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Malaysian government decided to scrap the fuel subsidy. Starting next month, December, the prices of RON95 petrol and diesel will be based on a managed float system. Note that this is based on “managed” and not “freely” float system. under the new managed float system for RON95 petrol, pump prices would be determined by a 10-day average of fuel prices in international traded markets plus fixed profit margins for refineries and retailers. So, every month, pump prices will change. Brent crude, an international benchmark, fell 3 percent to $70.15 a barrel on Friday. Therefore, starting from December the fuel price in Malaysia might, possibly adjust according to the global crude oil price. In Malaysia, we have seen many subsidies such as the sugar subsidy, which was abolished in 2013, and the much talked about fuel subsidy, which has been reducing every year, with the recent reduction by RM0.20 last month.
The government has justified its unpopular move – which is to cut back on the spending to trim its fiscal deficit and ultimately achieve high-income nation status by 2020. On the other hand, Malaysians are not satisfied with the decision and are feeling the squeeze of the increasing cost of living. Subsidy reduction is inevitable and it may not be the most horrible thing to happen to a country. To be globally competitive, Malaysians need to be realistic and be able to adapt to change.Though the initial idea behind subsidies is to help the disadvantaged groups in the country, but more often than not, those who benefit from the subsidies the most are the richer people or companies.
The government is looking to limit the subsidised price of RON95 fuel to “deserving Malaysians” (i.e. the poor), leaving those deemed “undeserving” with no choice but to use the unsubsidised RON97 fuel. Datuk Seri Ahmad Husni Hanadzlah, the Second Finance Minister said that starting next year, only those who are earning RM10,000 and below each month would be eligible for fuel subsidies. This is great news which means that the government is actually looking after the middle income group and not benefiting those who are in the high income levels. In fact, those who earn below RM5,000 will enjoy full subsidies while those earning between RM5,000 and RM10,000 will get partial subsidies. The disparity between the luxury and non-luxury cars is too much which means that before long, supply will run short and price will increase again. At the moment, Malaysians are not too happy about the removal of these subsidies and as usual, it would mean increase of prices of other products as it always happens.
Anyway, it is futile to worry about the impact on prices of goods because the prices of almost everything have been increasing on a regular basis. Expect it to continue in the coming years. With GST around the corner, it will definitely increase the cost of doing business. Any form of tax is bad for businesses, bad for consumers, but good for the government. Expect price increases. There's also talk of water & electricity tariff hikes. So, prices increase. Minimum wage, which has pushed up wages across all levels, have also contributed to the increase of prices. Unfortunately, the rate of decline of purchasing power is much higher. Since businesses need to pay more for salaries, prices increase. It would be prudent to keep an eye on the economy, both domestic as well as worldwide. Don't get distracted by petty issues and lose your focus on the economy. It's always the economy.
Analyst Kannika Siamwalla from RHB-OSK’s regional division yesterday expected, at worse, another 10 to 15 per cent slide – which would drop prices to US$65 to US$70 per barrel until year end. However, the crude oil price might be elevated after the control of OPEC by maintaining the production level. If the global crude oil price increased and the unsubsidized prices of RON95 petrol and diesel which are under managed float system would probably hike up to the level beyond Malaysians’ affordability. What will be the possible move of government in future? Rationalise the fuel price through subsidy or continue to allow the fluctuation of fuel price by following the global crude oil price?