kheru2006 (kheru2006) wrote,
kheru2006
kheru2006

Charting through choppy waters

Removing fuel subsidies will go a long way to further reduce national deficit and respond to the needs of poor households

THE last couple of weeks have gotten the goat of some Malaysians. I have read comments by the well-intentioned on the Cabinet decision to implement the “managed float” pricing mechanism for diesel and RON95 petrol which went into effect recently.


A managed float mechanism will give the country time and space to dampen volatility, particularly upward volatility.

It is not easy to wean ourselves off subsidies after years of dependency. The event of subsidy removal is a historic move by the Government to unwind our subsidy culture, especially when it comes to our sense of entitlement over petrol subsidies. I feel it is worth taking a step back to reflect on this.

Any ambitious nation in pursuit of growth must be anchored on rock solid fundamentals to succeed over time. As a society, we have a collective interest in Malaysia pursuing her high-income goals in a sustainable and inclusive manner.

Sustainability extends beyond mere concern for the environment. We must also equally address the country’s finances to secure the well-being of ourselves, our children and our children’s children.

As a nation of just under 30 million people, only one million (out of 1.7 million registered taxpayers) pay income taxes. Over the long-term such a narrow tax base is certainly unsustainable. After much debate over the past several years, we are now introducing consumption tax or goods and services tax in a necessary step to broaden the tax base. This is a bold bid towards more equitable revenue collection.

Securing sustainable growth also means the Government has the unenviable task of re-evaluating subsidies. The decision to rationalise subsidies was not made overnight or taken lightly. We understood the magnitude of its impact especially on the vulnerable and poor. Cabinet discussions on subsidy rationalisation were often robust and heated.

Internal meetings alone were not enough. We also took this conversation to the ground after concluding the six weeks subsidy rationalisation lab in early 2010. Members of the public and stakeholders were then consulted via an open day to seek views on how the Government should tackle the subsidy conundrum. This was further augmented by SMS blasts to open the dialogue as broadly as possible.

As a citizen, I was personally gratified with the response. About 90% of the 1,899 attendees and 61% of 191,152 text respondents accepted the importance of subsidy rationalisation – but asked that the process be conducted gradually to avoid shocks to households.

We listened closely, and in July 2010, kick-started the process by moving RON97 petrol to a managed float pricing mechanism. The subsequent four years have allowed plenty of time to understand public sentiment as well as retail dealers’ adaptation to the mechanism.

Maybe it was divine intervention that global crude oil prices have fallen over the last two months. Brent crude oil prices dipped to the average of about US$80 per barrel (from an average of higher than US$105 for the past two years). The day before the managed float mechanism for diesel and RON95 petrol was announced, Brent crude oil slid even lower at US$71.89 per barrel.

New mechanism

Under this new mechanism, RON 95 and diesel price will be market driven yet managed on a monthly basis per the Automatic Pricing Mechanism. Consumers and industry have a one-month lag time to adjust without the hassle of a daily yo-yo on pump prices if we introduced full float mechanism.

When we switched to managed float in December, RON 95 pump price slid to RM2.26 compared to RM2.30 in November whilst RON 97 pump price fell to RM2.46 from RM2.55. However, as the reduction in average global market price for diesel in December was lower than the amount of subsidy on this product in November, its price at the pump increased by three sen per litre.

Removing fuel subsidies will unlock RM19bil annually from Government expenditure (based on Budget 2015 allocation of RM21bil and after removing RM2bil for liquefied petroleum gas), going a long way to further reduce national deficit and give us room to respond to the needs of poor households.

What can fall can also rise. Global crude oil prices can go up in a free market, although industry forecasts do not anticipate it happening anytime soon. A managed float mechanism gives us the time and space to dampen volatility, particularly upward volatility.

To make it easy for the public to understand how it works, Domestic Trade, Cooperatives and Consumerism Ministry and the Finance Ministry will provide a detailed exposition on the managed float mechanism.

Integrated transport system

As an avid proponent of an integrated urban public transportation system, I am confident the line-up of commuter trains and buses, the light rail transit, monorail, as well as the upcoming mass rapid transit and high-speed rail network criss-crossing cities will make a palpable difference to our lives.

We will no longer need to depend on our cars or stress over fluctuating fuel prices. Families will have the options to live in suburbs where property prices are cheaper, and daily commute will not mean sitting choked in traffic watching your fuel gauge go down.

We are tackling head-on the challenges of maximising the well-being of Malaysians in a sustainable fashion. Staying afloat – while countries in Europe and Asia struggle with debt and instability – will go a long way in helping us chart through choppy waters for a prosperous and resilient Malaysia.

Datuk Seri Idris Jala is CEO of Pemandu, the Performance Management and Delivery Unit, and Minister in the Prime Minister’s Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my

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