Malaysia reduces fuel subsidy

Malaysia has an interesting approach to essential products: it provides either a ceiling price or a fixed price for many goods. In this way, the country's resources are shared across the entire population.

So petrol, rice, chicken and pork are amongst the goods that have a set price.

On Sunday this week, the government took the drastic step of removing all subsidies from imported rice. Domestically produced rice remains sold at a fixed price. Imported rice more than doubled in price overnight, but it is still cheaper than in, say, the Philippines.

Yesterday, faced with oil prices that have tripled in the past year, the Government was forced to reduce the subsidy on petrol. The nett effect was that as from midnight last night pump prices have jumped by 40%.

The population is blaming the government - but to do so is entirely wrong. Although local media have carried stories preparing motorists for the inevitable, most see only the effect on their own pocket.

For many, the increase in pump prices is a serious blow. But in Kuala Lumpur, for example, motorists prefer to sit in a traffic jam for an hour rather than use a highway which has a toll of around USD25c. The Ampang Road jam is miles long every morning and night - but the parallel Ampang Highway is almost deserted. New highways linking the city to the airport and to the administrative capital are almost empty because of charges of around USD50c whereas non-chargeable roads are clogged. Taxis take long roundabout routes instead of paying the toll - and they get a discount compared to other users. Cars sit with their engines running to keep the air-conditioning working. People use their cars for journeys of a few hundred metres instead of walking. And many motorists hit the power and brakes with equal vigour adding to fuel consumption. Many cars are poorly maintained, again increasing fuel consumption.

Small changes in habits and driving style would mitigate the increase in pump prices.

But the government's PR offensive has not got through to the general population who do not read the newspapers and do not watch the serious TV news. And so many say the government is not protecting them.

Nothing could be further from the truth: the subsidy system means that even after the increases, Malaysian drivers are paying USD80/litre. There is no tax and no duty.

A UK website monitoring fuel prices (www.whatgas.com) reports that in Sussex yesterday prices touched GBP1.30 per litre - that's about USD2.55 per litre. The UK adds a massive duty and value added tax burden to petrol prices.

As reported earlier this week, the Malaysian government explained that the previous fuel price subsidy, which kept pump prices almost stable for several years, would cost some USD5,000 million dollars this year alone as prices have gone from USD50 dollars per barrel to approaching USD200 dollars per barrel in a matter of months. No one is expecting respite any time soon.

The mistaken impression that the government has raised the price is strengthened by media reports with headlines such as " Malaysia raises petrol prices by 40%" (Channel News Asia).

The scale of the threat to the Malaysian economy if the fuel price subsidy remains in place is clear: at its previous level it had reached one-third of the national budget. There are plans to phase out the subsidy completely but the government is deeply aware that such a move will have a significant effect on the country's poor. Many in the countryside have no alternative but to drive and distances are often considerable as the many villages and small towns have limited services and facilities.

The increases are :

Product Previous price New Price

Petrol 95 1.92 ringgit 2.70 ringgit

Diesel 1.85 ringgit 2.58 ringgit

Malaysia is not the only country that subsidises fuel prices and consequently not the only country facing threats to its national budget. But of those countries it is the only one that has positively encouraged widespread car ownership amongst the poor with local production of inexpensive small cars and low interest rate schemes over a long period of years. That policy, formulated in the Mahathir years with the formation of national car company Proton and its local arch rival Perodua coupled with a substantial screwdriver-plant assembly of foreign marques which get preferential tax treatment, has resulted in an explosion of car ownership.

Yesterday, too, India - which has a rapidly expanding car-owning class - reduced the subsidy on fuel, but only by 10%. That was the figure that most people had expected as the change in Malaysia.

Malaysians do not have the same response to government as Indonesians: there cities grind to a halt as street protests grind around town. In India, some elements have a tendency to demonstrate by blowing things up.

No one expects any such response in Malaysia. In any case, last night, it seemed as if most of the population had far more important things to do: they were queuing for the last fill-up at the old prices.