High fuel prices contributed to the Election 2008 backlash that forced Abdullah’s eventual exitPrime Minister Datuk Seri Najib Razak could face questions over his commitment to economic reform after his government dodged a cut in fuel subsidies, threatening to put finances in peril and test the patience of investors seeking change.
The decision yesterday to avoid a subsidy cut is likely to be regarded as the latest in a series of U-turns by Najib’s two-year old government which has tried to woo investment by pledging to overhaul the economy while trying to keep voters happy.
The government had warned that high energy prices would force a review of subsidies but shied away from making cuts, saying it would hold fuel prices steady for now because of the needs of the people.
A deputy minister was quoted today as saying Malaysia would review fuel prices if the price of oil hit US$110 – US$120 (RM330 – RM360) per barrel.
Following are some questions and answers on the economic and political implications of a rollback in subsidies, which are expected to double to almost US$6.9 billion this year because of high energy prices.
Q: How serious is Najib about cutting subsidies?
Najib appears wary of the backlash that will follow further price hikes.
A: In a recent speech, Najib likened Malaysia’s fuel subsidies to “opium” but he appears wary of upsetting voters with steep price increases. The next general election is due by mid-2013.
Since taking office in 2009 he has raised the price of the widely used RON95 gasoline blend incrementally from RM1.75 per litre to RM1.90.
That is still below the RM2.10 target that a government body tasked with studying subsidies had recommended he achieve this year.
He has also twice delayed the implementation of a goods and services tax (GST) and softened his stance on the overhaul of a controversial affirmative action policy favouring the Malays.
Analysts say Najib may be willing to initiate these changes but only after he secures a strong mandate at the next general election.
Q: How long can the government hold off on subsidy cuts?
A: Najib needs to cut subsidies and widen the tax base to continue trimming the government’s fiscal deficit which hit a 20-year high of seven per cent of gross domestic product in 2009. The deficit was at 5.6 per cent in 2010 and is officially targeted to be 5.4 per cent this year.
Najib said this month that fuel subsidies in 2011, which make up the bulk of the total subsidy bill, have been revised upwards from RM11 billion to RM18 billion ringgit due to high global crude prices.
The additional RM7 billion spending would push up the budget deficit to 6.3 per cent of GDP in 2011 unless subsidies are cut, Bank of America Merrill Lynch said in a research note on May 20.
Global crude oil prices are set to rise to a possible high of US$140 by the end of 2012 as inventories and OPEC spare capacity run out, according to Goldman Sachs.
But some analysts say Malaysia may have some room to delay price increases as it is a net oil exporter and would gain from strong crude markets.
Increasing tax revenues and the recent divestment of state holdings in government-linked firms could provide the government with some room to undertake only a modest fuel price rise, said Bank of America Merrill Lynch.
Abdullah was forced to make way for Najib.
Q: What is at stake?
A: : Najib’s predecessor, Tun Abdullah Ahmad Badawi, saw his approval rating plummet from a high of 91 per cent to less than 50 per cent after doubling the price of gasoline from RM1.35 in 2003 to RM2.70 in 2008, according to independent opinion polling outfit the Merdeka Center.
Abdullah later cut prices seven times but voter anger over rising prices and his lacklustre administration led to record losses for the government in a 2008 general election and forced him into early retirement the following year.
Najib has been more cautious, preceding each of his three fuel price increases with measures to mitigate the impact on the poor such as higher salaries for low-ranking civil servants.
The opposition, which made major inroads in the Sarawak election last month, has pledged to reduce fuel prices if it wins the next general election.
The opposition has also criticised the government for failing to adopt a tougher stance on independent power producers whom they say should bear the brunt of any subsidy cut.
Independent power producers received RM19 billion worth of subsidised gas from national oil firm Petronas in 2009, according to media reports.
Q: What are Najib’s options?
A: His first option is to bite the bullet and raise gasoline retail prices along with electricity tariffs. The impact on food and transport could push inflation beyond an official target of 2.5-3.5 per cent this year.
But the government could try to cushion the blow for low income groups. Possible measures include rebates, increasing a cost of living allowances in the public sector and raising civil servants’ salaries.
Najib can expect a political backlash in such a scenario, which could dissuade him from holding snap general elections.
A second option is to make smaller gasoline price increases of between 5 to 10 sen along with an electricity tariff increase focused mainly on industrial users.
Najib would still need to manage voter unhappiness in this situation, which could influence the timing of the next general election. But he could still call for snap polls, as he banks on growing support from majority Malays and healthy economic growth.
A third option would be to hold off on any subsidy cuts until after the next general election. Such a move could indicate that national polls are imminent although there has been no indication of that. — Reuters
comments
Hard times, very difficult times await Malaysians if BN wins handsomely come PRU 13! Many are already up to their nose and with spiralling costs of food and now impending increase in the price of fuel, electricity and GST, can Malaysians survive? Can they leave comfortably? While prices in of fuel in Singapore dips, Singapore depends totally on imports of its fuel, Malaysians are looking at an impending increase in the price of fuel.
Of course the arguments that the prices of fuel is significantly higher compared to Malaysia, can we compare the incomes of Singaporeans and Malaysians. Singaporeans earn 7 times more than Malaysians, but, is the price of fuel 7 times more expensive than Malaysia?
The key question is, will there be a middle class if the BN continues to rule? Can those working in the cities survive? If those working in the cities cannot survive, they will not be able to remit monies back to the rural folks, and this is going to have a devastating effect on the country as a whole. Can an average family earning RM5,000 a month, put decent food on their family table after the fuel increase, which will inevitably spur another round of price increases on all groceries? Will they be able to meet their monthly committments, like housing instalments, car instalments, credit cards repayments and what not?
Malaysians, brace yourself for a horrible time of pain financially if BN wins handsomely come PRU 13! We would like to ask the Government of Najib Tun Razak, what happened to the USD1.25 billion project to make Malaysia self sufficient in food started two years ago? While we are sure the USD1.25 billion is gone for good, where is the results? Costs of food continues to spiral! A few billions squandered here and a few billions there, no wonder the Rakyat had to bear the brunt of the bad Governance of BN.
Malaysians, do you think it is time for change? Save Malaysia! Vote Pakatan Rakyat!
