KUALA LUMPUR: Economists are calling for the government to seize the opportunity to rationalise RON95 fuel subsidies, citing the strengthening ringgit and declining commodity prices.

Universiti Kuala Lumpur Business School economic analyst associate professor Aimi Zulhazmi Abdul Rashid said the current crude oil price, which has dipped to just below US$70 per barrel, presents a perfect moment for the government to introduce targeted subsidies for RON95 fuel.

"At RM2.46 per litre, Malaysia's RON95 remains the lowest in the region, after Brunei. This is a timely opportunity for the government to implement subsidy rationalisation, similar to its move to float the prices of chicken and eggs in November 2023. "Since then, prices have stabilised and even dropped by mid-2024," he told the Business Times.

Aimi said the upcoming Budget 2025 in October to be tabled in the parliament would be a control measure to counter any impact on the inflation rate and supply chain arising from the hike in RON95 price to market price.

"This will help the government to reduce the financial deficit immediately and tune the cash assistance to the needy more effectively in the upcoming 2025 Budget," he said.

Bank Muamalat chief economist Mohd Afzanizam Abdul Rashid said timing matters in the issue of ratioanalising fuel subsidies, especially when there are other moving parts in the equation namely the dollar-ringgit and the crude oil prices.

Thus far, he said the ringgit has appreciated 6.5 per cent against the greenback on a year-to-date basis while Brent Crude Oil has declined 6.2 per cent since the start of the year.

"Based on these two data points, we could safely say the actual market price for RON95 has gone down quite significantly. "Hence, the upward adjustment may be relatively low compared if the ringgit was weak and crude oil prices hovering at an elevated level," he said. However, Afzanizam said any upward adjustment to RON95 price will be more significant to consumer price index (CPI) since it accounted for 5.0 per cent of total CPI while diesel prices was merely 0.2 per cent of total CPI.

On the choice whether to do it in stages or at one go, Afzanizam believes that it should be done in one go, rather than in stages.

"This is to avoid higher inflation expectation should the upward adjustment in RON95 be done gradually. In addition, it would further infuriate the general public if prices are adjusted upward multiple times," he said.

CGS International  said as of Sep 11, 2024, the market price for RON95 stood at RM2.46/litre, which is only 41 sen higher than the regulated price of RM2.05/litre.

"This is the narrowest price difference since December 2021 amid the global postpandemic reopening. In the past, manual adjustments to fuel price ranged from around 10 sen to 60 sen, hence, we think it is possible to adjust only once," it said.

CGS Internatioonal argued however that the impact on consumption is ambiguous depending on the offsetting measures."We believe targeted cash handouts are likely to be used, guided by information from the Central Database Hub (PADU). However, the low take-up from the diesel's Budi Madani programme could signal possible limited reach unless the government comes up with lax requirements this time," it said.

Economist Geoffrey Williams said there is never an ideal time to implement subsidy rationalisation, but now is better that before because the general macroeconomic environment is stable.

However, he stated that RON95 rationalisation is more complicated because it involves very many more people than diesel subsidy rationalisation and the process is different. "The government must have a different process which cannot rely on registered users, discount cards and quotas. This new system must be designed well and tested and introduced in stages," he said. 

Williams suggested a tiered pricing scheme, similar to the electricity subsidy system, as it is the best scheme where the full subsidy applies for small purchases and is removed in stages for large purchases.

"This works very well for electricity, it is more efficient and can be implemented at point of sale at the petrol pumps. "It also encourages people to economise on buying and using petrol which is better for the environment," he added. Ends

https://www.nst.com.my/business/economy/2024/09/1105489/now-right-time-rationalise-ron95-subsidy-economists