Limited inflationary impact from targeted diesel subsidy, says report

THE targeted diesel subsidy implementation will see limited inflationary impact on end-consumers as the diesel weight in the CPI basket was small at 0.2%, according to a research house.

In a report yesterday, CIMB Investment Bank Bhd said the first-and second-order inflation pass-through was limited by continued provision of subsidies to logistical vehicles and small businesses, Sabah and Sarawak.

It said back-of-the-envelope calculations based on diesel subsidy savings of RM4 billion and unit diesel subsidy of RM1.05-1.25 per litre (assuming market price of RM3.20-3.40 per litre) suggested subsidised diesel volume could decline by 3.2-3.5 billion litres or 35-45%.

“Hence, our inflation forecast of 2.7% remains intact, which has imputed a +10bp contribution from diesel subsidy rationalisation,” it said.

On May 21, Prime Minister Datuk Seri Anwar Ibrahim said the Cabinet had agreed to implement a targeted diesel subsidy involving consumers in Peninsular Malaysia, sparing consumers in Sabah and Sarawak as it was used in nearly every family’s vehicle in both states.

“So, we will postpone any action (on targeted diesel subsidies for Sabah and Sarawak) as it will burden the people there,” he said in a live address to the nation.

To curb drastic rises in prices of goods and services in the Peninsula, however, the government will prepare subsidies for traders using commercial diesel vehicles, he said, according to Bernama.

Anwar also said that the subsidy would involve 10 types of public transport vehicles and 23 types of goods transportation vehicles under the diesel subsidy control system.

“This means that bus, taxi operators (and) fishermen will continue to be protected through subsidies or assistance that will help them. So, the government agreed to provide cash assistance to owners of private diesel vehicles that are eligible, (including) smallholders, farmers and traders.

“It is for the B40 (and) M40 (groups) who need to use diesel for their business or farming, mining, rearing livestock or fishing. This means (they) will not be impacted by this hike,” he said.

In the report, CIMB noted that the implementation date was not stated, though it understood that registrations for the diesel fleet card system were due to be in the next month, putting Jun as the earliest start date.

Apart from the newly announced cash aid to small businesses, the continued provision of diesel subsidies to public transportation, logistical vehicles, and East Malaysia keeps a lid on inflation pass-through, it added.

Considering the application process for fleet card, it said it expected the roll out to take place in mid-Jun at the earliest.

“There are two levels of application involved under SKDS 2.0, namely 1) application to KPDN for the purpose of authorization in which the approval takes 1-2 days, and 2) application to oil companies for the issuance of fleet cards estimated to take 3-4 weeks.

“The SKDS 2.0 application for companies operating 9 types of goods transport vehicles started on 7 Mar 2024 (Phase 1), and has been expanded to additional 14 types of commercial vehicles on 13 May 2024 (Phase 2). At this juncture, it is unclear if cash aids to eligible individuals owning diesel-powered vehicles requires an application, or the government will utilise information from Padu database,” it said. — TMR / pic TMR FILE