivised years of smuggling fuel into neighbouring countries, and allowed large segments of the commercial sector to increase profits on the back of cheap diesel, which they are not eligible for in the first place.
“Losses due to leakages amount to approximately RM4.5 million per day,” he said in a Linkedin post on May 23.
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URGENCY TO IMPLEMENT
Moving forward, Mr Ibrahim believed that the government would have to implement the exercise as soon as possible.
“Any later and it will be too close to the next elections,” he said.
He believed that there was an outright chance that the government would be impacted by this decision, but that a lot also depended on government measures to mitigate the cost of living for the people.
“The government would have time to mitigate the effects of this decision before the next election,” he said.
Mr Sivamurugan said that the government had to be calculative and tactical in their moves to make sure whatever reforms they undertake can enable them to retain support they have and regain support they would like to have.
“They would want to do it now and look at the outcome within 18 or 24 months. Closer to the election, they will have to prove that whatever unpopular decision made now would have been beneficial later,” he said.
For Dr Yeah, the implementation of the reallocation of subsidies would be the key to ensure that the negative impact of higher fuel prices was manageable.
“The subsidy costs have ballooned to a level that is not sustainable anymore and is wasteful in terms of efficiency. It is a poor allocation of resources,” he said.
