IMF: Subsidy Arguments Miss Key Points

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KUALA LUMPUR, Oct 8 – The International Monetary Fund (IMF) makes a compelling argument for removing energy subsidies such as those on petrol and replacing them with targeted subsidies for the vulnerable in society. In its study titled, “Energy Subsidy Reform: Lessons and Implications” the IMF points out the top 20% of the population gains six times more from energy subsidies than the bottom 20%, thereby reinforcing inequality.

The irony is that the top 20% can well afford it, while the bottom 20% can’t. Isn’t it better that the money spent “helping” the top 20% would be better spent if it were diverted to the bottom 20%. The IMF adds that fuel subsidies also weigh heavily on national budgets, increase debt levels, distorts resource allocation by encouraging excessive energy consumption.

Unfortunately, most Malaysians fail to recognise this, preferring instead to think that subsidies are actually good and should last forever. There are complaints that fuel subsidies should not be cut when global oil prices are falling. But this actually is the best time to cut subsidies – the adjustment results in less pain. Comparisons between Malaysia and the UK have been made, with the latter cutting its petrol prices.

But in the UK, petrol is charged at full market price, and those with cars have to contend with high motor insurance costs and taxes on car emissions. The IMF clearly states: “Governments could get more bang for their buck by removing or reducing subsidies and targeting the money directly to programmes that help only the poor.”

It calls for the removal of energy subsidies with price increases that are phased-in over time and the implementation of measures to protect the poor through targeted cash aid. Unfortunately, the disgruntled keep on making comparisons and citing examples which they feel support their argument, failing to appreciate that there’s more to the bigger picture than they care to admit.

For example, those citing India’s fuel subsidies to justify their argument for continued fuel subsidies in Malaysia’s fail to point out that a recent Indian Economic Survey noted that India should move away from price-distorting subsidy schemes and instead provide cash subsidies to households below the poverty line.

This is exactly what the Malaysian government has been doing in recent years – setting up the necessary mechanism for a more effective sharing of national wealth with the poor. Yet very few will give our government credit for doing the right thing, despite it being politically unpopular. 1Malaysia People’s Aid (BR1M) payments are an example of a targeted subsidy which benefits the poor more than fuel subsidies will.

Ultimately, targeted subsides lead to a reduction in poverty levels and benefit the local economy. Let’s take a look at the numbers in Malaysia. Our current fuel consumption is around 24 billion litres per year. A 20 sen reduction in subsidy amounts to a “saving” of RM4.8 billion per year. BR1M 3.0 in February 2014 entailed total cash payment of RM4.6 billion to some seven million recipients. Quite clearly, the reduction in fuel subsidy can offset the cost of BR1M.

What many fail to recognise is that the RM4.6 billion given to these households is actually being injected back into the local economy. What happens is that the recipients end up spending their money on local businesses, buying food, clothes and other household necessities from local traders. Consider the district of Kemaman, which has 20,000 families who are BR1M recipients.

The money they receive is used to purchase necessities and goods such as food, clothes and services – like hair dressing services thereby generating considerable spin-offs and impact on the local economy. In addition, the entrepreneurs among them, may use the money to start up their own small businesses – it may be an individual setting up a road side lemang stall or a group of people forming a little consortium to start an Internet cafe.

So, far from being a poor substitute for fuel subsidies, targeted subsidies like BR1M actually act as economic enablers for the poor. It represents an opportunity for them to raise their standard of living. At the moment, BR1M is paid on an annual basis, but some argue that with the removal of more fuel subsidies in the future, there is a good case for BR1M to be paid every quarter, providing a more sustainable “income” for the poor.

Instead of merely coming up with poor examples of countries which have fuel subsidies and denying the long-term benefits of fuel subsidy removal, detractors should consider the long-term effects of targeted subsidies like BR1M and its effects on the individual, the household and the local economy. This is among the many reasons targeted subsidies are given the thumbs up by the IMF.

Going back to comparisons with the UK – targeted subsidies there also include unemployment and child benefits for the low-income earners. With more cuts in fuel subsidies which free up national cash flow, the government can then consider other forms of targeted subsidies to those in need.

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