Putrajaya likely to fork out more for fuel subsidies, says economist

The government will need to increase spending on fuel subsidies because the price of oil may go up in the coming months, said an economist.

(FMT) – Nazari Ismail of Universiti Malaya said rising geopolitical tensions worldwide could result in an increase in the price of oil.

“The price of oil will likely increase due to the ongoing Israeli attack on the Palestinians. The ongoing Ukraine-Russia conflict is also another factor,” he told FMT.

Nazari said fuel consumption had also increased because of the rising number of cars on the road. This could also be a factor that would require the government to fork out more for subsidies.

He was commenting on the 2022 Auditor-General’s Report, which noted that the government had spent 322% more on subsidies in 2022 than it did in the preceding year, with a large chunk going to subsidising petroleum products.

According to the report, Putrajaya spent RM13.1 billion on subsidies in 2021, which ballooned to RM55.4 billion last year.

The lion’s share of the subsidies – RM45.2 billion, or 81.5% of the total expenditure – was spent on petroleum products, the report released earlier this week said.

Nazari said high oil prices in 2022 forced Malaysia to increase its spending on petroleum subsidies given the number of people who use fuel on a daily basis.

He said the worry of the government at the time was that the people, having become “used to inexpensive fuel prices”, would reject any increase.

“Therefore, the government decided to retain the subsidies,” he said.

However, Geoffrey Williams of the Malaysia University of Science and Technology does not expect fuel prices to go up, noting that they are lower now compared to 2022.

Instead, Williams said, the government should stop giving huge subsidies, noting that raising taxes to spend on subsidies would damage the nation’s economy.

“Overall spending should not be increased in the 2024 budget, and the focus must be on reducing subsidies, wastage, leakages and corruption,” he said.

Economy minister Rafizi Ramli said the price of energy, especially crude oil, was high. As a result, he told reporters that government expenditure on subsidies was likely to increase further in the future unless action was taken now to address the issue.

Rafizi said the high subsidy costs were partly due to leakages in the system, notably involving diesel.

He said these leakages stemmed from the disparity between the subsidised and unsubsidised diesel prices, which have been exploited by certain industries and individuals.

“(Because) diesel prices are artificially capped at the pump, we are witnessing people filling up their tanks with diesel at pump stations, and then they sell it to industry,” he told reporters after launching the World Bank’s Malaysia Economic Monitor October 2023 edition on Tuesday.