Malaysia has a rising debt of RM362 billion

 To date, Malaysia has a rising debt of RM362 billion, which is 52% of the country’s gross domestic product (GDP). It was due to this concern that the government would be taking proactive measures to do away with subsidies gradually. According to Minister in the Prime Minister’s Department Senator Datuk Seri Idris Jala, Malaysia is one of the most subsidised nations in the world. Its total subsidy of RM74 billion last year is equivalent to RM12,900 per household.

• The list which comprises subsidies paid for social, fuel and energy, infrastructure and food appears to be grossly overstated as (i) a substantial amount comes from non-budget provisions, especially gas subsidies from Petronas, which has no fiscal impact. (ii) subsidies for welfare and education should not be considered as subsidies as these are public goods. A case in point is education is an investment in human capital to expand the country’s productive capacity.

• The government has yet to decide on the implementation date and the gradual approach is viewed to be the best option as consumers and businesses will have time to digest the small hikes. Overall impact on inflation and, domestic demand as well as businesses would be manageable.

• Based on the subsidy-rationalisation plan proposed by the Prime Minister’s Department’s Performance Management and Delivery Unit (Pemandu), Malaysia’s consumer price index (CPI) will likely grow 4% between 2011 and 2012, and 3% post-2013.

• Amongst the key proposals are: (i) petrol prices will go up by 15 cents/litre in mid-year, and thereafter increase by 10 sen every 6 months until 2014. (ii) toll rates to increase as per concession agreement, except for highways without alternative toll-free routes; and (iii) electricity tariffs will be raised by RM0.024/Kwh and thereafter RM0.016/Kwh every 6 months.

• However, tackling subsidies alone is unlikely to solve the fiscal deficit problem. Fiscal reform has to be part of a wider programme of macroeconomic reform and political reform. There should also be more openness in government expenditure including significant acceleration of enforcement and prosecution for misappropriation and mismanagement of resources within the government that definitely has an impact on the overall economy.