Diesel Subsidy is No More

The long speculated end to fuel subsidy is here. Well, almost. The end of blanket diesel subsidy in Peninsular Malaysia comes with trepidation, as the rationalisation is long overdue. Yet, the years of delay in the rationalisation may have structurally weakened the nation’s economy. The big-bang approach to rationalise the diesel subsidy too is worrisome, as there may not be adequate room for Malaysian businesses, be they micro-SME or SME, to land on their two legs.

This week, the government announced the end of diesel subsidy for Peninsular Malaysia. The clappings and jokes aside, it is something we have been expecting, and unfortunately, we need.

Back in 2017, the then-BN administration was on track to implement fuel subsidy rationalisation. But the then-opposition campaigned on three main things; abolishing GST, maintaining fuel subsidies, and investigating the 1MDB scandal. Of these, they have abolished the GST but introduced a plethora of taxes in its place.

Even now, there are talks of reintroducing the GST or other similar value-added tax. 1MDB is an ongoing process, never-ending it seems. And now, partial rationalisation of the fuel subsidy, came not too long after a veiled threat to get the citizenry to register into the PADU database.

Dependency On Petroleum

The nation’s coffer has been too reliant on petroleum revenue ever since the formation of Petronas. No money? No problem. Get Petronas to pay the dividend.

The blanket fuel subsidy amongst others had helped to ensure the cost of living in Malaysia to be low, artificially. With artificially maintained low cost of living, employers don’t need to increase income. The impact is our income tax base becomes low. While we do get to attract foreign investors to capitalise on our ‘cheap’ employees, the distortion has forced our youths to seek employment overseas.

Globally, there is this move towards ESG, or Environmental, Social, Governance. Under this ESG, sustainability is a key concept. Revenue from petroleum is not sustainable in the long run as petroleum is a non-renewable resource. Even today, Petronas is finding it hard to sustain its dividend to the Malaysian government.

And now is the dilemma. The government that the people elected on the promise of maintaining the subsidy is now rationalising the subsidy, even if the subsidy they are rationalising now is just the diesel subsidy. This move will cause an uproar. Or rather it is already causing an uproar.

The fact that they had extended the subsidy by seven years, means we have delayed the inevitable for seven years.

Interestingly, BN supporters from 2017 are choosing to poke fun at the PH government and their supporters, not so much demanding the continuation of the subsidy.

Abolishing Diesel Subsidy The Right Move?

As we are already late by seven years, I am not sure if the move to abolish the subsidy directly for diesel is the right move or if it would utterly shock the market. Best case scenario, the market would right itself. Unfortunately, that would usually mean an increase in the cost of living. As mentioned, they rationalised only the diesel subsidy and only in Peninsular Malaysia. Would the impact to the overall fiscal burden over diesel subsidy be sufficient to impact the nation’s fiscal prudence?

Employers would need to increase their pay base to prevent staff-pinching, as employees would start to look for jobs to account for their expenditures. Some would turn to overseas.

The worst-case scenario would be that the seven additional years have distorted our market and it would be difficult to exit the addiction. Micro-SMEs and SMEs get a big hit. The prospect isn’t good. We can only hope that the so-called big data is there to identify who needs help and whatnot. Otherwise, we would be dishing out plates of overcooked fried calamari.

Signing off for now.

Feel free to support or dispute. No insult, please. You can have fried calamari, but be mindful of getting gout later.

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Danny Liew
Danny Liew is a freelance writer with extensive experience in defence, geopolitics, and economics for about 20 years. He contributes to the Perajurit defence portal, Malaysia Military Power (MMP), amongst others.

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