KUALA LUMPUR: The International Monetary Fund (IMF) makes a compelling argument for removing energy subsidies, such as those on petrol, and replacing them with targeted subsidies for the vulnerable in society.
In its study “Energy Subsidy Reform: Lessons and Implications”, the IMF points out that the top 20 per cent of the population gain six times more from energy subsidies than the bottom 20 per cent, thereby reinforcing inequality. The irony is that the top 20 per cent can well afford it, while the bottom 20 per cent can’t.
Wouldn’t it better if the money spent “helping” the top 20 per cent are diverted to the bottom 20 per cent?
The IMF adds that fuel subsidies also weigh heavily on national budgets, increase debt levels and distort resource allocation by encouraging excessive energy consumption.
Unfortunately, most Malaysians fail to recognise this, preferring instead to think that subsidies are actually good and should last forever.
There are complaints that fuel subsidies should not be cut when global oil prices are falling. But this actually is the best time to cut subsidies as the adjustment results in less pain.
Comparisons between Malaysia and the United Kingdom have been made, with the latter cutting its petrol prices. But in the UK, petrol is charged at full market price, and those with cars have to contend with high motor insurance and taxes on car emissions.
The IMF says governments can get more “bang for their buck” by removing or reducing subsidies and targeting the money at programmes that help only the poor.
It calls for the removal of energy subsidies with price increases that are phased-in over time and measures to protect the poor through targeted cash aid.
Unfortunately, the disgruntled keep on making comparisons and citing examples that they feel support their argument, failing to appreciate that there’s more to the bigger picture than they care to admit.
For example, those citing India’s fuel subsidies to justify their argument fail to point out that a recent Indian Economic Survey noted that India should move away from price-distorting subsidy schemes and instead provide cash subsidies to households below the poverty line.
This is what the Malaysian government has been doing in recent years, setting up the necessary mechanism for a more effective sharing of national wealth with the poor.
Yet, very few will give our government credit for doing the right thing.
The 1Malaysia People’s Aid (BR1M) is an example of a targeted subsidy that benefits the poor more than fuel subsidies will. Ultimately, targeted subsidies lead to a reduction in poverty levels and benefit the economy.
Our current fuel consumption is around 24 billion litres per year. A 20 sen reduction in subsidy amounts to a “saving” of RM4.8 billion per year.
BR1M 3.0 in February entailed total cash payment of RM4.6 billion to some seven million recipients. Quite clearly, the reduction in fuel subsidy can offset the cost of BR1M.
What many fail to recognise is that the RM4.6 billion given to these households is being injected back into the economy. What happens is that the recipients end up spending their money on local businesses, buying food, clothes and other household necessities.
Consider the district of Kemaman, which has 20,000 BR1M recipients.
The money is used to purchase necessities. In addition, the entrepreneurs among them may use the money to start small businesses.
So, far from being a poor substitute for fuel subsidies, targeted subsidies like BR1M act as economic enablers for the poor. It is an opportunity for them to raise their standard of living.
At the moment, BR1M is paid on an annual basis, but some argue that with the removal of more fuel subsidies in the future, there is a good case for BR1M to be paid out every quarter, providing a more sustainable “income” for the poor.
Instead of merely coming up with poor examples of countries that have fuel subsidies and denying the long-term benefits of fuel subsidy removal, detractors should consider the long-term effects of targeted subsidies and their effects on the individual, the household and the economy.
This is among the many reasons targeted subsidies are given the thumbs up by the IMF.
In the UK, targeted subsidies also include unemployment and child benefits for low-income earners.
With more cuts in fuel subsidies which free up national cash flow, the government can then consider other forms of targeted subsidies for those in need.