This slide will show to us how Malaysian Government conduct the subsidy since long time ago until the year of 2007.

1. MALAYSIA’S ECONOMIC SCENARIO:
SUBSIDY RELATED ISSUES
By:
Economic Planning Unit
Prime Minister’s Department, Putrajaya
17 January 2008
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

2. Briefing Outline
2
 Overall Performance, 2006-2007
 Growth Scenarios for MTR 9MP:
o Assumptions
o The Demand Side
o The Supply Side
o The Balance of Payments
o The Public Sector Accounts
o Policy Issues
o Possible Risks
 Subsidy Related Issues
 Conclusion
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

3. 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 2020
3

4. The 9MP : Overall Performance, 2006-2007
Original Target,
2006-2010
Achieved
2006-07
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

5. Growth Scenarios: MTR 9MP
5
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

6.  World output growth 2008-2010 :
5.0% p.a 1
 World trade growth 2008-2010 :
7.0% p.a 1
 Oil prices to remain high
 2008 : USD85 per barrel 2
 2009 & 2010 : USD80 per barrel 2
 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
5.2
4.8 5.0 5.1
7.5
9.2
6.6 6.7
7.2 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
1 IMF WEO October 2007 2 IMF WEO 2007 (Update November ’07)
6

7.  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 & price stability
 Higher contribution of TFP to growth, higher
efficiency of capital & productivity of labour
 Current account of BOP to remain positive
 New sources of growth from services, manufacturing
& agriculture sectors
Assumptions
7

8. 0
2
4
6
8
10
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
2007
2008
2009
2010
6.0
6.0
6.0
6.1
6.0
6.4
7.1
7.3
6.0
7.9
8.0
8.1
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
8

9. The Demand Side . . .
9
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

10. Achieved
2006-07
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
10

11. The Supply Side . . .
11
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

12. Achieved
2006-07
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
12

13. The Balance of Payments . . .
13
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

14. RM billion
9MP Target
(2010)
Achieved
2006
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 -24.4
Compensation 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
14

15. The Public Sector Accounts . . .
15
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

16. The implications of higher than RM200 billion DE & PFI RM20 billion
… full implications to been seen in 10 MP & beyond
Malaysia Plan
Development
Expenditure
(RM million)
PFI
(RM million)
Deficit as % of GDP Outstanding
Debt as % of
GDP
(End of Period)Average End of Period
8th MP 170, 000 - -4.6 -3.6 44.0
9th 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
MTR 9MP
(Baseline
DE215 b)
215, 000 35, 000 -3.9 -4.0 43.5
16

17. Policy Issues …
17
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

18. 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

19. 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

20. .. 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

21. 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

22.  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

23.  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
23

24. Possible Risks …
24
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

25. 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
25

26. Subsidy Related Issues …
26
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

27. Energy subsidy refers to action by government that :
i. lowers the cost of energy production; or
ii. raises the price received by energy producers; or
iii. 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; and
iv. 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

28.  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
28

29. Extent of Subsidy
29
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
158 sen/litre 239.64 sen/litre
Gasoline for
fishery sector
100 sen/litre 277.25 sen/litre
Diesel for fishery
sector
100 sen/litre 239.64 sen/litre
Natural gas for
power sector
6.40/MMBTu RM26.00/MMBtu
RM18.0 billion
Natural gas for
industrial sector
11.32 –
12.87/MMBtu
RM38.39/MMBtu
Other subsidy RM 2.4 billion
* 2005

30. Other Subsidy
30
Sector
2005 (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

31. Gas Subsidy
31
Period Subsidy (RM Billion)
May 1997 – Mac 2007
Total 58.2
Power 48.8
Non-Power 9.4

32.  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

33.  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

34. Should the Government continue or
discontinue with subsidy?
... con’t Subsidy Related Issues:
Next Question
34

35.  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
35

36. Conclusion …
36
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS

37. 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

38. Terima Kasih
www.epu.gov.my
38

39. The implications of higher than RM200 billion DE & PFI RM20 billion
… full implications to been seen in 10 MP & beyond
Malaysia Plan
Development
Expenditure
(RM million)
PFI
(RM million)
Deficit as % of GDP Outstanding
Debt as % of
GDP
(End of Period)Average End of Period
8th MP 170, 000 - -4.6 -3.6 44.0
9th 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
MTR 9MP
(Baseline
DE215 b)
215, 000 35, 000 -3.9 -4.0 43.5
MTR 9MP
(Baseline
DE230 b)
230, 000 80, 000 -4.0 -4.3 42.8
MTR 9MP
(Baseline
DE250 b)
250, 000 80, 000 -4.5 -4.8 43.8
39

40. 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

41. -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 – 2010
DE RM215 b + PFI RM35 b
Debt
41

42. 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
42