27TH NATIONAL ECONOMIC BRIEFING FUEL SUBSIDY RATIONALIZATION:

ASSESING SOME ISSUES AT THE NATIONAL LEVEL

NEB special session on 17th July 2012

Presented by Khalid Abdul Hamid (khalid@mier.po.my) and Zakariah Abdul Rashid

GIST OF PRESENTATION

Background on Fuel subsidy

Previous studies

Determination of fuel subsidy Results & recommendations

Fuel Subsidy

q Definition: In narrowest term: Direct cash payments by a government to a fuel producer or consumer. In broader term: Government interventions on direct and indirect fuel subsidy on cost and prices q Types Direct fuel subsidy: Direct financial transfer, preferential tax treatment, trade restrictions, direct investments and R&D. Indirect fuel subsidy: Long-term investments, sectoral structure, trade balances, growth and welfare.

q Measuring Direct and indirect effects on price of goods in question.

q Size of subsidy Effects are widespread, vary by importance and according to fuel and country. Estimating on size depends heavily on dimensions and methodology.

3

The workings of subsidy How it works

Government intervention

Subsidy types Lowers costs of production

Raises cost of production

Lowers price to consumers

Direct effects Grants to producers Grants to consumer Low-interest or preferential loans to producers

Tax treatment Rebates or exemptions on royalties, sales tax, producer levies and tariffs

Tax credit

Accelerate depreciation allowances o energy supply equipment

Trade restrictions Quotas, technical restrictions and trade embargoes

Energy-related services provided directly by government les than full costs

Direct investment in energy infrastructure

Public R&D

Energy sector’s Regulations

Demand guarantees & mandate deployment rates Price control

Market-access restrictions

Source: UNEP/IIEA 2002

4

Generally 2 types of subsidy: for producer and consumer

FUEL SUBSIDIES IN SOUTH EAST ASIAN COUNTRIES In 2010, it is estimated that four South East Asian countries spent a combined total of $35.07 billion subsidizing fossil fuel consumption: Malaysia ($5.67 billion), Thailand ($8.47 billion), Viet Nam ($2.93 billion) and the Philippines ($1.1 billion) (IEA, 2011; FCO, 2011). In addition, Indonesia is estimated to spend $16.9 in 2011 (calculated from SNSA).

With population census of 2009, per capita subsidy will be the highest by Malaysia (USD200), followed by Thailand $126.6, Indonesia $73, Vietnam $34.1 and the Philippines $11.9.

5.67

16.9

8.47

2.93 1.1

0 2 4 6 8 10 12 14 16 18

0

50

100

150

200

250

Malaysia Indonesia Thailand Vietnam Philippines

South Asean Countries’ fuel subsidy (in billion USD)

Fuel subsidy in billion USD Per capita subsidy

BACKGROUND Fuel subsidies in Malaysia

•  Type and proposed rationalization plans •  Malaysia had a cap on electricity and petroleum in place for some

years. The difference between world market and these caps have been subsidized by the government;

•  In 2008 govt. introduced a broad package of reforms on energy subsidies-reductions, rebates, windfall tax and social safety net

•  Price of electricity was raised in August 2008, Petroleum in June 2008. To offset increase in fuel prices govt. offered road taxes rebates

•  Drivers of subsidy reform •  Rising oil prices especially 2007 and 2008 increase subsidies as

cap widened, mounting fiscal burden to the govt. and prompting to review subsidy policy. In 2008 alone an amount of RM14 billion was reported and had since continuously on an increasing trend.

•  Results and key factors affecting the outcome: •  The price rises implemented despite widespread protests (IEA,

2009, Hamid, 2008).

GIST OF PRESENTATION

Background on Fuel subsidy

Previous studies

Determination of fuel subsidy Results & recommendations

STUDIES ON SUBSIDIES A research project on subsidy rationalization was undertaken with ERIA using Input-Output and Computable General Equilibrium

•  Anticipated to be tabled to the EAS Minister of Energy from EAS member country

•  Towards an Asean Economic Community (AEC) integration

•  Global Subsidy Initiative (GSI)

•  Competition policy

Facilitate IISD of Geneva under the GSI- to come-up with policy guidelines for policy makers and conferences to share experiences on subsidy rationalization

Presenting some of our major works and findings at MIER’S National Economic Briefing, MOF and related agencies in 2012

Examining the impacts of some crude oil issues on country-wide, sectoral and welfare related to subsidy rationalization on the Malaysian economy by Khalid (2010), Narges (2010), Fauzi (2007), Zakariah & Shahwahid (1994), etc.

9

Elasticity of demand shows that an increase in any of the listed goods and services react to an increase in price. A high elasticity of demand goods reacted highly in S-R and L-R to increase in prices for example in air travel. In contrast low elasticity goods like Alcohol or movies does not change much with change in price. Thus, in terms of fuel subsidy, if an increase of price due to subsidy removal a high demand for fuel goods will have a higher reaction than non-oil goods.

q A  fuel  product  is  price  elas*c  when  it’s  price  change  cause  a  big  effect  on  its  demand.    Ø E.g.  An  increase  in  fuel  price  will  dampen  people’s  demand  for  larger  cars  and  also  travel  due  to  the  price  increase  in  air  ;ckets  vice-­‐versa.  

q Likewise   a   product   is   price   inelas*c   when   a   change   in   the   fuel   price   will   have   minimal   effect   on   its  demand.    

Ø These  products  are  insensi;ve  to  any  price  changes,  e.g.  even  with  a  10,  20  or  30%  hike  in  the  fuel  price  will  not  prevent  a  smoker  from  smoking  less.    

q Two  different  curves  in  the  following  graph  may  explain  the  concept  of  price  elas;city’s  to  demand.  

q When  a  product   is  of  a  higher  price  elas;city,  any   increase   in  the  price  e.g.   from  P2  to  P1  will  result  in  a  larger  reduc;on  in  the  quan;ty  demand  which  can  be  measured  as  D-­‐C.

 q The   steeper   the  demand  curve   the   lower  will   be   the  price  elas;city.  When  price   increase  from  P2  to  P1,  the  reduc;on  of  quan;ty  demand  is  only  equivalent  to  B-­‐A.  

 

Subsidy’s effects: Can we estimate its sensitivity? Elasticity of fuel demand

COMPETITIVENESS: ENERGY INTENSITY

10

0.0  

0.1  

0.2  

0.3  

0.4  

0.5  

0.6  

0.7  

0.8  

0.9  

1   3   5   7   9   11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  

M  

VA  

0.0  

0.1  

0.2  

0.3  

0.4  

0.5  

0.6  

0.7  

0.8  

0.9  

1   3   5   7   9   11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  

M  

VA  

0.0  

0.1  

0.2  

0.3  

0.4  

0.5  

0.6  

0.7  

0.8  

0.9  

1   3   5   7   9   11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  

M  

VA  

Lowest  Indonesia  

Highest  China   Moderate  Japan  

Developed countries have low energy intensity but high output generated. Developing countries have high energy intensity but at lower output. ERIA paper by Khalid & Zakariah (2011).

0.0   0.1   0.2   0.3   0.4   0.5   0.6   0.7   0.8  

Food  Crops  Vegetables  

Fruits  Poultry    Farming  Other    Livestock  

Fishing  Meat  and  Meat  Produc;on  

Preserva;on  of  Seafood  Preserva;on  of  Fruits  and  Vegetables  

Dairy  Produc;on  Oils  and  Fats    Grain  Mills  

Bakery  Products  Confec;onery  

Other  Food  Processing  Wine    and    Spirit  

 SoZ  Drink  

0.608  0.570  0.557  

0.483  0.528  0.502  

0.182  0.231  0.255  

0.162  0.120  0.143  

0.202  0.236  

0.194  0.277  

0.202  

0.092  0.197  

0.074  0.041  

0.040  0.107  

0.068  0.104  

0.159  0.266  

0.061  0.332  

0.147  0.416  

0.188  0.198  

0.260  

VA  

M  

VULNERABILITY TO OIL PRICE EFFECT MLPS: EXOGENIZED OIL PRICE CHANGE

11

0.0   0.1   0.2   0.3   0.4   0.5   0.6   0.7   0.8  

Food  Crops  Vegetables  

Fruits  Poultry    Farming  Other    Livestock  

Fishing  Meat  and  Meat  Produc;on  

Preserva;on  of  Seafood  Preserva;on  of  Fruits  and  Vegetables  

Dairy  Produc;on  Oils  and  Fats    Grain  Mills  

Bakery  Products  Confec;onery  

Other  Food  Processing  Wine    and    Spirit  

 SoZ  Drink  

0.221  0.145  

0.271  0.271  0.276  

0.245  0.540  

0.443  0.397  

0.356  0.610  

0.387  0.404  

0.217  0.372  

0.218  0.294  

0.070  0.077  

0.087  0.190  

0.146  0.117  

0.189  0.189  

0.165  0.188  

0.174  0.110  

0.212  0.113  

0.206  0.142  

0.208  

VA  

M  

Direct effect

Indirect effect

Estimated using MLPS yield price effects in terms of VA and import. E.g. oils & fats have low direct effect but high indirect effects. Khalid & Zakariah, Anadolu (2010)

Study Gaps: Ø  Providing a quantitative account impact of phasing out subsidies of

energy products in short and medium runs.

Ø  An integrated approach of I-O, SAM and CGE, can examine country-wide, sectoral and welfare. With extension specific price-shifting and price-spread model to evaluate income and expenditure share that measures household’s welfare.

12

Research questions: Reforms issues:

•  Correct level of energy prices and how it is estimated? •  How subsidies is distributed, by energy type and by consumer

sector? •  Should prices be raised to economic levels gradually or

suddenly? •  Which social groups should be compensated for the loss of

income that reducing or removing subsidies would involve? •  What would be appropriate compensation and best method of

payment?

•  Subsidies tries to attain economic, social and environmental objectives, but, expenditure had increased at alarming rate, deteriorating trade and economy and even environmental and burden the poor that contradict to its own objectives.

•  Negativity in subsidy - attempts to reduce fuel prices through differentials at points of sale for a category of consumer has proved ineffective in most countries, leading to lower in productivity, spread smuggling and informal activities.

•  Developed country used less energy intense input of production but generated more output. In contrast, less developed country has high intense in its production input, but less output generated. (Chapter 10 ERIA Research Project Report 2010, No. 25). In total effects, share of intensity in inputs share are influenced by how a country consume its energy.

•  Fuel subsidies should protect the very poor group in the economy. Ironically, in many countries the burden of expenditure/income impacted more on the poor (Kpodar, Coady, 2009).

Review of study

13

GIST OF PRESENTATION

Background on Fuel subsidy

Previous studies

Determination of fuel subsidy Results & recommendations

Price of fuel at pump in 2005

Product No Subsidy Subsidized   RON94 Diesel LPG

  3.07 2.66 3.80

  1.92 1.58 1.75

 Gasoline

(RON97)

Prices on 31 July 2005

Peninsular Sabah Sarawak Product Cost + Operational Cost + Company Margins + Petrol Station Commission + Sales Tax

164.21

9.54

4.45

8.00

58.62

164.21

8.98

4.45

8.00

58.62

164.21

8.13

4.45

8.00

58.62 = Actual Price 244.82 244.26 243.41 -  Sales Tax

(Exemption) -  Subsidy

58.62 24.20

58.62 25.64

58.62 23.79

= Retail Price 162.00 160.00 161.00 The price of fuel subsidized at pump is in the following table: As of 31 July 2007 2005 the breakdown of Gasoline prices in Malaysia is as above

16

Determination of fuel subsidy through the APM, 2011

Figure :Determination of sales tax, subsidy and retail price by the Automatic Pricing Mechanism, 2011

Source: Ministry of Domestic Trade and Consumerism

0.17

0.18

0.13

0.13

0.00

0.25

0.29

0.30

0.83

0.58

0.58

0.57

0.00 0.20 0.40 0.60 0.80 1.00

RON97

RON95

DIESEL

BIODIESEL

Tax  exemp;on Subsidy Retail  price

  Subsidy Costs as of December 2007 Subsidy Tax Exemption Total

Cost (RM Billion)   2003 2004 2005 2006 2007 2008

  4.76 7.15 7.85 7.59 7.41

 

  1.82 4.79 8.16 7.28 8.77

  6.58

11.94 16.01 14.67 16.18 35.00

Increasing Oil Subsidy Costs to the Government The government pays cost of subsidy

Table 1: Total Cost of Oil Subsidies As of December 2007 (RM billion)

Source: The Economic Planning Unit and NEAC

MOUNTING EXPENDITURE IMPACTED FISCAL DEFICIT THRU FUEL SUBSIDIES AND REVENUE LOST

2001 2002 2003 2004

2005 Before 31 July Increase

After 31 July Increase

Subsidy Revenue Lost Total

2.40

5.08 7.48

0.92

3.31 4.23

1.82

4.76 6.58

4.79

7.15 11.94

7.59

7.85 15.44

6.63

7.85 14.48

Table 2: Total Petroleum Subsidies and Revenue Lost, 2001-2005 (RM billion)

Source: The Economic Planning Unit and NEAC

IMPACT OF OIL PRICE INCREASE IN 2005

Source: Estimated from EPU & NEAC

Observations:

20

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per  cent  of  fuel  subsidies  from  total  government  subsidies,  1990-­‐2010

%  of  total  subsidy

Source: Economic Report, MOF

21

0

2000

4000

6000

80001993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

7,873

PETROL DIESEL LPG

Consumption: Fuel subsidy by product types, 1993-2010 (in RM million)

Source: Ministry of Domestic Trade & Consumer Affairs

OBSERVATIONS •  As countries is more developed, share of subsidy from input

use for production changes (less/more). Less developed country has high protection in its production. Developed country have lesser subsidy which is more competitive in its direct and indirect production.

•  In total effects, share of subsidy in inputs share are influenced by whether a country is more developed or less.

•  Welfare effects have different effects by different policies.

22

GIST OF PRESENTATION

Background on Fuel subsidy

Previous studies

Determination of fuel subsidy Results & recommendations

SOME RESULTS & FINDINGS: HOUSEHOLD SPENDING ON FUEL PRODUCTS

•  Malaysia is amongst the highest car ownership in the world about 600 cars per 1,000 population since 2003 (IDRC) passing even developed countries like UK and Japan)

•  Major fuel consumption concentrated on medium and rich groups compared to low intake by poor categories

•  Policies tend to encouraged expansion of auto industry compared to building mass public transportation infrastructure (constructing roads vs public transportation route interconnections-inflexible)

•  On monthly basis, household spends about 8% in 2004/05, and increased to 9% in 2009/10 on fuel products in Malaysia (HES)

•  The overconsumption trend (inefficiency, misallocation and environmental degradation) contradicts with the NEM objective towards high income, inclusiveness and sustainability.

25

Country-wide: Preliminary data construction and identification on I-O Tables 2000 and 2005:

Table 1 : Aggregate e nergy sectors and their related inputs by MSIC , 2005 Energy Industry Commodity Group Commodity Description Crude oil , natural gas and c oal P etrol eum oils, crude

Natural gas , in gaseous state Coal

Petroleum production* Diesel Petrol RON 97 below and above Furnace oil LPG Other Fuel

Electricity and gas Electricity gas

*Note: The I - O Table 2005 termed Petroleum production as Petroleum Refinery Source: I - O Table 2005, Department of Statistics and National Energy Balance Malaysia

COMMODITY * COMMODITY

(RM'000)

Crude petrol, natural gas &coal

Petrol & coal products Electricity & gas

2000 2005 2000 2005 2000 2005 Crude petrol, natural

gas &coal 483,690 0 11,565,797 30,436,185 7 0

Petrol & coal products 155,736 3,379,324 2,224,440 7,862,719 1,292,593 6,536,770

Electricity & gas 29,893 29,337 274,857 396,727 663,745 4,458,645

Table 2: Energy purchased by energy sectors in years 2000 and 2005 at current price, RM’000

26

Simulations   Output (Weighted)   GDP   Income  

Baseline (A)   1.87   1.33   0.428  Scenario (B)   1.93   1.41   0.454  Differences (C = B – A)   0.06   0.08   0.026  

Analysis:

Total effects

• Phasing out oil subsidy will increase oil price but geared towards increase in efficiency and lower the cost of producing goods that will bring increase in output; • If oil and gas price is aligned to market prices by 2017 a considerable amount of money will be saved from phasing out subsidy from 2016 i.e. in the range of RM30 billion per year; • The increase in gas price is certainly more marked than oil due to the existing subsidies and future trend in prices could possibly lead to very small or considerable impacts on consumption and household. In fact, if domestic energy prices are expected to adjust based on the amount and price of imports, delaying the removal of subsidies will primarily increase costs to the government and leave little room for policy space in case market prices are higher than expected. This will, in turn, create more costs by limiting the scope of government intervention (excluding the option to keep or increase energy subsidies); • Further, it is noted that productivity is mostly damaged by rising prices, rather than by absolute price levels. In fact, countries with different price levels can compete equally in the global market thanks to other competitiveness factors (e.g., infrastructure and human capital, or knowledge). In this context, countries with lower energy intensity, which are often the ones with higher energy prices, will be less vulnerable to future energy price increases. Malaysia in this respect is in a disadvantageous situation relative to current competitors that face higher absolute prices, but have reached lower energy intensity.

Table 5: Estimates of output, GDP and income multiplier before and after subsidy removal, 2005

FINAL DEMAND METHOD: IMPACT OF FUEL SUBSIDY REMOVAL

SECTORAL IMPACT: CPI

27

Table 1 : CONSUMER PRICE INDEX FOR MAIN GROUPS, MALAYSIA (2010=100)

Group Wt. Index % Change

Apr Mar Apr Jan - Apr Jan - Apr Apr 2012/ Apr 2012/ Jan - Apr 2012/ 2011 2011 2012 2012 2011 2012 Mar-12 Apr-11

TOTAL 100 102.6 104.5 104.5 102.3 104.5 0 1.9 2.2 Food & Non-Alcoholic Beverages 30.3 104 106.7 106.4 103.5 106.8 -0.3 2.3 3.2

Alcoholic Beverages & Tobacco 2.2 104.6 104.6 104.6 104.6 104.6 0 0 0

Clothing and Footwear 3.4 99.8 99.4 99.5 99.9 99.5 0.1 -0.3 -0.4 Housing, Water, Electricity, Gas & Other Fuels

22.6 101.2 103 103 101.1 102.9 0 1.8 1.8

Furnishings, Household Equip. & Routine Household Maintenance

4.1 101.2 103.5 103.6 101.1 103.3 0.1 2.4 2.2

Health 1.3 102.2 104.2 104.4 102 104.2 0.2 2.2 2.2 Transport 14.9 104.2 104.9 105.2 103.6 105 0.3 1 1.4 Communication 5.7 99.9 99.3 99.2 100 99.3 -0.1 -0.7 -0.7 Recreation Services & Culture 4.6 101.9 103.2 103.2 100.6 103.3 0 1.3 2.7

Education 1.4 102.1 104.6 104.8 101.7 104.5 0.2 2.6 2.8 Restaurants and Hotels 3.2 105.1 108.4 108.6 104.3 108.2 0.2 3.3 3.7

Miscellaneous Goods & Services 6.3 101.3 104.1 103.9 101.2 104 -0.2 2.6 2.8

Non-Food 69.7 102 103.5 103.7 101.8 103.5 0.2 1.6 1.7 Durable Goods 6.5 100.2 100.7 100.2 100.1 100.7 -0.5 0 0.6 Semi-Durable Goods 4.4 100.2 100.2 100.3 100.2 100.3 0.1 0.1 0.1 Non-Durable Goods 41.6 103.8 105.4 105.3 103.5 105.6 -0.1 1.4 2 Services 47.5 102.1 104.5 104.6 101.7 104.4 0.1 2.4 2.7 Based on the above changes and the weights assigned to the main groups, the relative contribution to the overall increase of 2.2 per cent in the CPI can be identified as shown in Table 2. The three main groups, Food & Non-Alcoholic Beverages; Housing, Water, Electricity, Gas & Other Fuels and Transport together accounted for 76.0 per cent of the overall increase recorded for the current period.  

28

Rich

Poor

Source: HES 2009/10 DOSM

Where is the fuel spending in household share 2009/10?

PRICE-SHIFT MODEL: ESTIMATED DIRECT PRICE EFFECT ON HOUSEHOLD EXPENDITURE

29

Average monthly expenditure per household in Malaysia, 2009/10  

Budget share in RM  

weighted average of Budget share in % (1)  

Price change in % (2)  

Impact on expenditure (1) x (2)  

Per cent of total impact in %  

Food & non-alcoholic beverages   448.38   20.5   3.2   0.66   65.5  Clothing & footwear   74.83   3.4   -0.4   -0.01   -1.4  Housing, water, electricity, gas & other fuels   494.9   22.6   1.8   0.41   40.7  Furnishing, equipment & routine   88.96   4.1   2.2   0.09   8.9  Health   28.82   1.3   2.2   0.03   2.9  Transport   326.88   14.9   1.4   0.21   20.9  Communication   123.65   5.6   -0.7   -0.04   -4.0  Recreation, services & culture   100.79   4.6   2.7   0.12   12.4  Education   30.92   1.4   2.8   0.04   4.0  Restaurant & hotels   238.94   10.9   3.7   0.40   40.4  Other goods & services   233.3   10.7   2.8   0.30   29.8  Total/average   2190.37   100.0   1.97   0.20   20.01  

On average, a double increase in price due to subsidy will increase a 20% effect in expenditure

Source: HES 2009/10 and CPI from DOSM.

MALAYSIA: HOUSEHOLD EXPENDITURE ON FUEL, 2009/10

9.24% 9.51%

7.09% 7.02%

8.79%8.31%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Malaysia Sem.  Msia Sabah  (termasuk  WPLabuan)

Sabah  (tidak  termasulWP  Labuan)

WP  Labuan Sarawak

%  fuel  exp  from  total

30

9.14% 9.35%

7.12% 7.05%

8.59% 8.26%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Malaysia Sem.  Msia Sabah  (termasuk  WPLabuan)

Sabah  (tidak  termasulWP  Labuan)

WP  Labuan Sarawak

%  fuel  exp  from  total

9.57%10.11%

7.04% 6.97%

9.43%8.40%

0%

2%

4%

6%

8%

10%

12%

Malaysia Sem.  Msia Sabah  (termasuk  WPLabuan)

Sabah  (tidak  termasulWP  Labuan)

WP  Labuan Sarawak

%  fuel  exp  from  total

Malaysia Urban

Rural Household in Malaysia spent around 9% in 2009/10

SUBSIDY IS PRO-RICH

31

0.0

1.0

2.0

3.0

4.0

Diesel Gasoline AVK Fuel  oil LPG Kerosene

National  budget  share  by  product

Fuel  exp  by  product

0.0

1.0

2.0

3.0

4.0

Diesel Gasoline AVK Fuel  oil LPG Kerosene

Household  budget  share  by  fuel  products  and  income  quintiles

Q1  Poor Q2 Q3 Q4 Q5  Rich

ü  Basically expenditure and income categories run progressively

ü  Fuel products are more consumed on the cheapest include kerosene (even kerosene are highest for rich income)

ü  Examination from product and income, both are much influenced by pro-rich and pro-industry policies.

Source: estimated from HES 2009/10

PRICE-SPREAD MODEL: CONSUMPTION CHANGES BETWEEN 2000 & 2005

Variable change   2000   2005   Per cent change  

Retail Price (Price Spread model)   0.203   0.313   55%  

FMCI (pet prod)   1.079   1.163   8%  

CPI Weight on food   34.9   30.3   -13%  

Share of non-food   0.566   0.778   37%  

Fuel subsidy in RM million   3,425   8,164   138%  

RON 97 (as of jan)   110   142   29%  Diesel (as of Jan)   65.1   171.86   164%  

32

ANALYSIS

33

. Ø There are different magnitude for various

types of income and expenditure. Malaysia is more of a progressive type (high income and high expenditure – tend to cheap buying)

Ø Overconsumption of products may deteriorate plans to have sustainability of energy resources

Ø For welfare analysis, it is expected that there are still big challenges to bring up the lower income groups (inclusiveness).

GENERAL POLICY OPTIONS

¢ Subsidy reform in less developed country should drive towards higher efficiency and open more room for integration

¢ Policy intervention in subsidy reforms:

�  Estimation and ideal level of energy prices � Distribution of subsidies by energy types and sectors � Gradual or sudden price adjustments in the economy � Compensation to affected group on loss of income

from reducing or removing subsidies �  Appropriate amount compensation and best payment

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SOME ALLOCATION STRATEGIES OPTIONS Ø  In technical form it may comes in the form of the following

strategies: v Pro-wage v Pro-poor v Pro-growth

Ø  The bottom line govt should focus on lowering fiscal deficit, promote growth and increase competitiveness

Ø  Producer shouldn’t be accepting subsidy at all since it is not intended for productive sectors. Subsidy removal open the window to increase efficiency and optimisation in their productive sectors. This may create more creative business opportunities and innovation

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CONT… SOME ALLOCATION STRATEGIES OPTIONS Ø  Consumers must transformed into more responsible and

productive subsidy versus the general subsidy: v Rich income group shouldn’t be accepting subsidy at all since

it’s rationale is to help the poor. It lowers their competitiveness whilst they should increase their capabilities and capacities by injecting more capital and technologies.

v Medium income group should now switch into more value for money products by the phasing out subsidy rather than being confused by lower price due to subsidy. As an option they can now plan to lower their travelling plans into more productive activities

v Poor income groups should be given more targeted subsidy provided their activities are driven by multiplier and productivity.

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LIMITATIONS OF STUDY: 1.  Static input-output 2.  Latest 2010 I-O is not yet published 3.  Static CGE need to upgrade to a more dynamic model

(recursive) 4.  Subsidy data is only estimation on fuel subsidy,

verification with taxation need to be undertaken 5.  Future study will able to make effective policy

recommendations

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Thank you for your span of

attention

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