The removal of the cooking oil subsidy and rumours of a shortage caused Malaysians to buy bottles and bottles of cooking oil.

The latest removal of the subsidy for cooking oil is reminiscent of the 1980 hit song by the band Queen, Another One Bites the Dust. It comes in the wake of the removal of subsidies for sugar and fuel over the last three years.

The announcement last week of the phased removal over the next two months — except for the 1kg polybag — and swirling rumours of an impending shortage, whipped many Malaysians into clearing bottles of cooking oil off supermarket shelves.

This caused supermarkets to impose a quota of two bottles per purchase to ensure adequate supply for all.

Subsidies are a citizen’s dream, but a government’s nightmare. There are four reasons for the removal of the cooking oil subsidy.

FIRST, to cushion the effect of other financial assistance. Doubtless, subsidies alleviate the plight of the poor from the inexorable escalation of the cost of living. But, unlike in India and other poorer parts of the world where one in four are poor and where government subsidy for food is warranted, Malaysia’s poverty rate is a miniscule 0.7 per cent.

As such, the government considers that the other special assistance, chiefly the recently announced increases of between RM50 and RM150 to the 1Malaysia People’s Aid, or BR1M, would be able to cushion at least a quarter of the population from the effects of the subsidy removal.

SECOND, removing subsidies makes economic sense. Subsidies are price-distorting and send the wrong signals. If we know that we will have to buy the expensive anti-diabetes drug, we would rather prevent it now than treat the disease later at a great cost. It might be otherwise, should such medication be offered free or at subsidised prices. And, subsidies cause wasteful consumption when prices are artificially depressed as a result.

THIRD, the removal is part of the government’s rationalisation programme to save public funds. For example, with the managed-float system, where prices at the petrol pump change according to the market price, the government saves RM20 billion annually in fuel subsidies. And, blanket subsidies, unlike the targeted ones, such as BR1M, benefit the rich.

In one study, the International Monetary Fund (IMF) found that 61 per cent of the benefit of fuel subsidy goes to the richest or top 20 per cent of citizens. Rather than subsidising the rich, such savings can be put to better use to improve essential public services, such as health, education and affordable housing.

Saving on subsidies will also help trim the budget deficit, which the government aims to eliminate by 2020. Through their gradual removal, the subsidy bill will halve from the RM44 billion in 2012 to RM22 billion next year. It now consumes 10 per cent of government revenue. It is this subsidy rationalisation that has helped prop up our A-sovereign credit rating. That rating has enhanced investors’ confidence and increased foreign direct investments while making the cost of funds relatively cheaper.

FOURTH, subsidies have the perverse effect of attracting smuggling. Examples abound: unscrupulous fishermen selling their subsidised fuel to Thai and Indonesian counterparts; and crooked businesses eligible for subsidised sugar illegally selling their excess supplies to ineligible industries. Given that the price of cooking oil in Malaysia is double that of Thailand and triple that of Laos, some 45,000 tonnes gets smuggled out of the country. The government bleeds RM540 million annually in subsidies because of this. Removing cooking oil subsidy will thwart smuggling of the commodity across the border.

Indeed, this is one reason why subsidies for the 1kg pack remain. While relieving the plight of the poor, these small packs will be too cumbersome to transport in bulk without arousing suspicion.

Of course, for every action there is a consequence. The removal will have a negative impact on the cost of living. The impact on household income will likely be small. Assuming an average household consumes 5kg of cooking oil a month, and each kilogramme costs a ringgit more now, that will cost a household an additional RM5.

However, prices in restaurants and street stalls will compound as a result of profiteering. Everyone suffers because of the greed of a few. Expect the price of roti canai and nasi lemak to go up together with other food items.

A similar situation prevailed when the government introduced the Goods and Services Tax (GST) in April last year. Profiteers raised the prices of goods, including those that were GST-exempted. The government was quick to check profiteering. There were high-profile cases that were charged in court for profiteering.

Likewise, in the case of cooking oil, greater enforcement against profiteering and smuggling should send the message to wholesalers, retailers and traders that it does not pay to live off the misery of the people. We have laws against that. Wholesalers and suppliers hoarding cooking oil can be charged under the Control of Supplies Act 1961.

The act carries a fine of up to RM250,000. Those who profiteer can face the full wrath of the Price Control and Profiteering Act 2011 with fines of up to RM1 million or five years’ jail and/or both.

The national price council needs to monitor price levels closely to protect consumers. They have to ensure businesses do not take advantage to rake in excessive profits.

The government should also engage with businesses to educate them on ethical business practices and warn them of the serious consequences of profiteering.

The 2017 Budget plans to increase fair-price shops from 640 to 1,000 to encourage greater demand for ethical businesses.

Although the public welcomes them, subsidies hurt the economy and government coffers. It can lead to a culture of entitlement. The government is right in removing the subsidy for cooking oil.

Ultimately, it falls on us, consumers, to be vigilant against unscrupulous price increases and report such instances immediately to the authorities. As Epictetus, a Greek philosopher, once said: “Make the best use of what is in your power, and take the rest as it happens.”

Datuk Dr. John Antony Xavier is the head of the Strategic Centre for Public Policy at the Graduate School of Business, Universiti Kebangsaan Malaysia

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