Any major change in fuel subsidy will hurt market, people – Tanah Rata assemblyman

The Russia-Ukraine war has disrupted global commodity markets, and many countries including Malaysia are already affected by increased prices in goods such as oil and food.

KUALA LUMPUR, March 15 – Any major shift in the provision of fuel subsidy in the country could send shockwaves through the market, says state assemblyman for Tanah Rata (Cameron Highlands, Pahang) Chiong Yoke Kong.

In a statement here today, Chiong, who is also the Democratic Action Party Socialist Youth Deputy Chief, urged the Ministry of Finance as well as other relevant ministries and agencies not to change or even terminate the fuel subsidy only for the sake of reducing government spending.

Referring to a recent announcement by the government that it was planning to review the current fuel subsidy mechanism, he said any major policy change could hurt the market and society.

Finance Minister Tengku Datuk Seri Zafrul recently announced in the Parliament that following the spike of world crude oil prices, the government had to cover a significant increase in subsidies up to 10 times, increasing from RM200 million for January 2021 to more than RM2 billion for January 2022. As such, the government will review the subsidy mechanism to be more targeted towards aiding the vulnerable groups.

He said that while the government’s main purpose seemed like it planned to reduce its spending and provide some extra subsidies to the vulnerable groups, it should be studying the potential impacts that the major policy change will bring about to the market.

“The core principle of implementing the fuel subsidy is not about subsidizing consumers but rather stabilizing the prices in the market.

“More importantly, the fuel subsidy mechanism is crucial in stabilizing the raw material market, in particular, the food market that is directly impacted by oil prices. This is to avoid raising inflation that will bring about far-reaching and huge impacts across all economic sectors and reduce the consumers’ purchasing power,” Chiong said.

Within the fuel subsidy mechanism in Malaysia, the government also provides diesel subsidies apart from the RON95 subsidies that most consumers are familiar with. This is because diesel is the main fuel used by the transportation sector.

Chiong also pointed out other sectors that stand to be impacted by any rise in fuel prices.

Natural gas is the main key component in producing nitrogen fertilizers. Towards the end of last year, many major international newspapers reported that due to the skyrocketing natural gas prices, the profits of the chemical fertilizer industry also decline.

Hence, the producers have to cut down the production of nitrogen, causing chemical fertilizer shortages. In the future, the situation might exacerbate and lead to chemical fertilizer shortage and significantly higher agricultural costs.

“Despite the fact that Malaysia is an oil producer, our country does not have a well-developed downstream sector. Hence, Malaysia has to import chemical fertilizer, the price of which is always affected by the international market.

“For those who are interested or involved in agriculture, they can always hear farmers complain that the recent chemical fertilizer prices have increased dramatically, causing a spike in agricultural costs that burdens the farmers.”

The assemblyman said with the increase in costs of food production, the market prices of vegetables and fruits will also go up.

“In the end, all consumers will have to bear the brunt of high food prices. At the same time, the government must keep a close eye on the ever-changing international development. Russia and Ukraine are important international food exporters, yet the devastating war has disrupted the global commodity markets.”

The global oil benchmarks surged above USD100 a barrel for the first time since 2014, and Brent crude oil price even surged to USD130 a few days ago.

Furthermore, given that the international community has imposed various economic sanctions against Russia, the risk of trade routes disruptions has greatly increased. It has further led to increasing costs of logistics and its insurance, and thus the spike of chemical fertilizers and food prices as a whole.