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Diesel Price Hike in June 2024

The Malaysian government has initiated the first phase of its fuel subsidy rationalization plan by implementing a significant increase in diesel prices in Peninsular Malaysia. Effective immediately, diesel prices surged by RM1.20 per litre to RM3.35, marking a 56% rise, with prices subject to weekly reviews.

Economists generally maintain a calm outlook regarding the impact on the consumer price index (CPI), with some even lowering their inflation forecasts for 2024. They note that while the direct impact on CPI from diesel’s price hike is minimal (around 0.1%), attention is warranted for potential indirect effects. Analysts predict that the targeted diesel subsidy mechanism, set to save approximately RM4 billion annually, will enhance fiscal efficiency.

The move follows concerns over escalating subsidized diesel consumption compared to the growth rate of diesel vehicles. Despite challenges like under-registration in the Subsidised Diesel Control System 2.0 (SKDS 2.0), economists expect the next phase of rationalization to focus on RON95 petrol subsidies, possibly by late 2024.

Experts caution that any adjustments to RON95 subsidies should be carefully timed and phased due to its broader impact on inflation and household purchasing power. They emphasize the need for robust systems like the Central Database Hub (Padu) to manage subsidy eligibility effectively.

While the government manages the rollout of its subsidy rationalization plan, projections vary among research units. CIMB Treasury and Markets Research, for instance, revised down its inflation forecast for 2024 to 2.3%, reflecting lower-than-expected inflation rates earlier in the year. In contrast, other economists foresee moderate inflation rates ranging from 2% to 3.5% for headline inflation.

The ongoing discussions highlight a pivotal shift towards sustainable fiscal practices, aiming to reduce subsidy dependence while improving public transport infrastructure. Analysts like Carmelo Ferlito advocate redirecting saved funds towards enhancing urban mobility, suggesting long-term benefits over subsidy dependency.

In conclusion, Malaysia’s fuel subsidy rationalization marks a strategic move towards fiscal efficiency, accompanied by cautious economic forecasts amidst evolving consumer and market dynamics. The journey ahead will necessitate balanced policy implementation to mitigate inflationary pressures while fostering sustainable economic growth.