KUALA LUMPUR: A free float of fuel prices in Malaysia may save the government RM29 billion but it will also cost RM29 billion to consumers, including low-income groups who will be hit hardest, economists said.
The shift towards free float should be done gradually, although this is not the right time to do it as a sudden increase in fuel prices will be adversely affect the recovering economy, they cautioned.
They suggest that if the government still wants to go for the free float, the savings should be redistributed to the low-income groups.
RON95 is currently sold at RM2.05 per litre and diesel at RM2.15 per litre.
Malaysian University of Science and Technology's economic professor Geoffrey Williamssaid the potential savings should be redistributed to low-income groups through Central Database Hub (Padu) so that they could afford to pay for higher fuel costs.
"Other than redistribution only tiered prices for petrol to solve the problem, the subsidies should remain for small volume purchases by low-income groups and be removed for high volume purchases which mostly affect higher earners.
"The biggest saving in the short-term without harming consumers is to crack down hard on diesel smuggling and theft," he told Business Times.
Dr. Mohd Afzanizam Abdul Rashid, chief economist and head of social finance at Bank Muamalat Malaysia Bhd, said there could be bad ripple impacts on the economy from such a free float.
This includes sudden price increases of goods and services and shrinking confidence from consumers and businesses, which could slow down growth.
"It is very delicate. The ripple effects can be very deep especially when income inequality in our society is very much prevalent.
"The move might result in negative shocks to the economy as the price level would suddenly jump and can lead to other problems such as weak consumer and business sentiments which can lead to slower growth," said Afzanizam.
He said the government should carefully study the costs and benefits before making any policy changes. "Surely, the government would do their own due diligence such as cost and benefit analysis before prescribing any policy."
Penang Institute economist and socioeconomic researcher Doris Liew said the removal of the petrol subsidy aligns with the Madani Economy framework, which aims to reduce the fiscal deficit to 3.0 per cent of gross domestic product (GDP) over the next 10 years.
She said by rationalising subsidies and raising service taxes, the government should be able to meet its fiscal deficit goal of 4.3 per cent of gross domestic product by 2024.
"A possible subsidy transfer of RM150 a month to B40 will cost the government around RM5.7 billion a year. This is much lower than the RM45 billion that the government currently spends on blanket RON95 fuel subsidy.
"However the shift towards floating RON95 rate should be done gradually to minimise market distortion as subsidy rationalisation will have an inflationary effect," Liew added.
Corporate finance professional David Singh said removing fuel subsidies is a sensitive issue for the public.
The government can implement this to reduce its fiscal deficits but the consequences to the economy are vast, he added. Opportunist businesses will use this as a ground to increase the prices of goods and services.
"We will go through another profit-price spiral driving inflation when the purchasing power of the grassroots has depreciated with the fall of the ringgit exchange rate," David said.
He warned the issue has political significance, and so the government needs to be careful.
It is better if the government makes improvements with fewer resources first, especially in how it buys things and pays civil servants, before stopping subsidies that really affect poor people's ability to buy things, he added.
"We are barely out of the water from the economic disaster created by Covid-19 and should not adopt a shock-and-awe policy to remove subsidies."
David said the government should seek a gradual reduction of subsidies and find the right time to do so and now is certainly not the time yet.
Center for Market Education chief executive officer Dr Carmelo Ferlito suggested that the government start with a small scale experiment. "An experiment that would have limited impact but it would give a chance to test the mechanism, to fine tune so as to have something quite good when the rationalisation is extended to larger scale."
Liew said a cash transfer to the poor via Padu to help with higher fuel costs is important to manage the cost of living of the poor and the middle class.
But Padu registration remains low. There is a risk of leakages, such as the cash transfer not reaching those who fall through the cracks of the Padu system.
"Padu's success becomes a precursor to the outcome of this policy," she remarked.
Economists said now is an opportunity for the government to push for more sustainable and alternative transportation methods, including electric vehicles (for cars and e-bikes) and public transportation.
Value Investing Substack independent financial analyst Aaron Pek said targeted subsidies (fuel or otherwise) is a programme currently being pursued by not just Malaysia but other countries including Singapore, Indonesia, India, Egypt, Tunisia and El Salvador.
"It is perceived as being one of the more efficient policy options with respect to government allocation of scarce resources, in the context of most global governments being extended in terms of debt-to-GDP ratios, as well as having little room for further unconventional monetary policy," said Pek.
Pek however, said there may be benefits in getting creative with the magnitude, reach and methods of the actual policy implementation.
"I personally feel that it's unlikely that the government will do a free float of fuel prices immediately, opting instead for a more gradual approach over time.
A sudden and complete lifting of fuel subsidies overnight could increase prices broadly across the whole economy by up to two to three times.
This is given how fuel subsidies (i.e. energy) feed into lowering the costs of nearly everything in the real economy, as well as the expectations shock given the current politicised nature of inflation.
"The likely implementation of the curtailing of fuel subsidies will need to be properly balanced against social and political needs as well. In that context, there is a lot of room for interpretation regarding what the likely or optimal approach to the removal of fuel subsidies could end up looking like," Pek said.
S&P Global Market Intelligence associate director Hafiz Noor Shams said 2024 would be the best time to cut subsidies on three factors - baseline 2024 GDP growth would likely be robust, 2024 baseline inflation would likely be low and there is no big election expected in the near term.