Budget 2024 on subsidies reform: RON 95 petrol safe for now, diesel and EV users targeted but solar incentives extended

Malaysia’s blanket-wide subsidies are disproportionately benefiting high consumption lifestyle ultra-rich Malaysian elites, said Prime Minister Anwar Ibrahim at today’s tabling of Budget 2024.

“Economic policies should be aimed at achieving economic growth and equalization. But what has happened is that huge subsidies are benefiting the rich. With reduction in leakages, revenue can better distribute to the public, including raising wages.

“Excessive subsidies in the past have resulted in our countries debt and liabilities reaching RM 1.5 trillion, or 82 percent of GDP. Debt servicing cost alone will reach RM 46.1 billion, or 15.2 percent of 2024’s tax collections revenue,” said Anwar.

RM 64 billion allocated for 2023’s subsidies spending, but actual cost to hit RM 81 billion

Last year, Budget 2023 has allocated RM 64 billion for subsidy and assistance, but Anwar says actual spending this year will hit RM 81 billion as the government is still maintaining subsidized prices for essential goods even as inflation hits global commodity prices.

“While subsidized goods help in minimizing the cost of living for the people, the reality is that subsidies disproportionately benefit the wealthy, and the low prices have led to wastage and smuggling out of the country. Furthermore, subsidies are also consumed by over 3.5 million foreign nationals.

“Therefore, starting from the next year, the approach to subsidy re-targeting will be implemented in phases. Some of the savings from these subsidies will be redirected to increase the allocation for cash assistance through the Rahmah Cash Contribution, from RM 8 billion to RM 10 billion.”

Fuel subsidy reform to start with diesel

The public can express a sigh of relief as the government has avoided announcing an increasing in prices of subsidised RON 95 petrol, for now.

Previously, Economy Minister Rafizi Ramli has already said that the government will trial a new targeted fuel subsidy programme as early as November. Eligible Malaysian households will be selected based on the Pangkalan Data Utama (PADU, or Central Database) socio-economic database.

The trial will likely still proceed as planned but from Budget 2024, it may not be implemented nationwide yet, at least not for RON 95 petrol, which is still kept at RM 2.05 per litre.

Instead, the government’s fuel subsidy reform will start with diesel, currently capped at RM 2.15 per litre.

Use of subsidized diesel is up 40%, diesel vehicle sales is only up 3%, where did the rest went?

The reason why diesel is targeted is because diesel fuel has a far higher incidence of leakage due to smuggling.

“The subsidized price of diesel is set at 2.15 Ringgit per litre compared to the market price of 3.75 Ringgit per liter. This means that the government subsidizes 1.60 Ringgit per litre of diesel, totalling approximately 1.5 billion Ringgit overall. According to usage data, subsidized diesel sales have increased by up to 40 percent since 2019, while the number of vehicles using diesel has only increased by less than 3 percent. This suggests a possibility of significant smuggling activities due to the excessively low diesel prices in Malaysia,” said Anwar.

The Prime Minister didn’t announce what is the new price for diesel, or if it would be floated on the free market. Instead, Anwar only said that diesel subsidy will be rationalized in stages. We will have to wait for further details from the Ministry of Domestic Trade and Consumer Affairs.

“To prevent wastage and smuggling, the government intends to rationalize diesel subsidies in phases. In principle, subsidized diesel prices will continue to be enjoyed by selected users such as freight transportation companies. Other users will be charged higher prices. This approach can reduce subsidy wastage while mitigating the impact on consumer goods prices,” said Anwar.

Since freight transport companies are spared from any increase in fuel prices, PM Anwar warned against opportunistic businesses from raising prices of their goods and services. To combat price fixing and cartel-like behaviours, the budget allocated to the Malaysia Competition Commission (MyCC) will be increased to RM 10 million.

High electricity consuming households (EV owners?) targeted, no change to 90% of consumers

PM Anwar revealed that in 2022, the top 10 percent of electricity consumers received 50 percent of electricity subsidies, while the bottom 50 percent received just 10 percent.

“Therefore, starting this year, the government has implemented targeted subsidies by reducing some subsidies for the top 10 percent of electricity consumers while maintaining the same subsidy for the remaining 90 percent of consumers. This targeted approach has saved more than RM 4.6 billion from the projected RM 20 billion electricity subsidy. However, the government will still bear a 16 billion Ringgit electricity subsidy in 2023, particularly for household users and Micro, Small, and Medium Enterprises (MSMEs).

“The government will continue to refine the targeted electricity subsidy approach based on electricity consumption levels. The government hopes that this decision sends the right signal to consumers to practice energy efficiency and prudent electricity usage in their daily lives.

“Furthermore, the government has agreed to continue providing a monthly electricity bill rebate of up to 40 Ringgit to low-income households with an allocation of 55 million Ringgit. Additionally, the government has decided to waive the deposit payment for electricity bill accounts registered in the individual's name.”

EV owners encouraged to invest in household solar panels

The Net Energy Metering (NEM), which allows households with rooftop solar panels to offset their electricity bill by transferring excess electricity generated to the grid, will be extended until 31-December 2024. The program was supposed to expire this year.

Anwar also said that the government is also developing a rooftop solar buyback program with minimum system costs but did not provide more details.

He also urged more private companies to offer "Zero Capital Cost" home solar subscription models, like those provided by Petronas’ Gentari.