Malaysian Subsidy (2007)

MALAYSIA’S ECONOMIC SCENARIO:

SUBSIDY RELATED ISSUES

By:

Economic Planning Unit Prime Minister’s Department, Putrajaya

MALAYSIA’S ECONOMIC SCENARIO:

SUBSIDY RELATED ISSUES

By:

Economic Planning Unit Prime Minister’s Department, Putrajaya

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Briefing Outline

2

Overall Performance, 2006-2007

Growth Scenarios for MTR 9MP: o Assumptionso The Demand Sideo The Supply Sideo The Balance of Paymentso The Public Sector Accountso Policy Issues o Possible Risks

Subsidy Related Issues

Conclusion

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THRUST 5• Enhancing Delivery System

•Governance• International Cooperation

• Public Private Sector Collaboration

THRUST 1• High value added activities• New sources growth• Accelerating Investment

THRUST 2• Human Capital• Education• R & D / S & T• Skill training

THRUST 3• Addressing poverty• Corridor development• Rural development• Equitable Wealth Distribution

THRUST 4• Infrastructure Development• Energy• Environment• Sports & Culture

MACROECONOMIC TARGETS

• Sustainable GDP growth• High per capita income• Low unemployment• Low inflation & price stability• Fiscal prudence• BOP current account surplus

VISION 2020VISION 2020

3

The 9MP : Overall Performance, 2006-2007

Original Target, 2006-2010

Achieved2006-07

Real GDP growth (% p.a.)

6.0 1 6.02

Per capita GNP (RM) 3 23,573 22,569

Per capita GNP (US$) 3 6,273 6,448

PPP Per capita GNP (US$) 3 13,878 13,274

Inflation (% p.a.) Low 2.6

Current A/C of BOP (% GNP) 3 13.4 14.9

FG account (% of GDP)

-3.4 -3.2

1 Constant 1987 Prices 2 Constant 2000 Prices 3 End of period

Scenarios

Definition

4

Growth Scenarios: MTR 9MP

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World output growth 2008-

2010 : 5.0% p.a 1

World trade growth 2008-

2010 : 7.0% p.a 1

Oil prices to remain highOil prices to remain high 2008 : USD85 per barrel 2008 : USD85 per barrel 22 2009 & 2010 : USD80 per 2009 & 2010 : USD80 per

barrel barrel 22

World inflation expected to

remain low despite high oil

price

Growth projection in line

with potential output

2.0 2.02.12.32.32.3

4.8

5.4 5.24.8 5.0 5.1

7.5

9.2

6.6 6.77.2 7.2

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2005 2006 2007 2008 2009 2010

World Inflation World Output (GDP) World Trade

% Growth

Assumptions Assumptions

1 IMF WEO October 2007 2 IMF WEO 2007 (Update November ’07) 6

Fiscal policy is supportive of economic

growth Gradual reduction on oil subsidies MTR 9MP to remain supportive of private

sector initiatives

Sustainable growth with low inflation & Sustainable growth with low inflation &

price stabilityprice stability Higher contribution of TFP to growth, higher Higher contribution of TFP to growth, higher

efficiency of capital & productivity of labourefficiency of capital & productivity of labour

Current account of BOP to remain positiveCurrent account of BOP to remain positive New sources of growth from services, New sources of growth from services,

manufacturing & agriculture sectorsmanufacturing & agriculture sectors

Assumptions Assumptions

7

0

2

4

6

8

10

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

2007200820092010

6.06.06.06.1

6.06.47.17.3

6.07.98.08.1

Low Baseline High

The Growth Scenarios : Challenging the 6% 9MP target . .

Projections

Baseline: 7.0% p.a.

High: 8.0% p.a,

Low : 6.0% p.a.

2008-10

Achieved

6.0% p.a.

2006-07 % Growth

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The Demand Side . . .

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Achieved2006-07

Growth Projections (%)

2008-10 2006-10

Consumption 8.0 7.8 7.9

Private 8.6 8.1 8.3

Public 5.8 6.7 6.3

Investment 7.7 10.6 9.4

Private 7.7 11.6 10.0

(RM bil.) nominal

132.3 288.9 421.2

Public 7.7 9.5 9.0

Exports 5.2 5.6 5.5

Imports 6.8 7.1 6.9

GDP 6.0 7.0 6.6

GDP by Expenditure : Accelerating private investment & sustaining exports

Scenarios

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The Supply Side . . .

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Achieved2006-07

Growth Projections (%)

2008-10 2006-10

Agriculture 3.4 5.4 4.6

Mining 1.5 4.3 3.2

Manufacturing 4.8 5.2 5.1

Construction 2.3 7.7 5.5

Services 8.3 8.5 8.5

Government Svs 7.2 7.5 7.3

Bus. & Non Gov. Svs 8.5 8.7 8.6

Elect. gas & water 4.7 5.5 5.2

Transport & comm. 7.3 8.4 8.0

Dist. Trade, hotels, etc

9.6 9.4 9.5

Finance, insc., etc 10.3 9.4 9.7

Other Services 5.0 7.0 6.2

GDP 6.0 7.0 6.6

GDP by Industry of Origin : Generating higher growth in the services, manufacturing & agriculture sectors

V added A Based

Scenarios

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The Balance of Payments . . .

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RM billion

9MP Target(2010)

Achieved2006

Target

2008 2010

Goods (Trade Balance) 149.8 134.6 123.0 129.3

Exports 804.8 589.7 641.5 731.0

Imports 654.9 455.2 518.4 601.7

Services (net) -4.5 -6.9 -2.6 -0.4

Transportation -26.7 -19.6 -20.4 -19.1

Travel and Education 34.4 23.5 31.5 32.6

Other Services -11.9 -10.4 -13.1 -13.2

Government Transactions -0.4 -0.4 -0.6 -0.6

Income -39.5 -17.4 -19.1 -24.4Compensation of Employees

-1.3 -0.3 -1.3 -1.1

Investment Income -38.3 -17.1 -17.8 -23.3

Current Transfers -14.5 -16.9 -17.4 -19.4

Current Account Balance 91.2 93.4 83.9 85.1

(% to GNP) 13.4 16.8 12.5 10.4

The BOP: Reducing the services deficits By Quarter

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The Public Sector Accounts . . .

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The implications of higher than RM200 billion DE & PFI RM20 billion … full implications to been seen in 10 MP & beyond

Malaysia PlanDevelopment Expenditure (RM million)

PFI (RM

million)

Deficit as % of GDPOutstanding Debt as % of GDP

(End of Period)

Average End of Period

8th MP 170, 000 - -4.6 -3.6 44.09th MP Target 200, 000 20, 000 -3.4 -3.4 48.6

MTR 9MP (Baseline DE200 b)

200, 000 20, 000 -3.5 -3.8 42.6


215, 000 35, 000 -3.9 -4.0 43.5

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Policy Issues …

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Policy Issues : The Demand Side Enhancing private investment

Accelerating domestic investment & FDI Lack of complementary facilities in promoted

areas - international schools, hotels, exorbitant land & property prices, recreational facilities

Competitive tax & non-tax incentives Delivery system Public security & quality of life

Addressing the slowdown in exports (declining share to world exports – current growth contributed by high oil price)

Accelerating exports of services – professional &

consultancy 18

Policy Issues : The Supply Side Agriculture

Weakness in the implementation of

agricultural HIP Private sector participation is not moving

fast enough Manufacturing

Transition to high value-added E&E & biotech subsectors has not shown significant impact

Transport equipment industries need to venture exports market aggressively

Discourage labour intensive activities in line with policies to reduce foreign workers 19

.. con’t Policy Issues : The Supply Side Services

Tourism industry – maximize its potential contribution to growth

Further enhance potential export of other

services Health tourism must be promoted as a

package Professional & consultancy services Creative industry including animation &

contents development

20

Policy Issues : The BOP Addressing the slowdown in

exports - declining share to world exports

Need to increase contribution of services account Travel & education Transportation Professional & consultancy

services

21

High dependency on oil revenue : increasing non-oil revenue

Further enhance the revenue base to sustain revenue growth

Strengthen the fiscal discipline to prioritize and ensure cost effectiveness of expenditures

The exercise control on OE growth – OE growth outpaced revenue since the 7MP

Policy Issues : Public Sector

22

Subsidies to be reviewed to reduce financial burden as well as promote productivity & competitiveness

Ensure value for money through tender system & competitive bidding

Any additional PFI should be compensated with a reduction in DE in the next Malaysia Plan

... con’t Policy Issues : Public Sector

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Possible Risks …

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ALIS

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Possible Risks . . . Slowdown in world economic growth

impacts of sub-prime crisis to US & other major economies

prospects of China after the 2008 Olympic

High oil price High inflation Geo-political risks Lower private investment Occurrence of large-scale disasters

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Subsidy Related Issues …

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Energy subsidy refers to action by government that :

i. lowers the cost of energy production; orii. raises the price received by energy producers; oriii. lowers the price paid by energy consumers.

Subsidy will lead to loss of economic efficiency such as :

i.reduce incentives to conserve or use energy more efficiently;ii.reduce incentives to minimize costs, resulting in less efficient plant operation and investments that may otherwise not be economic;iii.Direct subsidies in the form of grants or tax exemptions act as a drain on government finances; andiv.Price caps or ceilings below market-clearing levels may lead to physical shortages and a need for administratively costly rationing arrangements.

IEA’s DEFINITION ON SUBSIDY

27

Subsidy on petroleum products (gasoline, diesel & LPG) for transportation sector and household

Subsidy on gas for power and industrial sectors

Subsidy on other items (cooking oil, paddy. etc.)

Subsidy Related Issues: Types of Subsidies &

Beneficiaries

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Extent of Subsidy

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PRODUCTS SUBSIDISED PRICE

NON-SUBSIDISED PRICE

(market price)

ESTIMATED AMOUNT OF

SUBSIDY/YEAR(RM billion)

Gasoline for transport sector

192 sen/litre 277.25 sen/litre

RM15.0 billion*Diesel for transport sector


Gasoline for fishery sector


Diesel for fishery sector


Natural gas for power sector

6.40/MMBTu RM26.00/MMBtuRM18.0 billion

Natural gas for industrial sector

11.32 – 12.87/MMBtu

RM38.39/MMBtu

Other subsidy RM 2.4 billion

* 2005

Other Subsidy

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Sector2005 (RM Million)

Agriculture (Paddy Price Subsidy) 626.1

Small Entrepreneur Fund 440.4

Education (text book etc) 787.6

Transport (Toll compensation etc.) 474.8

Orang Asli 33.0

Total 2,370.9

Gas Subsidy

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Period Subsidy (RM Billion)

May 1997 – Mac 2007

Total 58.2

Power 48.8

Non-Power 9.4

Maintain price stability

Lower cost of doing business

Enhance competitiveness

Maintain low inflation

Attract foreign direct investments

... con’t Subsidy Related Issues: Positive effects

32

Create market distortion

Lead to leakages – not for the targeted groups

Create artificial supply shortage

Intensify smuggling & hoarding activities

Lead to inefficient allocation & utilisation of resources

Increase subsidy burden

Affect socioeconomic development

... con’t Subsidy Related Issues: Negative effects

33

Should the Government continue or discontinue with subsidy?

... con’t Subsidy Related Issues: Next Question

34

Re-define the targeted groups

Re-determine the level of support

Adopt market-based pricing on a gradual basis

Intensify enforcement

... con’t Subsidy Related Issues: Way forward

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Conclusion …

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Conclusion The present level of subsidy is not sustainable.

An urgent need to gradually move to market base pricing.

Reduction of subsidy has to be done on a gradual basis to reduce the impact and allow sufficient time for end-users to make adjustment.

Certain level of subsidy may need to be maintained. Target groups need to be determined. Savings from subsidy reduction can be productively

channeled towards socioeconomic development.

37

Terima KasihTerima Kasihwww.epu.gov.mywww.epu.gov.my

38

The implications of higher than RM200 billion DE & PFI RM20 billion … full implications to been seen in 10 MP & beyond

Malaysia PlanDevelopment Expenditure (RM million)

PFI (RM

million)

Deficit as % of GDPOutstanding Debt as % of GDP

(End of Period)

Average End of Period

8th MP 170, 000 - -4.6 -3.6 44.09th MP Target 200, 000 20, 000 -3.4 -3.4 48.6


200, 000 20, 000 -3.5 -3.8 42.6


215, 000 35, 000 -3.9 -4.0 43.5


230, 000 80, 000 -4.0 -4.3 42.8


250, 000 80, 000 -4.5 -4.8 43.8

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RM billion

9MP Target (2010)

Achieved

2006

Target

2008 2010

Revenue 152.1 123.5 148.5 158.7

Operating Expenditure

135.7 107.7 130.3 148.6

Current Account 16.3 15.9 18.2 10.1

Gross Development Expenditure

41.7 35.8 47.4 44.9

Overall Balance -24.3 -19.1 -28.5 -33.8

% to GDP -3.4 -3.3 -4.1 -4.0

Federal Government Financial Position : DE RM215 b PFI RM35 b

Scenarios HBL

Higher deficit if there is revenue shortfall … 40

-5.7 -5.2 -5.3 -5-4.1 -3.6 -3.3 -3.2

-4.1 -4.4 -4.0

-100

-50

0

50

100

150

200

250

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

-10

-5

0

5

10

15

20

25

Deficit (% to GDP) Revenue OE (RM bil.) DE (RM bil.) Deficit (RM bil.)

OE (RM b.) -LHS

Revenue (RM b.)- LHS

DE (RM b.) - LHS

Overall Deficit (% to GDP) - RHS

Overall Deficit (RM b.) - LHS

Actual Forecast

% to GDPRM bil.

Revenue, OE & DE, 2000 – 2010DE RM215 b + PFI RM35 b

Debt 41

Conclusion The 6.0% growth scenario is achievable

The baseline scenario with real GDP growth of 7.0% p.a. 2008-2010 must be supported by concrete measures

The 8.0% growth will strain the economy Achieving a continuously narrowing fiscal

deficit will be a challenge, hence the need to enhance fiscal prudence

Reducing the level of subsidies would contribute towards socioeconomic development

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Malaysian Subsidy (2007)

Economy & Finance

Transcript of Malaysian Subsidy (2007)