Thestar: Saturday May 28, 2011
By YVONNE TAN
WHILE there's fear that subsidy cuts would burden consumers heavily and inflation could spike up, this could be more perception than reality.
For one, Dr Yeah Kim Leng, chief economist at RAM Ratings Bhd points out that 60% of Malaysian households, on average, earn more than they spend.
“So they have a buffer to protect against rising prices. It is the bottom 40% who earn less than RM1,500 per month that we should be concerned about,” he says.
Consumers, particularly in this income group will have to respond to the changing prices by adjusting their spending patterns, paying for only the essentials, Yeah says.
For others, the effect of higher prices may dissipate quickly as they get used to it, he says.
AmResearch Sdn Bhd senior economist Manokaran Mottain agrees with Yeah, saying that Malaysians would still be able to manage price increases even after the next round of subsidy removal essentially for the price of RON95 petrol, diesel and liquefied petroleum gas provided the prices of goods and services do not spiral as a result.
“Here is where the authorities must ensure that prices are not simply raised,” he says.
He believes that the Government should lessen subsidies and channel the funds saved from subsidies into addressing the transportation and housing needs of the country.
Manokaran says subsidy rationalisation is inevitable, given the current strong commodity price levels and their impact on the Government's budget.
In his latest economic report, Manokaran says if the Government wants to maintain prices at current levels, an increase in subsidies would mean a reduction in other expenditures, be it operating or development.
The Government may introduce austerity measures to operating expenditure, such as reducing ministries' expenses like overheads and promoting fiscal prudence.
However, trimming development expenditure especially will be detrimental to economic growth and welfare of the country.
In this context, the Government has no other option other than to introduce a gradual cut in subsidies, according to Manokaran.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says subsidy removals will undoubtedly affect consumer spending especially if such measures lead to widespread increases in the prices of consumer goods.
Still, it must be done as the rising cost of global commodities has placed a significant burden on the Government's coffers and thus become a compelling reason for the Government to review its subsidy policies.
“As for food items, the removal of subsidies has to be done very gradually as it affects the poorest segment of the population,” he says.
In its economic update, Kenanga Research says it is “definitely supportive” of the original plan espoused by the Performance Management and Delivery Unit also known as Pemandu which entails a gradual removal of subsidies via periodic fuel hikes.
“This would remove price distortions, market distortion and inefficiencies caused by artificially low prices, besides reducing a significant impediment to the global competitiveness of Malaysia's manufacturing sector,” the research outfit says.
Fuel remains the biggest component of the Government's subsidies and the current price of global crude oil at above US$100 per barrel is estimated to cost the Government RM18.3bil this year in fuel subsidy, higher than the RM10.2bil set aside for Budget 2011.
“Given that crude oil prices would remain high or above US$100 per barrel, we reckon that fuel subsidy alone could exceed RM20bil by next year as the strengthening of the ringgit and higher petroleum revenue may only partially offset the rising subsidy,” says Kenanga in its update.
The research house is projecting budget deficit to reach 6% of gross domestic product (GDP) this year from 5.6% in 2010, against the Government's hopes of shrinking it to 5.4% of GDP this year.
Yeah says this is largely because of the fuel subsidies and price-controlled items such as cooking oil which is paid from the cess contributed by the oil palm producers.
Charges for several essential services such as transport fares for buses, taxis, school buses and trains, are also subject to price control, thus holding down any unreasonable price hike by businesses and vendors.
Yeah says the central bank in its annual report last year, estimated that the full impact of the RON95 price adjustment last year amounted to a 0.1 percentage point of the Consumer Price Index (CPI) the gauge of inflation levels, increase while the price adjustments for the other controlled items such as sugar, diesel, liquified petroleum gas and cigarettes amounted to less than 0.05% points.
In the first subsidy rationalisation programme on July 16 last year, the price of RON95 and diesel went up by 5 sen per litre while sugar and liquefied petroleum gas were raised by 25 sen and 10 sen respectively, resulting in total savings of RM779mil for the Government.
Based on this data, Yeah expects that a gradual pace of subsidy reduction will result in between half to a full percentage point increase in the CPI this year.
Bank Negara said in March that inflation on the whole would range between 2.5% and 3.5% this year, after assuming that some subsidies would be rationalised. Last year, inflation stood at an average of 1.7%.
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