Malaysia to pay RM28 billion in fuel subsidy in 2022 – five times higher than RM5.3b allocated in Budget 2022


The government of Malaysia may be on track to spend RM28 billion in fuel subsidies this year if the price of crude oil remains above US$100 (RM419) per barrel. While the government stands to gain a larger sum in oil revenue, the fuel subsidies bill this year could be five times higher than the RM5.3 billion allocated under Budget 2022, KAF Research has found, The Star reported.

“Based on the above analysis, the government will receive a higher oil revenue amounting to about RM57 billion this year from RM44 billion estimated under Budget 2022 at the current oil price of about US$109.20 (RM458) per barrel, which is 65.5% higher that the Budget 2022 assumption of US$66 (RM277) per barrel,” KAF Research said.

This however means that the government will also incur a subsidy bill of RM28 billion, while the larger-than-expected increase in subsidies of RM22.7 billion would far surpass the RM13 billion gain in oil revenue, it said; higher oil prices may therefore pose a net negative impact on the country’s fiscal position “to the extent that every US$10 (RM42) per barrel increase in oil prices raises the fiscal deficit by 0.1% of gross domestic product (GDP),” the KAF Research report read.

Premium grades of petrol have been continuously climbing in price. For the week of March 17 to 23, 2022, RON 97 is priced at RM4 per litre, while RON 95 petrol remains at its capped price of RM2.05 per litre; diesel retail prices are similarly capped, with Euro 5 B10 and B20 at RM2.15 per litre, and Euro 5 B7 diesel at RM2.35 per litre.

According to sensitivity analysis by KAF Research, every US$1 (RM4.19) increase in the price of Brent crude means a RM300 million increase in the government’s revenue. However, the same increase will also increase the subsidy bill by RM440 million, which translates to “a net fiscal impact of minus RM140 million for every US$1 per barrel increase in oil prices, after subsidies kick in above the break-even point of US$55 (RM231) per barrel,” the report said.

When oil prices averaged US$70.85 (RM297) per barrel last year, the government had spent RM11 billion in subsidies; last month saw Brent crude go above US$100 (RM419) per barrel last month, which was the highest since 2014, following the Russian military invasion of Ukraine from February 24, The Star reported. Russia is the world’s third-largest oil producer after the United States and Saudi Arabia.

The research firm maintained its estimate of a fiscal deficit of 6% of GDP for 2022, as the government has several options for covering the shortfall of RM7 billion to RM10 billion based on the average oil price estimate of between US$90 (RM378) to US$110 (RM462) per barrel, The Star reported.

The Malaysian government has two options at this juncture, says KAF Research; it can either revert to the previous targeted subsidy programme that had been shelved, and abolish the fuel price ceiling, or raise the fuel price ceiling to “a more tolerable level of RM2.80 to RM3.00 per litre,” the research firm suggested.

“Before an announcement is made regarding the targeted fuel subsidies, we expect Bank Negara Malaysia to begin normalising rates in the second half of the year at the pace of one to two rate hikes,” the research firm’s report added.

A one-time cash payment assistance programme of up to RM625 was introduced by the Malaysian government, and fuel prices were floated at the same time. Fuel subsidies were abolished in 2014 and prices were instead based on an automatic price mechanism, however fuel subsidies were reintroduced in 2018 which saw RON 95 petrol and diesel priced at RM2.20 and RM2.18 per litre, respectively.

The post Malaysia to pay RM28 billion in fuel subsidy in 2022 – five times higher than RM5.3b allocated in Budget 2022 appeared first on Paul Tan’s Automotive News.


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