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Insight – Subsidies instead of mega projects?

In times of rising inflation, financing the hefty subsidy bill of RM77.3 billion has become so large that megaprojects that have substantial side effects may be delayed to make way for subsidies.

Would it be a big loss if we postponed some of these megaprojects that could be delayed, anyway, by rising construction material costs and labor shortages?

Is this a lasting solution – just putting some big projects on hold to funnel money into grants?

This may also be a time to consider the feasibility of some of the big plans, especially given current trends such as flexible working arrangements that already involve less travel.

For example, between public transport and Internet connectivity, which should be prioritized?

The government must weigh its options because:

> Investing in infrastructure can facilitate growth, improve living standards and generate higher income opportunities.

> Grants will immediately help ease the financial burden of the rakyat but have no recurring benefits.

It’s a delicate balancing act.

The main contributor to rising inflation – food prices – had recorded the largest increase since 2011, at 5.3% year-on-year in May 2022.

The government must take heed of current trends and exercise due diligence to derive maximum benefit from them, said Chief Economist of Bank Islam Malaysia Bhd, Afzanizam Mohamed Rashid.

In addition to delaying spending on megaprojects, part of the allocation could be diverted from the large allocation of RM75.6 billion for development expenditure, compared to the average of RM48 billion since 2010.

A key area to note is that the rate of growth of government expenditure, particularly for salaries and emoluments, has greatly exceeded government revenue from all sources.

All eyes are on how the government is proposing to bring the growth rate of spending on wages and salaries back under some semblance of control.

Inflation management is necessary in a social and economic context, as protests can break out against rising inflation and food prices.

The main contributor to rising inflation – food prices – had recorded the largest increase since 2011, at 5.3% year-on-year in May 2022.

From this perspective, it would justify diverting more funds to grants when cost pressures are exacerbated by the Russian-Ukrainian conflict and supply disruptions, said Julia Goh, senior economist at United Overseas Bank. (M) Bhd.

Even with the subsidies, inflation is already on the rise; the government estimates that without the subsidies, inflation could be much higher at over 11%.

With inflation surging in South Korea, Thailand and the Philippines in June, Malaysia’s consumer price index for June, due out on July 22, is expected to show headline inflation (a measure of headline inflation) above 3%, Goh said.

From this perspective, it would justify diverting more funds to grants when cost pressures are exacerbated by the Russian-Ukrainian conflict and supply disruptions, said Julia Goh, senior economist at United Overseas Bank. (M) Bhd.From this perspective, it would justify diverting more funds to grants when cost pressures are exacerbated by the Russian-Ukrainian conflict and supply disruptions, said Julia Goh, senior economist at United Overseas Bank. (M) Bhd.

The negative fallout will be amplified if subsidies are removed at the same time that interest rates may need to be raised aggressively, in line with actions taken by other central banks.

Since this is not demand-driven inflation, it makes sense to subsidize fuel and food costs, as the price spike may be temporary, said Chris Eng, director of the strategy of Etiqa Insurance & Takaful Bhd.

Malaysia, as a net oil exporter, is able to better manage inflation by channeling its oil revenues into subsidies.

In August 2021, Petroliam Nasional Bhd (PETRONAS) had declared an additional RM7 billion in dividend payments to the government, on top of its initial target of RM18 billion.

CGS-CIMB Research estimates that PETRONAS is in a position to exceed its initial commitment of RM25 billion in dividend payments in 2022, as the government expects an additional RM30 billion in subsidy expenditure.

Income from commodity revenues is not enough to fund the entire subsidy bill.

However, delaying megaprojects to fund subsidies is clearly not sustainable; buying a reprieve from short-term pain may be politically expedient, but pay little attention to longer-term costs.

Perhaps for the first time, government is faced with the reality of allocating limited resources to unlimited needs; previously, it seemed the limits of economic constraints were only a passing concern, said former Inter-Pacific Securities research chief Pong Teng Siew.

“We now have a problem of over-subsidization of the nation.

“It’s a reality we have to deal with with a low-wage workforce that has been kept ‘satisfied’ with so many subsidies,” said Tricor Malaysia non-executive chairman Veerinderjit Singh.

Subsidies already exist; due to the current crisis, there is no choice but to use any additional income (from taxes levied on the increased profits of some commodity suppliers) to fund increased subsidies .

Malaysia needs a serious reforming mindset, instead of just taking funds from the right hand and putting it into the left.

However, the timing of the enactment of these reforms must be the right one, otherwise it could lead to further inflationary pressures if subsidies are removed immediately or in the short term.

With limited government resources, subsidies have become a major concern as many grapple with the rising cost of living.

If the situation does not improve soon, the challenge of sustaining these subsidies, primarily from commodity revenues, will be very difficult as commodity prices fluctuate and fall.

Yap Leng Kuen is a former editor of StarBiz. The opinions expressed here are those of the author.