10/03/2022 (The Edge Markets), Kuala Lumpur - The government will review the fuel and cooking oil subsidy mechanism, so that it will be more targeted towards aiding and subsidising the vulnerable groups and those who really need help, Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said.

"The implementation of targeted subsidies is expected to optimise the government's financial resources and the savings achieved can be redistributed for more effective programmes to contribute to the well-being of the people," he told the Dewan Rakyat on Thursday (March 10).

Tengku Zafrul said the current subsidy scheme entails subsidised prices enjoyed by all, regardless of rich or poor. Furthermore, he said the high-income group is enjoying more subsidies based on a greater level of consumption compared to the low-income group.

Total subsidies expected to reach RM28 billion in 2022

The minister said since the beginning of 2021, world crude oil prices had shown a significant upward trend, with the benchmark Brent crude rising to US$85 (about RM355.72) per barrel in January 2022 from US$55 per barrel in January 2021.

Following this increase, he said the government had to cover a significant increase in subsidies for petrol, diesel and liquefied petroleum gas (LPG) of up to 10 times, increasing from RM200 million for January 2021 to more than RM2 billion for January 2022.

Coupled with the conflict between Russia and Ukraine, world crude oil prices had risen sharply to more than US$100 per barrel, the highest level since 2014, he said, adding that with this increase, total petrol, diesel and LPG subsidies are expected to exceed RM2.5 billion a month.

"If the world crude oil price remains above US$100 per barrel, total subsidies for the whole of 2022 are expected to reach RM28 billion compared with RM11 billion for 2021."

Tengku Zafrul said consumers currently pay only RM2.05 per litre for RON95 petrol but the actual cost in March had reached RM3.70 per litre.

"The government has to cover the difference of RM1.65 per litre. For example, every time we go to the petrol pump station, if we were to refuel RM100 worth of petrol or about 49 litres, the amount paid by the government is RM81 as the total actual cost based on the market price is RM181 for 49 litres of RON95."

He said this means that the government is subsidising up to 45% of the total amount paid. As for diesel, he said consumers pay only RM2.15 per litre at petrol stations, while the actual cost had also exceeded RM4 per litre.

"The huge gap between retail prices at petrol stations and actual market prices will result in a higher risk of subsidy leakages due to smuggling of petroleum products out of the country.

“The government also cannot borrow to finance operating expenditure such as subsidy costs. Hence, the increase in subsidy costs needs to be offset by increased revenue and cost savings,” he explained.