The size of the middle class in Malaysia has remained relatively small at 20 per cent. It is 50 to 55 per cent in a typical developed country.
The Establishment Post: Malaysia’s fuel subsidy removal - Unpopular but necessary
By Vanitha Nadaraj

Published 2 December 2014

There was a window of opportunity when oil prices declined sharply and Malaysia took advantage of it to make downward adjustments to fuel subsidy. An unpopular but necessary move. From December 1, Malaysia will abolish subsidies for the widely used RON95 grade of petrol and diesel. This could potentially save the government almost RM20 billion ringgit (US$5.97 billion) annually.

A managed float mechanism will be put in place where prices will adjust according to the market rate. The same mechanism is being used to set the price of premium petrol RON97 since the beginning of the year. Indonesia also took advantage of the window. The country cut subsidies and this caused fuel prices to go up by more than 30 per cent, a move that will save Indonesia more than US$8 billion next year.

Debts and deficits

Malaysia made the move to reduce rising national debt and Malaysia’s fiscal deficit that is among the highest in Asia. Malaysia has been grappling with a budget deficit since 1998 after the Asian financial crisis. Malaysia is at the tail end of a subsidy reform programme that took off in July 2010. This programme maps out a schedule of subsidy reductions for fuel, sugar and other products, over a three to five year period. A lot of commitment has gone into fuel subsidy rationalisation and many expect the same fervour and tenacity in plugging wastage and leakage.

To mitigate the impact of the fuel price increase on low-income groups, cash handouts and other social welfare measures were given under the 1Malaysia People’s Aid (BR1M) programme. There are now 7.1 million BR1M recipients, which is almost 24 per cent of Malaysia’s 30 million population. The number of recipients almost doubled from 4.1 million when BR1M was introduced in 2012. A total of RM8.7 billion (US$2.6 billion) has been disbursed over the years and next year more than RM5 billion (US$1.5 billion) will be given out.

Middle class dilemma

The biggest fear for the average Malaysian family is that cost of living would escalate and this would be further aggravated by the Goods and Services Tax that will come into force in April. There is cause for their concern because the median income of the middle 40 per cent of Malaysian households at RM4,372 a month (US$1,306) and prices of essential items have gone up. It is becoming a challenge for many to stretch their income.

But subsidy rationalisation is a necessary move and the government cannot postpone it any longer. The allocation for subsidies in Malaysia has increased 14 times from RM1.65 billion in 2002 to RM23.5 billion in 2013, solely to maintain low fuel prices (US$490 million to US$7 billion), according to columnist Ivanpal S. Grewal.

One of the main findings in the Malaysia Human Development Report 2013‎ released by United Nations Development Programme on Nov 25 was that 53 per cent of Malaysian households have no financial assets.

In his keynote address at the launch of the report, renowned economist Tan Sri Dr Kamal Salih said: “However, throughout the entire‎ period until now, the size of the middle class has remained relatively small for Malaysia, trending around the 20 per cent when in comparison in a typical developed country situation, the percentage is closer to 50-55 per cent.”

One of the solutions is an upward revision in wages and the National Wages Consultative Council is due to announce a new order in 2015. But there is a Catch 22 situation here. The next wage revision can knock out a huge number of SMEs that are already struggling to accommodate the last wage adjustment that was in 2012. There is fear that many of these SMEs will close business should the minimum wage be increased. The impact of this is huge because SMEs employ 57 per cent of the workforce and SMEs is identified as one of the economic growth engines.

There is no easy solution, but the removal of fuel subsidy is a start. Now, the focus will have to go towards making the middle and lower class resilient.

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It is essential that Malaysia continues to prioritise inclusive growth and social cohesion, and moves forward with the second generation policies that are needed to support this.
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