Govt’s plan to cut subsidies this year hits speed bump

Ambank M Bhd chief economist Firdaos Rosli says there is a greater risk of mistargeting without a complete Padu database.

(FMT) – The government’s long-awaited plan to cut fuel subsidies this year and tighten its finances has hit a major speed bump — most citizens aren’t cooperating.

Less than half of Malaysians have updated their income details in the government database that will enable authorities to determine where handouts should be directed once the nation limits subsidies on the cheapest form of fuel.

Economy minister Rafizi Ramli said this week he expects the number of registrations on the central database hub, Padu, to increase to 10 million — or about 50% of the population aged 21 and above — by the March 31 deadline.

The low take-up rate — fuelled in part by worries over data security — is a cause for concern.

Prime Minister Anwar Ibrahim needs to undo hefty subsidies to boost investors’ confidence in the country, with the Malaysian ringgit languishing near a 26-year low.

The government estimates savings of at least RM4.73 billion to RM9.47 billion a year from a shift to handouts that target only the needy.

“The situation is not ideal for the government and could result in more teething issues,” said Lavanya Venkateswaran, an economist at Oversea-Chinese Banking Corp.

As of Wednesday, about 40% of the target group had signed up with the economy ministry’s Padu.

Policymakers need sufficient data to decide who would be eligible for government aid.

Anwar rose to power in late 2022, promising to improve investor confidence by cutting down on wastage and leakages.

But economic growth last year undershot official estimates and the prime minister’s approval ratings have already taken a hit.

The government currently has limited fiscal space and “needs to implement fiscal reforms so that it rests on a sustainable and intact foundation”, Anwar said in a post on X on Wednesday.

Such reforms will focus on targeted subsidies and expanding the revenue base to improve the people’s welfare, he said.

Malaysia intends to narrow its budget deficit to 4.3% of gross national product this year, from 5% last year.

Trust deficit

Padu’s hiccups risk exacerbating the government’s woes. Rafizi said he will rely on existing data from other government agencies for Malaysians who failed to sign up by the end of the month, adding that this ran the risk of using out-of-date information.

But even that may not be enough.

“The precise subsidy distribution channel is still largely unknown, so there is a greater risk of mistargeting without a completed Padu database,” said Firdaos Rosli, chief economist at Ambank M Bhd.

“That said, the government could mitigate this by clarifying the ceiling of the subsidy bill they intend to spend this year.”

Malaysia spent about RM81 billion on subsidies last year.

Security fears have emerged as a major reason for the public’s lukewarm response toward Padu.

When the database was first launched in January, social media users raised concerns over various bugs and vulnerability issues that Rafizi was quick to address.

Two months on, the database is still facing a trust deficit — including among state government leaders.

International Islamic University Malaysia’s Syaza Farhana Shukri said there are two groups who have yet to sign up — urban, tech-savvy people concerned about data sharing, and those who oppose the government and whatever it does.

The latter group sees their actions as a form of protest, a way to show their general distrust and dislike toward the government. However, their stance may change once they see cash assistance coming in, said the associate professor of political science.

Despite all the risks, the government appears to have little choice but to continue with its plan. The sooner, the better.

The fiscal math accounts for about an 18% drop in government spending on subsidies and social assistance, and this seems critical for it to reach its fiscal deficit target of 4.3% of GDP this year, according to OCBC’s Lavanya.

Ensuring the Padu database reaches at least a minimum level of completion “will go a long way in ensuring a smoother and more complete adoption to the new mechanism over time”, she said.