SINGAPORE, June 13 — Diesel fuel prices across most of Malaysia soared by more than 50 per cent, as the country slashed its diesel subsidies in West Malaysia on Monday (June 10) as part of a wider shift away from blanket subsidies.
The move effectively aligned diesel rates with market prices, as pumps across the peninsula shot up from RM2.15 (S$0.61) to RM3.35 (S$0.96) a litre — a 56 per cent increase.
Economists told TODAY that they foresee a moderate increase in the price of goods and services in Malaysia as a result of the reforms, though the wider impact on the country’s fiscal position is still unclear.
As for prices of Malaysian goods imported into Singapore via its land border, they are expecting a “minimal” impact.
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Explaining the move last month, Malaysia’s Prime Minister Datuk Seri Anwar Ibrahim said that the cuts are part of his plan to focus aid for low-income groups in the country by restructuring its wide-ranging subsidies, which he argued had benefitted the ultra-rich since their consumption or spending on goods and services is greater.
Fuel, rice and cooking oil, as well as other basic items, are heavily subsidised in Malaysia, which has seen its subsidy bill rise to record levels in recent years.
The country’s diesel subsidies alone surged almost 10-fold from RM1.4 billion (S$400 million) in 2019 to RM14.3 billion (S$4.08 billion) in 2023.
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The diesel subsidy cuts are expected to bring about savings of RM4 billion, which will be channelled to fund public transport and cash aid, Anwar said separately on Tuesday at the finance ministry’s monthly assembly.
As part of a bid to restructure the country’s subsidy distribution system, the government had also announced the rationalisation of subsidies for electricity tariffs and sales of chicken last year, which are estimated to save RM4.5 billion and RM1.2 billion a year respectively.
However, there are some exceptions to the removal of the diesel subsidies.
In Sabah and Sarawak, where the use of diesel vehicles is widespread, the price of diesel will remain subsidised at RM2.15 a litre. Logistics vehicles under the government’s MySubsidi Diesel programme can also qualify for the subsidised diesel rate.
Lower diesel prices have been set as well for fishermen and land public transport vehicles such as school buses and ambulances, the finance ministry said.
Impact on Malaysia
Because of these continued subsidies under the MySubsidi Diesel scheme for commercial vehicles, Dr Cassey Lee, senior fellow and coordinator of the regional economic studies programme at Singapore’s Iseas-Yusof Ishak Institute, expects just a “moderate increase” in the prices of goods in the country.
The programme, which is targeted at logistics companies, provides the firms with fleet cards that allow them to continue buying subsidised diesel at fuel retail stations.
The scheme aims to cushion some of the impact of fuel costs on supply chains and so safeguard consumers from extreme price increases.
However, some increase — albeit a “moderate” one — in goods’ prices is still expected, experts said.
In its monetary policy statement published on May 9, the Central Bank of Malaysia said that inflation in 2024 is expected to “remain moderate”, but the outlook for the rest of the year is dependent on the “implementation of domestic policy on subsidies and price controls”, as well as global commodity prices and financial market developments.
Elaborating on this, Suhaimi Ilias, chief economist at Maybank Investment Banking Group, said that the banking group expects the country’s inflation to average at 2.4 per cent this year, which is higher than the 1.7 per cent average for the first four months of the year.
This implies that monthly inflation could pick up from June onwards and last for the rest of the year.
On how the diesel subsidy reforms will translate to programmes for Malaysians, Dr Lee said that the reforms will “release some fiscal resources” for the federal government.
The aim of redirecting what was previously spent on diesel subsidies to lower-income groups in Malaysia may also help these groups to weather inflation.
It remains to be seen, though, how the overall fiscal position will change, or how significant is the aid for lower-income groups, since much depends on how the government spends the money, Dr Lee added.
He noted: “For example, the Malaysian government has increased the salaries of civil servants by 13 per cent, costing RM10 billion annually.
“This amount is close to savings from the diesel subsidy reforms. This suggests that the net change is near neutral from a fiscal point.”
If executed well, Suhaimi from Maybank said that the reforms would demonstrate the government’s political will to undertake unpopular but necessary policy reforms — especially from the perspectives of the financial market and international rating agencies.
Conversely, a poor execution of the reforms could also lead to negative political implications.
Dr Lee said: “If the diesel subsidy reforms result in the perception of increasing hardship and worsening economic performance, the popularity of the present government will decline.
“This will also put the government on the defensive and it will have less appetite for future reforms such as the RON95 petrol subsidy reforms.”
Impact on Singapore
The experts said that they do not foresee the diesel subsidy reforms in Malaysia to affect the general prices of imported goods in Singapore significantly, but certain imported products from Malaysia might end up costing marginally more.
Dr Lee of Iseas-Yusof Ishak Institute expects the price increases of goods driven by trucks into Singapore to be “minimal”, reiterating that commercial vehicles can continue to buy subsidised diesel via the MySubsidi Diesel fleet card system.
The move is not expected to have a “material impact” on Singapore’s overall inflation, another analyst said. Dr Chua Hak Bin, regional co-head of macro research at Maybank Investment Banking Group, noted however, that there may still be second-order effects on the prices of certain goods here.
Some food items transported from Malaysia may see a small increase in prices, for example.
However, as a contributory factor to food prices in Singapore, Dr Chua said that the cost of fuel used during transportation is not as significant compared to the overall costs of labour and vehicles, as well as taxes.
As labour and rentals account for a big proportion of overall costs for food-serving services, the impact of the extra cost of transport on overall menu prices in Singapore will likely be small, he added. — TODAY