Tuesday, June 10, 2008

Malaysia's cost-cutting package: When not enough is dangerous

If there is anything we learn from watching politics in Singapore, it is that if you look beyond the shiny gloss surface, you might see an ugly reflection. And this is even more so for our neighbours up north.

Malaysia announced a 2.0-billion-ringgit ($612-million) cost-cutting package aimed at softening the blow after an unpopular 41 percent fuel price increase. A component of this cost-cutting package is a 10% reduction in Minister allowances. Not exactly a major sacrifice if you consider that it is only their entertainment allowances are affected. As their vacations will also be limited to domestic and ASEAN destinations, I am assuming that the state pays for their vacations.

Now I am assuming that 10% of minister allowances and the savings from their travel expenses would not amount to more than a few millions of dollars per year. If it did amount to a larger than proportionate share of the cost savings then perhaps they should be looking at the other 90%. But assuming it doesn’t, these small personal ‘sacrifices’ are operating in tandem with monumental sacrifices from the people of Malaysia as the major component of this cost-cutting package is the deferment of major infrastructure projects.

Unfortunately, while saving the Government millions, such projects like upgrading public transportation and building low-cost housing would in fact help the poor reduce their dependency on private vehicles and rising house prices (due to rising material costs brought about by rising fuel). Therefore, such cost cuttings would only amount to a short term fix and in fact make Malaysians less able to tackle rising costs in the future.

And what about the revenues from rising crude prices? Last year, Malaysia's fuel subsidies cost the state about US$12.44 billion. At that time, crude oil prices hover around US$100 a barrel. However, as a net oil exporter, Malaysia gains from high oil prices, reaping US$77.6m a year in revenue for every US$1 rise in crude prices. Prices of crude has since risen by roughly US$30 and simple projections would mean an increase in revenue of approximately US$2 billion. Can this be channelled to the poor instead? Apparently not as the newly restructured fuel subsidy system (even after the reduction) is expected to cost US$14bn this year (US$2 billion more than last year).

Thus, if a 41% increase is fuel price is a direct result of a reduction in fuel subsidy, there is essentially no increase in revenue the government can play with as the government is essentially spending the same amount as last year while the people are spending more at the stations and left to face rising inflation.

The major source of funding for this relief package is thus coming from a public spend; public spending which would have been more effective in providing relief in the long run. A seeming in ability to manage the economy would definately open the door for the Opposition. We all know the power of bread and butter issues to swing opinion.

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