World Bank welcomes Malaysia’s move to study targeted fuel, cooking oil subsidy mechanisms

KUALA LUMPUR: The World Bank reckons that subsidies should be targeted and hence welcomes the Malaysian government’s move to review the fuel and cooking oil assistance mechanisms.

Senior country economist Shakira Teh Sharifuddin said at present, fuel subsidies benefit households in the high-income segment more than those in the low-income group.

A study by Bank Negara Malaysia (BNM) previously estimated that 40 per cent of fuel subsidies went to the high-income households and only four per cent went into the pockets of the lowincome segment.

“So, broadly, our view is that subsidies should be targeted to those who are more in need. The government is thinking about moving towards a more targeted system rather than a blanket subsidy system and this is very much welcome,” she told reporters after launching the World Bank East Asia and Pacific Economic Update - April 2022 report yesterday.

Shakira said about 40 per cent of government subsidy spending is channeled towards fuel and cooking oil subsidies.

Although the Russia-Ukraine war had a positive spillover effect on Malaysia in terms of government revenue, it would still have a negative impact on food prices, she said.

“We have already seen some impact on food prices. In terms of financial exposure, it is small at the current juncture. It will create uncertainty and volatility in the financial market, of course, depending on how the situation evolves,” she noted.

Shakira said rising inflation would increase the vulnerability of the low-income group because they spend a bigger portion of their income on food and utilities.

A World Bank High-Frequency phone survey found that even after receiving government assistance, more than 60 per cent of lower income households with a monthly income of RM4,000 or below had inadequate financial resources to cover their basic needs in late 2021.

Meanwhile, one-quarter of households reported having savings that would last only for three months or less, while 16 per cent did not have savings at all.

According to its April 2022 Update, the current shocks are likely to magnify existing postCovid difficulties.

About eight million households fell back into poverty during the pandemic, while regional firms continued to struggle, with more than 50 per cent reporting payment arrears in 2021.

The report said that indebted governments, which saw their debt as a share of gross domestic product (GDP) increase by 10 percentage points since 2019, will struggle to provide economic support.

“Financial tightening and increased inflation, at least one percentage point above previous expectations due to the oil price shock alone, will shrink room for monetary easing.

“And overexposed banks, with credit as a share of GDP about 10 per cent higher than before the pandemic, will have to cope with new financial stresses and increased risks to loans,” said the report.

In Malaysia, fiscal space too is expected to remain constrained, limiting the room for fiscal policy to play a bigger redistributive role.

“Gaps in the social protection system remain/persist, leaving out several vulnerable groups such as youth and informal workers.

“In addition, the triple shocks of Covid-19, food inflation, and floods may deplete poor and vulnerable Malaysians’ resilience toward future shocks and, in turn, widen socioeconomic inequalities among Malaysians,” the World Bank said.