On Sunday, I invited financial experts Hann Liew and Sani Hamid to talk about the government’s plan to transition away from blanket subsidies to targeted subsidies.

We went through the details of what has been announced so far and discussed how the new policies will impact you as a consumer.

If you missed the insightful session, listen to the full replay on Spotify.

Scroll down for a written summary.

What we know so far:

On May 21, PM Anwar announced the cabinet’s decision to implement the subsidy rationalization for fuel.

It will start with diesel first and apply to users in Peninsular Malaysia.

The prime minister stressed that this move is targeted at foreigners and the rich, and will save the government RM4 billion annually. Sabah and Sarawak are exempt from this rationalization program, at least for the near future.

This means that diesel will be floated in the market really soon, which will see prices increase by 55%, from RM2.15/litre to RM3.33/litre.

That said, diesel subsidies will still be provided to companies transporting goods and public transport providers to reduce the impact on the people.

To further assist citizens in alleviating the jump in diesel costs, the government has initiated a cash subsidy program for diesel vehicle owners.

Known as Budi Madani, it will give RM200/month to Malaysians who:

• Own a registered diesel private vehicle (except luxury vehicles <10 years of age).

• Have a valid road tax.

• Have an annual income of RM100,000 and under (individuals or couples).

Applications are live and can be done here.

With the recent move, petrol subsidies are expected to follow a similar trajectory sooner or later.

Q1: Tell us more about blanket subsidies and why the government is removing them.

Blanket subsidies are a dilemma for the government.

Although it helps the rakyat ease some of their expenses, it heavily benefits the rich because they tend to drive bigger cars that consume more fuel.

In 2020, the total subsidies in Malaysia rose to RM80 billion - the highest in history.

At least 40% of it went to the T20 group, according to a study conducted by the National Economic Action Council.

This money should have been channeled to the poor or needy, or at least used to better our country.

Q2: What are your thoughts on the subsidy removal starting with diesel?

Hann: I wouldn’t say this is a great move, but the removal of subsidies is inevitable. The government will have to do it sooner or later, and it is admirable that the current administration is finally ripping off the band aid.

I would’ve approached this matter differently by completely removing subsidies for petrol and diesel, then ramp up the cash handouts for the lower and middle class.

Sani: This is the right step for the government to transition to targeted subsidies and cash handouts to ensure that the money goes to the people who really need it.

Q3: Is it even a good time to remove subsidies, especially with inflation and the recent SST increase?

Hann and Sani: There is no better time to remove blanket subsidies. They shouldn’t have existed in the first place.

Apart from heavily benefitting the rich, blanket subsidies lead to another alarming issue: leakages and smuggling.

According to NST, diesel subsidy leakages jumped 10-fold to RM14.3 billion last year from RM1.4 billion in 2019.

People are getting more and more creative at smuggling our subsidized oil to profiteer off our hard-earned tax money.

The Borneo Post estimates that around RM4.5 million is lost daily due to the smuggling of petroleum products.

Q4: Is Budi Madani a good initiative? Will it really help citizens in alleviating the rising costs of diesel?

The new subsidy program is questionable in a few areas, in particular:

• Who qualifies as wealthy?

• Will a single parent earning RM12,000/month supporting 4 children and elderly parents be considered as T20?

• What about people who own old luxury cars (>10 years)?

• How is a car considered as luxury?

These queries must be addressed if the government aims to remove the larger subsidy for petrol.

That said, Budi Madani will most certainly help citizens with the jump in diesel prices.

According to calculations done by PaulTan, the RM200 payout will cover the price difference for 169.5 litres of diesel every month. For a car that burns an average of 10 km/L, it works out to a mileage of about 1,700 km per month.

Q5: Should we be worried of more price increases?

Yes, brace yourselves.

Even though many news sources stated that it will hardly impact consumers, some businesses will use this as an excuse to raise prices. These costs will trickle down to the consumer and inevitably lead to a spike in inflation.

According to TA Research, inflation could increase by more than 2% if the diesel subsidy removal is implemented soon.

This written summary does not fully encapsulate the thoughts shared by the speakers during the session.

Listen to the full replay on Spotify.

Disclaimer: The information contained in this newsletter is for informational and educational purposes only. Nothing herein shall be construed to be financial, legal, or tax advice.

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