The Impact of Removing Fuel Subsidies on Domestic Outputs in Malaysia

Abstract

The aim of this study is to examine the impact of ending fuel subsidies on the 19 aggregated sectors in Malaysia. Two alternative complementary policies, including the extra savings’ reallocation on agricultural investment and direct cash transfer targeting the poor, were taken into account to mitigate the possible undesirable circumstances under the subsidy removal. To conduct this study, a computable general equilibrium (CGE) model was developed on the basics of the standardized Löfgren CGE model with some appropriate adjustments and assumptions. The empirical results show that the output growth differs considerably across sectors in response to the subsidy removal. On average, domestic outputs decrease. The sectors that consume large amounts of fuel product in their respective production processes, tend to be more vulnerable to this subsidy removal. Nonetheless, an overall improvement in the growth of production is reported by increasing investment on the agricultural sectors compared with the cash transfer. The expansion of agricultural activities demands for more raw materials from other sectors and supply its output as food or as raw material to non-agricultural sectors, bringing an overall economic development. The cash transfer scheme has minimal impact on domestic outputs.