Abstract
Direct cash aid has been introduced to protect the poor from the impact of rising fuel prices in efforts to remove subsidies in Malaysia. Thus, this paper is aimed at evaluating the changes in prices and quantities of consumer commodities produced by 17 sectors in response to the integration of direct cash aid into fuel subsidy removal. Specifically, the direct cash aid was a reallocation of saved resources through the complete removal of fuel subsidy. This study was carried out using the Lofgren-based computable general equilibrium (CGE) model, by simulating the before and after imposition of fiscal integration. With the withdrawal of government fuel subsidy, the findings showed that recipients of the cash aid tended to spend on basic necessities such as food and beverages, and petrol (for individual vehicle consumption). Nonetheless, the sudden increase in consumer expenditure led to higher consumer prices as current supplies was unable to catch up with increase in demand. Thus, it is advisable to have other effective, concurrent development programs to stimulate future economic development. Keywords: Fuel subsidy removal, Direct cash aid, Computable general equilibrium (CGE) model.
Highlights
Fuel subsidy was one of the subsidies provided extensively by the Malaysian government to support the restructuring objectives of the National Economic Policy (NEP) and the National Development Policy (NDP)
Enabling access to lower fuel prices had induced substantially uncontrollable fuel consumption which concealed the fact of the risk of huge government resources that went only to fuel subsidy, crowding out other developmental spending
The impact of integrating direct cash aid into subsidy fuel removal was estimated by considering the changing prices and quantities of consumer commodities produced by the 17 sectors
Summary
Fuel subsidy was one of the subsidies provided extensively by the Malaysian government to support the restructuring objectives of the National Economic Policy (NEP) and the National Development Policy (NDP). Fuel subsidy expenditures set a record highest point with RM20.3 billion or 13.0 percent of the operating expenditure on subsidies in 2008 on account of the sharp increase in world oil prices (Ministry of Finance, 2011). This had hugely burdened public finance, incurring high budget deficits. Even though prices for RON 95 fuel and diesel remained at RM 2.20 and RM2.18 per litre, respectively for some time in order to stabilize fuel prices and reduce the cost of living of the people These circumstances clearly demonstrated the government’s intentions of removing all fuel subsidies to improve the fiscal budget
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