Malaysia’s boon and bane

WHEN Price range 2022 was introduced in November 2021 by the Finance Minister, the federal government’s income was based mostly on a crude oil value forecast of US$67 (RM281.40) per barrel.Primarily based on this forecast, the federal government anticipated to gather some RM43.9bil by way of petroleum-related income.

The majority of that is within the type of the annual dividend from Petroliam Nasional Bhd (Petronas) amounting to RM25bil, the Petroleum Earnings Tax or PITA of RM12.4bil and different types of petroleum-related income of RM6.5bil.

On the identical time, the federal government was additionally anticipated to spend a substantial sum within the type of subsidies, particularly these associated to the retail value of petrol.

Primarily based on knowledge that was offered within the Price range 2022, some 5.2% of the whole deliberate expenditure goes in direction of subsidies and social help, which interprets to about RM17.4bil.

Nonetheless, this expenditure continues to be fairly loosely outlined as a extra detailed breakdown suggesting that the federal government anticipated to spend some RM6.2bil in petrol (which incorporates RON95, diesel, and liquefied petroleum gasoline (LPG)) and toll subsidies and others.

Therefore, the forecast petrol subsidy based mostly on a crude oil value of US$67/barrel was most likely nearly RM4.4bil for 2022 based mostly on this column’s estimate.

Therefore, with the consumption of roughly 22 billion liters of subsidised petrol/diesel per 12 months, the federal government was ready to subsidise roughly 20 sen per liter based mostly on the RON95 market value of RM2.25 per liter in opposition to the managed market value of RM2.05 per litre.

Petrol value asean

Extra subsidies?

In response to the Finance Minister, Malaysia is ready to fork out RM28bil this 12 months if oil costs keep above the US$100 (RM420) per barrel mark.

The minister additionally commented that the worth of RON95 is presently subsidised as a lot as RM1.65 per liter based mostly on a good market value of RM3.70 per litre.

Malaysia makes use of the Technique of Platt Singapore or MOPS as a reference value to derive the retail value of petrol within the nation and the above feedback had been made when Brent was buying and selling at about US$120 (RM504) per barrel, as in opposition to US$108.89 (RM457. 34) per barrel on the time of writing.

Assuming the same RM1.65 per liter subsidy can also be accorded to diesel, the federal government is ready to subsidise near RM3bil per thirty days (based mostly on the consumption of 1.83 billion litres of petrol/diesel per thirty days multiplied by RM1.65 per litre).

In essence, the federal government subsidies for petrol and diesel are extremely correlated to the worldwide crude oil costs and for each US$10 (RM42) value change, the federal government’s gas subsidies adjustments by roughly RM610mil per thirty days or RM7.3bil per 12 months, based mostly on this column’s estimates.

After all, with the upper oil costs, the federal government’s income too is ready to enhance and this may very well be each within the type of Petronas’ dividend and different petroleum-related taxes and funds.

That is estimated to be about RM7.8bil for each US$10 (RM42) change within the Brent crude oil value.

Therefore, on a internet foundation, the federal government will nonetheless be capable of afford these subsidies, however the nation loses out by way of income when subsidies are prolonged absolutely.

Are subsidies inexpensive?

Offering social help to Malaysians of want is the job of any authorities that sits in Putrajaya.

Nonetheless, earlier than we agree that subsidies are unhealthy for the individuals because it encourages not solely wastage but in addition smuggling actions, we should take notice that the explanation why the federal government is caught on this perpetual argument as as to if it ought to subsidise petrol merchandise or not.

In different nations, and we do not have to go far for this to make a comparability, petrol costs aren’t solely really bought at market costs, however they’re additionally taxed.

Determine 1 gives the present market costs of petrol in varied Asean nations.

A tax on gas is a norm

Judging from the info within the desk, one can see the huge disparity in Asean nations with a median and imply value of RM5.54 and RM5.39 respectively.

Actually, Malaysia’s gas costs are so low that we’re at present ranked twelfth most cost-effective on the earth.

The huge value differential amongst Asean nations is because of taxes being imposed by the respective governments to curtail consumption and encourage shoppers to change to extra inexpensive public transportation.

For instance, in Europe, based mostly on knowledge offered by, the place costs ranged between €1.30 to €2.35 (RM6.06 to RM10.95) per liter of gas, the tax part itself is between a subsidy of €0.17 (RM0.80) per liter to a tax of €1.52 (RM7.06) per litre.

Malaysia too has a taxation mechanism in its gas calculation as the automated pricing mechanism (APM) adopted by the federal government requires a tax of 58.62 sen per liter for petrol and 19.64 sen per liter for diesel.

Nonetheless, this isn’t imposed when the federal government steps in to repair the worth at a sure stage, which is what we’ve got right this moment for RON95 at RM2.05 per liter.

Distortion from value management

Malaysia once more missed the chance to play catch-up with the remainder of the world when oil costs dropped drastically in 2020 after the pandemic.

As a substitute of taxing gas, Malaysia determined to be beneficiant and lower gas costs even to as little as RM1.25 per liter in April 2020. Nonetheless, as costs steadily climbed again, Malaysia solely adjusted the costs to the extent when costs hit RM2.05 per liter in late February 2021.

Thereafter, as costs proceed to rise, not solely did Malaysia preserve the worth, the aspect of subsidy kicked in.

When gas is reasonable, it encourages wastage as shoppers aren’t made conscious of the particular value of a selected product. Similar to water, which is a finite useful resource, offering free water is solely a populist transfer and the associated fee to generate handled water to shoppers is many occasions greater than the precise value we’re paying.

Fixing RON95 or diesel too is a populist transfer and by proper, the federal government ought to transfer away from subsidies and let the shoppers pay what the market value is.

RM30bil APM distinction

Assuming if we return to the APM that we’ve got, the federal government might be amassing RM10bil in income and doubtless saved some RM20bil in subsidies if world crude oil costs common US$88 (RM369.42) per barrel this 12 months.

Therefore, the distinction between the subsidy offered and the tax collected is a big RM30bil distinction, which can be utilized to supply focused help to the B50 group.

Sure, adjusting for gas costs is painful, but when even nations like Laos, Cambodia, Thailand, and Indonesia can do it, why cannot we?

Why ought to we subsidize gas when the federal government’s coffers are in dire straits?

The elephant within the room

Offering blanket subsidies just isn’t the reply and targetted subsidies are tough if costs aren’t adjusted.The easiest way to deal with this challenge is to make requirements extra inexpensive.

This may be achieved by way of a greater wage construction, beginning with a minimal wage that displays actuality.

The next minimal wage will encourage employees to be higher compensated and any market value adjustments for fundamental wants are simply absorbed.

To do that, the federal government ought to set a timeline as to when it intends to maneuver in direction of market-based pricing to allow most of the people to regulate their consumption sample in addition to to allow the adjustment to be absorbed into the economic system, particularly with respect to inflation expectations.

In conclusion, whereas the upper oil value is a boon for Malaysia, which can allow the nation to enhance its petroleum-related income, additionally it is a bane for the federal government within the type of subsidies.Pankaj C Kumar is a long-time funding analyst. The views expressed listed below are the author’s personal.


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