(Bloomberg) — The Malaysian government is bracing for public backlash as it commits to rolling back gasoline subsidies by mid-2025, a politically sensitive and long-delayed pledge that is crucial to convincing investors it is serious about budget reforms .
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The government is considering a two-tiered pricing system for the country’s most used fuel, so that the richest 15% pay the market rate for RON95 gasoline while the rest enjoy the current subsidized price, Economy Minister Rafizi Ramli said on Saturday. This is expected to save the government 8 billion ringgit ($1.9 billion) a year – although it could also trigger second rounds of price hikes and lead to a rise in inflation, he said.
“We are prepared for the stormy waters ahead,” Rafizi said in an interview on Bloomberg Television’s “Insight with Haslinda Amin,” airing Monday at 11 a.m. Hong Kong time. Although the government has spent time preparing the masses and explaining their reasons for the subsidy reforms, “it is a once-in-a-generation decision that affects everyone’s lives.”
It’s a plan that’s been years in the making, and how Malaysia handles it will be crucial for Prime Minister Anwar Ibrahim as he looks to boost investor confidence while avoiding the fate of his three immediate predecessors, each of whom has been in office for less than two years. Anwar must balance the interests of the various political parties that make up his coalition government.
The scaling back of diesel subsidies in June was followed by the loss of the ruling coalition in a by-election. While it has bounced back in two consecutive polls, the stakes are higher with RON95: Malaysians are so dependent on private transport that vehicles outnumber the population.
“My hope, and our responsibility in government, is to ensure that we manage this properly so that it is sustainable,” Rafizi said, a day after Anwar unveiled a record spending plan to stimulate the economy.
According to Rafizi, inflation is the government’s main concern, even though only a fraction of the population will experience higher RON95 prices.
“It is the nature of the Malaysian economy that at any sign of a rise in fuel prices, you will see everything else rise,” said the 47-year-old, a qualified chartered accountant. “Our simulation is that if there is a price increase, we will have to go through at least a 12-month cycle before inflation basically stabilizes again at around 2%.”
The government expects inflation to average between 2% and 3.5% next year, from 1.5% to 2.5% in 2024. The 3.5% estimate is a ‘worst case scenario’ that Rafizi hopes it can be avoided if the nation sticks to inflation. towards a two-tiered pricing system for RON95.
Another option is to raise prices of RON95, as was done for diesel in June, and distribute money to the needy to cushion the impact of higher costs, Rafizi said. But such assistance may not reach everyone as only 60% of Malaysia’s workforce works in the formal sector, he added.
Regardless of the mechanism, Anwar cannot afford to delay such a step, which the government initially wanted to implement this year. Higher government wages and pension costs prompted him to unveil Malaysia’s largest annual budget on Friday. He is counting on subsidy cuts and a broader tax base to further reduce the budget deficit to 3.8% of gross domestic product next year, from 4.3% in 2018. 2024. The government has pledged to reduce the budget deficit in the medium term to 3% of GDP.
Restoring fiscal health is crucial for Malaysia to maintain emerging Southeast Asia’s highest credit rating and maintain investor confidence as Anwar looks to build the country into a global artificial intelligence hub.
A broad-based consumption tax could go a long way in boosting Malaysia’s fiscal strength. Before the goods and services tax was abolished in 2018, it represented about 20% of revenues, or 3.3% of GDP, according to Lavanya Venkateswaran, an economist at Oversea-Chinese Banking Corp. in Singapore.
Rafizi said the government’s focus, however, will be on subsidy reforms and optimizing spending before they can consider bringing back a consumption tax. Previous Malaysian governments have struggled to raise tax collection rates, among the lowest in Southeast Asia.
After a revolving door of leaders since 2018, the current government has reason to be cautious.
“We don’t want to be a one-hit-wonder boy band,” Rafizi said.
Other highlights from the interview:
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Malaysia expects to sign an agreement with Singapore on their special economic zone in Johor state by December, with the first batch of investors expected to arrive in the first half of 2025. The government has initially set aside 5 billion ringgit for an infrastructure facilities fund. it can quickly call upon upgrading works in the zone.
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Malaysia aims to grow its economy by at least 5% per year in the coming years, although the country expects growth of 4.5% to 5.5% in 2025.
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Rafizi hopes the ringgit can reach 3.8 against the dollar if Malaysia can maintain strong growth over the next four to five quarters. The currency, which has been the best performer in emerging markets this year, closed around 4.3 per dollar on Friday.
–With help from Naman Tandon, Alex Chandler and Kevin Dharmawan.
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