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    Economic Impact of Removing Energy Subsidies in Malaysia

    Kimura, Shigeru | October 2016
    Abstract
    The petroleum subsidy alone was over RM20 billion, which corresponds to around 10 percent of the total government expenditure. Malaysia’s fiscal deficit was 4.5 percent of the gross domestic product (GDP) in 2012, and the government aims to reduce it to 3 percent by 2015 and to 0 percent by 2020. The country has already started implementing policies to phase out the fuel subsidies. In December 2014, the government of Malaysia officially removed subsidy for fuels and introduced the “managed float system.” The Special Industrial Tariff for electricity will also be abolished by 2020. If the subsidy in natural gas being sold to electricity companies is removed, electricity price could increase to almost double. However, the Automatic Price Mechanism on transport fuel, such as gasoline, has shifted to the flotation method per 1 December 2014. Currently, the retail price of gasoline and diesel are influenced by market price. Consequently, the price hike in transport fuel after the removal of energy subsidies turned out to be overestimated. According to this study using the 2010 Malaysian Input-Output (I-O) Table, any increase prices in electricity and transport fuel leads to a serious price impacts to other sectors in Malaysia. Looking at other price changes historically, the rise of Production Price Index in Malaysia, such as wholesale price index and consumer price index was around 9 percent and 4.9 percent, respectively, from 2000 to 2012. When compared to these numbers, the price impact of a subsidy removal ranges from 5 percent to 6 percent is considered significant and hence mitigation measures such as phasing out subsidies particularly for the highly impacted sectors are increasingly important. Electricity price hikes largely affect the hotel and restaurant sector relative to other sectors. On the other hand, a transport fuel price hike affects several sectors widely. Our study shows the overall effects of subsidy removal and accordingly we propose two options on the usage of the subsidy budget. First, the Malaysian government can use its energy subsidy budget to reduce the fiscal deficit. This option can lower GDP (1.5 percent lower compared with the reference case), with deficit improvement of 0.9 percentage.
    Citation
    Kimura, Shigeru. 2016. Economic Impact of Removing Energy Subsidies in Malaysia. © Economic Research Institute for ASEAN and East Asia. http://hdl.handle.net/11540/10343.
    Keywords
    Household Energy Consumption
    Industrial Energy Consumption
    Results-Based Monitoring And Evaluation
    Evaluation Techniques
    Evaluation Studies
    Evaluation Methods
    Commercial Energy
    Urban Development Finance
    Trade Finance
    Small Business Finance
    Rural Finance
    Roundtable on International Trade and Finance
    Regional Development Finance
    Public Service Finance
    Public Finance
    Project Finance
    Private Finance
    Nonbank Financing
    Non-Bank Financial Institutions
    Municipal Finance
    Local Government Finance
    Local Currency Financing
    Limited Resource Financing
    International Financial Institutions
    Infrastructure Financing
    Industrial Finance
    Government Financial Institutions
    Government Finance
    Financing of Infrastructure
    Financial Sector Development
    Financial Regulation
    Domestic Energy
    Energy Demand
    Energy Prices
    Energy Pricing Policy
    Energy Supply
    Primary Energy Supply
    Development Indicators
    Social Participation
    Low Income Groups
    Income Generation
    Newly Industrializing Countries
    Taxation
    Public Accounting
    National Budget
    Municipal Bonds
    Local Government
    Local Taxes
    International Monetary Relations
    International Financial Market
    International Banking
    Central Banks
    Business Financing
    Capital Resources
    Budgetary Policy
    Capital Needs
    Corporate Divestiture
    Capital Instruments
    Pension Funds
    Insurance Companies
    Banks
    Portfolio Management
    Fiscal Administration
    Economics of Education
    Development Banks
    Subsidy
    Solar battery
    Renewable energy resource
    Green Energy
    Power resource
    Electric power
    Energy development
    Renewable energy resource
    Energy assistance
    Energy tax credit
    Electric power consumption
    Cost effectiveness
    Supply and demand
    Prices
    Energy resource
    Energy consumption
    Price Indexes
    Infrastructure
    Use tax
    Taxing power
    State of taxation
    Tax-sales
    Tax revenue estimating
    Tax planning
    Spendings tax
    Special assessments
    Tax administration and procedure
    Sales tax
    Real property and taxation
    Progressive taxation
    Effect of taxation on land use
    Effect of taxation on labor supply
    Intergovernmental tax relations
    Inheritance and transfer tax
    Energy tax
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    Citable URI
    http://hdl.handle.net/11540/10343
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    RPR_FY2015_No.15.pdf (762.5Kb)
    Author
    Kimura, Shigeru
    Theme
    Energy
    Finance
     
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise
    Copyright 2016-2021 Asian Development Bank Institute, except as explicitly marked otherwise