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Malaysian Subsidy (2007)

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

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MALAYSIA’S ECONOMIC SCENARIO:
SUBSIDY RELATED ISSUES
By:
Economic Planning Unit
Prime Minister’s Department, Putrajaya
17 January 2008
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS
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
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
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
Growth Scenarios: MTR 9MP
5
FORUMEKONOMIMALAYSIA2008:
SATUANALISIS
 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

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Malaysian Subsidy (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
  • 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
  • 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
  • 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
  • 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