Subsidies and Price Controls of Malaysia

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 Subsidies and Price Controls of Malaysia


          The Malaysian government subsidizes and control prices on a lot of essential items to keep the prices low. Items such as palm oil, cooking oil, petrol, flour, bread, rice and other essentials has been kept under market prices to keep cost of living low. In 2008, the government announced that it has spent RM40.1 billion in 2007 in subsidies to keep prices levelled. Smuggling and hoarding, which led to shortages, is a prominent problem in Malaysia due to the subsidies. For example, cooking oil is subsidised for domestic use only. This situation creates an environment where industrial players hoard domestic cooking oil for industrial use. During shortage time, such as the January 2008 cooking oil crisis, the government imposed a 5 kg limit for each purchase to relief domestic demand. However, the limited purchase has created more panic in buying, which prompted the Government to negotiate with cooking oil manufacturers to increase their production capacity, and situation reverted to normal within one week time. Another example is where vehicles in Thailand came to Malaysia to smuggle cheap petrol and diesel out of the country. The government also looked into restructuring the fuel subsidy, so that the selected needy group could get the subsidy. The government is considering to remove subsidy on diesel on general consumers while maintaining subsidies for the right groups, for example those involved in public transport.

           On May 5, 2008, the Malaysia government raised the price of petrol by 41 per cent from MYR1.92 to MYR2.70, (87 cents) a litre, or 10.23 Ringgit ($3.30) a gallon. The government stated that the spiraling fuel subsidy bill that could have been more than 56 billion Ringgit ($17 billion) this year due to rising world oil prices. Diesel prices also were raised upwards of 63 per cent to 2.58 Ringgit (80 cents) per litre. In addition to the fuel hike, Malaysia also increased electricity tariffs starting in July by as much as 26 per cent for some consumers. The government in the meantime promised cash rebates for owners of vehicles with engine capacities of 2 litres or less, and diesel subsidies for truck and bus operators. According to the Malaysian government, the revised energy prices would save the government 13.7 billion Ringgit ($4.4 billion), part of which will be used to help subsidize rising food prices. Before the price revision, Malaysia was spending 7.5 per cent of total economic output on fuel subsidy, the highest percentage in the world.

           The government has considered to remove the subsidies but a formal plan was yet to be materialized as of 2007. In 2008, the government considered to remove price controls on construction materials such as cement and steel bars, while banning exports to ensure steady supply. The government experimented with the idea by allowing Sabah and Sarawak construction players to import steel and cement since February 2008. The government then, on May 12, 2008 removed ceiling prices on steel bars and billets and removed import duties on selected items under HS Code 7214.10 110 and 7214.20 910, which does not fully cover steel bars use by the construction industry. The government then further liberalized the cement industry by abolishing ceiling prices on June 5, 2008. Another strategic item which Malaysia was heavily subsidized but moving towards a market based approach, was Natural Gas, which was used in the industrial sector. Beginning July 1, 2008, the government was expected to reduce the gas subsidy 5% to 10% per annum over 11 years, in which the gas price will reflect market price.

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