KUALA LUMPUR: A free float of RON95 and diesel could save the government RM29 billion in fuel subsidies.

Hong Leong Investment Bank (HLIB) research said this however would mean pump prices increasing by 64 per cent for RON95 and 61 per cent for diesel.

As at Mar 20, 2024, RON-95 stood at RM2.05 per litre and diesel at RM2.15 per litre.

The research firm said given the absence of goods and services tax (GST), subsidy reforms are now even more crucial if its 12th Malaysian Plan Mid-Term review fiscal deficit target is to be achieved.

"We envision this to entail floating fuel to market prices and concurrently, dishing out cash aid to those that Pangkalan Data Utama (PADU) has identified as target groups. A "fuel float" move would help reduce the fiscal deficit but put upward pressure on inflation," it said. 

HLIB's estimates show that the move  could hypothetically, reduce the fiscal deficit from -4.3 per cent  of gross domestic product (government's 2024 target) to -2.8 per cent.

Subsidies and social assistance (S&SA) in Malaysia has almost tripled from RM23 billion in 2010 to an estimated RM64 billion in 2023 (peaking at RM67 billion in 2022).

According to the Auditors General's Report 2022, Putrajaya spent RM55 billion on subsidies that year (+322 per cent year-on-year (YoY) and 6.5 per cent higher vs pre-pandemic).

The biggest chunk, 82 per cent came from petroleum products, mainly RON95 and diesel.

HLIB research argued that  with a more focused framework, subsidy funds (giving a fish) could instead be allocated to boost DE (equipping one to fish) which has longer term benefits to the rakyat.

"Artificial lowering of fuel prices via subsidies has driven Malaysia's per capita gasoline consumption and transport emissions to be the highest in ASEAN (ex Brunei)."

In addition, the current fuel subsidy structure isn't hitting the right spot as the T20 enjoys 35 per cent of it compared to only 24 per centby the B40 - a study showed that the former consumed 64 per cent more on RON95 vs the latter.

Having ceiling prices below the true market price also leads to the problem of smuggling (particularly rampant for diesel), causing a leakage of subsidy funds," it said.

https://www.nst.com.my/business/economy/2024/03/1028094/free-float-ron95-and-diesel-could-save-government-rm29bil-fuel