Friday, June 6, 2008

Welcome to the New Era of Global Inflation!

After the government made the sudden decision to raise petrol and diesel prices with effect from 5 June 2008, Malaysians will be quickly entering a new era of globalised inflation ranging from between 5-7% per annum in the next one year. Is this good or bad after years of enjoying the shelter of government subsidies (basically our own money)?

Well it depends. Most sensible bloggers and economists are correct in concuring that a fuel price hike is necessary and will enhance the efficiency of the economy. We have lived under the shelter of excessive subsidies for too long and need to adjust our consumption habits. However, the whole debate about the fuel price hike of 41% to RM2.70/litre plus the efforts to provide a rebate needs to be simplified into 4 issues:

(1) The quantum of the increase is a shock to consumers and companies' pockets and this 41% hike in the fuel bill has never ever happened before in Malaysia's history. Who knows whether we will enter into a steep economic slowdown while most of our trading partners in the US , Europe and Japan are now going through economic stagnation? Is the government and the central bank so confident that they can fine-tune the economy after this shock treatment?

(2) About RM7.5billion or 55% of the savings from the government's reduced subsidy is given back to the people who are apparently car and motorbike owning lower income groups. So in a way, this is a form of income distributive policy by taking the subsidy previously enjoyed by both rich and lower income groups to give to the lower income car owners. But distinguishing the income groups by the capacity of their car engines is a questionable policy. Can't a car owner with > 2000 cc buy cars of 2000 cc and below and be entitled to the rebate. Anyway, the RM625 is not sufficient to cushion the higher cost of fuel.

(3) Is the government really short of cash when out of the estimated RM53 billion of subsidy (without fuel hikes), its actual direct subsidy is less than RM20 billion.

(4) Instead of using the other 45% of RM13.7 billion to subsidise food, why not improve the public transport system and lower the import duties on cars so that our standard and quality of living will be on par with Thailand and Indonesia where the prices of cars are much lower? Alternatively, build a wider and more efficient rapid train system similar to Singapore's.

Aside from the issue of leakages through inefficient spending, these issues will probably be played up by the Opposition, which incidentally, has suddenly made a U turn on their position on petrol prices. (anyone remember them harping about using Petronas profits to reduce petrol prices before the elections?)

Let's see whether the political backlash will lead to some solid debates in parliament and eventually more efficient use of resources.

For those who hope that oil prices will come down below US$130 per barrel, I think that hope is skating on thin ice. World demand for oil is running at 87 million barrels a day while supply is only 85 million barrels a day. It's basically a supply and demand mismatch and the reserves are been drawn down to meet the excess demand from the emerging middleclass in China, India, etc. Welcome to a new era of economic realities and all eyes are now on what Bank Negara's governor will do with interest rates.

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