15-5-2024 (KUALA LUMPUR) In a move that has garnered scrutiny from investors and watchful observers, Malaysian Prime Minister Anwar Ibrahim has signaled a judicious approach to reducing fuel subsidies, a contentious issue that has long been a subject of debate within the nation’s economic landscape. Speaking at the Qatar Economic Forum on May 14, Anwar emphasized his commitment to safeguarding the well-being of the masses, even as he acknowledged the need for reforms.
“I concede that things need to be done, but it needs to be done judiciously,” Anwar told Bloomberg Television’s Haslinda Amin. “Because in no way will I punish the masses.”
Malaysia’s fuel prices are among the most affordable in the world, thanks to substantial state support. When probed about the possibility of cutting such subsidies this year – a move his government had earlier indicated – Anwar responded with a measured stance, stating that it would happen “at the right time, when we are fully prepared.”
Anwar, who assumed power in late 2022 with a pledge to improve Malaysia’s fiscal position and reduce government debt from its current level of over 60 percent of gross domestic product, reaffirmed his commitment to curbing wasteful spending and plugging leakages. However, he underscored the delicate balance required to maintain the satisfaction of the Malaysian people.
While such reforms may bolster the country’s allure to investors, they risk further eroding Anwar’s popularity, which has waned a year since his ascension to power. Malaysia’s GDP growth cooled to 3.7 percent in 2023 after posting the fastest expansion in two decades the previous year.
Addressing the potential savings, Anwar revealed that the government stands to save 5 billion ringgit (S$1.4 billion) annually after reducing support to electricity and poultry consumers. “Now, we have to consider diesel as there are too many leakages,” he added, alluding to the next phase of subsidy reforms.
Malaysia’s current approach involves absorbing a substantial portion of the cost of fuel and cooking oil for its population, a measure estimated to cost a staggering RM81 billion (S$23.27 billion) in 2023. Anwar has sought to replace these broad subsidies with targeted assistance in 2024, aiming to narrow the 2024 budget deficit to 4.3 percent of gross domestic product from 5 percent in 2023.
Upon assuming power, Anwar inherited a fiscal gap of 5.6 percent and a debt burden of 1.5 trillion ringgit, according to the premier’s remarks. As details on the long-awaited rollback of hefty subsidies remain scarce, the central bank anticipates that inflation, which had been below 2 percent since September, may average as much as 3.5 percent this year, potentially impacted by the subsidy reforms.
“How do we then proceed to undertake this reform without punishing the poor?” Anwar posed rhetorically. “That, to my mind, is very central.”
Analysts at Citigroup foresee a “meaningful rise” in the risk of an interest-rate hike later in 2024 should Malaysia begin cutting fuel prices in July. Malaysia’s central bank last adjusted borrowing costs a year ago, placing it at a record differential to the Federal Reserve, a factor that has weighed on the ringgit, which dipped to a 26-year-low in February.
