The rationalisation of fuel subsidies in Malaysia has begun with the removal of the blanket subsidy for diesel, with the retail price of B10 and B20 diesel in the peninsula increased to RM3.35 per litre as of today, June 10. This is a RM1.20, or 56%, jump from the previous RM2.15 per litre price for the fuel, which has been capped since 2021 by the government.
It’s a move that prime minister Datuk Seri Anwar Ibrahim says is painful but necessary to save the country, but the rationalisation programme will of course not stop there, as the government has already made it clear that it has plans to do the same for RON 95 petrol, although the timeframe as to when that implementation will happen hasn’t yet been offered.
The sooner this happens, the less of a price increase is needed, if the aim is to meet the targeted savings set for this year in Budget 2024, says Maybank Investment Bank. In a research note, its chief economist Suhaimi Ilias said that a simulation reveals what is needed to attain the target, as Dagang News reports.
He said that in Budget 2024, the government said it was targeting savings of RM11.5 billion on its subsidy expenditure for this year. So far, it has achieved a savings of RM7.4 billion, including RM4 billion from the adjustments made in electricity subsidies and RM1.2 billion from the elimination of chicken subsidies.
He added that a further reduction of RM2.2 billion is projected from the targeted subsidy of diesel, which is a pro-rated amount based on the RM4 billion in savings that can be achieved from fuel rationalisation in a full year.
According to the investment bank, an increase of 10 sen per litre for RON 95 petrol can save the government RM2.5 billion in subsidies for a full year, assuming the increase is offset by monthly cash assistance to eligible recipients under targeted subsidies such as that for diesel.
So, with that, the simulation made by by the investment bank indicates that the price of RON 95 petrol would need to be increased by 32 sen, or 15.6%, to RM2.37 per litre starting this July 1 to achieve the RM4.1 billion savings needed to meet the RM11.5 billion target.
Suhaimi said that should the government act slower, implementing it in the fourth quarter, the price of RON 95 petrol will have to be raised higher to achieve the savings target in 2024, given the shorter timeframe. He said that in such a scenario, the price of the fuel will have to be increased by 65 sen, or 31.7%, to RM2.70 per litre if it began on October 1, 2024.
However, Suhaimi pointed out that any move to introduce targeted subsidies for RON 95 petrol is ultimately a “political decision,” and that the government has the final say on the actual quantum and timing of the price adjustment.
He added that the government could delay the implementation of the subsidy rationalisation programme involving RON 95 this year and still make its targeted savings for the year. This was because an additional dividend from Petronas could cover any shortfall in the RM4.1 billion required to achieve the total reduction target defined in the 2024 Budget.
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