KUALA LUMPUR (Aug 12): The best time for Malaysia to transition from blanket to targeted subsidies is when the country is no longer facing high inflationary pressures, Bank Negara Malaysia (BNM) Governor Tan Sri Nor Shamsiah Mohd Yunus said.
Implementation of targeted subsidies must account for two things, namely the current inflationary environment, and that it should be done in phases, the central bank governor said during the press conference on Malaysia’s 2Q22 GDP data release.
“Assistance needs to be given to the vulnerable sectors,” she said, pointing to the 20% of the economy which is still operating below pre-pandemic levels as of the second quarter.
While the change from a blanket subsidy regime to a targeted one will push up inflation, savings from the transition can be used to support mechanisms like social protection programmes, Nor Shamsiah said.
A phased and targeted roll-out will help manage the impact of the blanket subsidy removal on the economy, she said.
“The outcome that we want to achieve is to have sustainable and inclusive growth,” she added.
Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the government’s subsidy and cash aid spending for 2022 is expected to more than double to RM77.7 billion from the initial estimate of RM31 billion. Some RM37.3 billion is spent on a blanket fuel subsidy, of which the bulk goes to the M40 and T20 income groups who spend more on fuel.
On Aug 9, Tengku Zafrul reportedly said it is too early to introduce targeted subsidies in Budget 2023, considering the high global inflation.
Malaysia’s consumer price index rose to a 12-month high of 3.4% in June 2022, led by a rise in food prices. The figure is much lower than the global average of 6.7%, and 5.6% in emerging economies, due to the blanket fuel subsidy and the government halting an increase in electricity tariffs for households while slowing the rate of increase for commercial end-users.
BNM has forecast the headline inflation to average between 2.2% and 3.2% this year, compared with Malaysia’s long-term average of 1.6%.
The central bank has also increased the overnight policy rate by 50 basis points this year to 2.25%, with a trajectory to normalise to pre-pandemic levels of 3%-3.25% partly to pre-emptively address the heating domestic demand.
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