KUALA LUMPUR: The 1Malaysia People's Aid (BR1M), a brainchild of Bank Negara Malaysia (BNM), has been helpful in providing assistance at the household level by assisting low income groups mitigate the pressures from subsidy rationalisation undertaken by the government.

According to the central bank, BR1M has supported consumption and growth as the low income groups' marginal propensity to consume was high.

"The post BR1M period also saw gradual and sequenced adjustments and removals of subsidies and price controls.

"With fewer price distortions, the economy also became more flexible and nimble in adjusting to shocks, and therefore delivering growth and sustained rise in income," the central bank said in a written reply to Bernama when asked on the impact of BR1M.

As to whether the BR1M payout was to tempt the rakyat, BNM said it was solely focused on economic considerations which were to assist the poor and in ensuring the targeted subsidies were more efficient and effectively implemented.

It also acknowledged that the idea of BR1M was first mooted during BNM's Board of Directors Briefing to the Prime Minister on March 2011.

The proposal was carefully considered and deliberated in subsequent Economic Council Meetings in March and August 2011, said BNM.

"In essence, the proposal was to help deserving groups directly once the Government's blanket subsidy was gradually reduced," it said.

It explained that prior to BR1M's introduction in 2012, the Government was already on its path towards fiscal consolidation, which included subsidy rationalisation.

"However, there was no existence of other mechanism to help the poor and vulnerable groups affected by this exercise.

"BR1M was meant to be a direct and targeted assistance to the low income groups to ease the pressures arising from subsidy rationalisation," BNM said.

In this regard, a cash transfer mechanism was seen as a critical first step towards deeper reforms in the country's welfare system and social protection.

BNM, therefore, forwarded its recommendation to the Government to help the vulnerable groups.

Asked on the studies done before the introduction of BR1M in 2012, BNM said it conducted research on the then prevailing subsidies mechanism and also the social safety nets in other countries.

"It was found that wide ranging subsidies, administered prices and price controls had created deep inefficiencies and rigidities that prevented the economy from adjusting to global and domestic realities", the central bank said.

It was also found that the existing subsidy and price control mechanism had incurred large fiscal costs, and that it could potentially weaken the financial position of the Government in the long term.

"Equally important, the existing subsidy regime was regressive as the mechanism was disproportionately subsidising the rich, much more than the poor.

"The cost of blanket subsidy to the economy was enormous.

"Given the prevalent conditions, BR1M was introduced to direct assistance to the targeted vulnerable groups in a more effective and cost-efficient manner," it said.

Targeted subsidies are a form of direct transfers from the Government to the vulnerable groups to ease their financial burden.

In the previous blanket subsidy regime, every segment of the society, regardless of their financial background, was entitled to the same subsidy.

"Thus, it was an unbalanced system," it pointed out.

An example of a blanket subsidy would be the fuel subsidy which was subsequently replaced by the managed float system in 2014.

A study based on the Household Expenditure Survey 2009/2010 showed that the richest 20 per cent of households received a large 42 per cent of the subsidy.

On the other hand, the poorest 20 per cent of households received only four per cent of the fuel subsidy.

"This is due to wealthy households owning more and bigger cars, and therefore consuming larger quantities of fuel.

"Thus, the blanket subsidy system is a less effective tool in ensuring the benefits of low f

uel prices are widespread and inclusive.

"This calls for more targeted measures to replace the blanket subsidy system," the central bank added. -- BERNAMA