Is There a Case for Fuel Subsidy Removal in Malaysia?

Abstract

This paper examines the indirect welfare effect of removing fuel subsidy on the Malaysian households. The analysis is based on the price-shifting model developed by Coady and Newhouse (2006) and carried out using the data from the Household Expenditure Survey 2004-2005 and the input-output table 2004-2005. The analysis yields the following key results: a) The removal of fuel subsidy is expected to have a relatively huge indirect welfare effect on the society; b) The indirect welfare effect is expected to be uneven across different broad categories of goods (of which the most affected ones are: i) Food and Non-Alcoholic Beverages, ii) Housing, Water and Electricity; and iii) Transportation); and c) The indirect welfare effect is expected to be uniform across different income-based segments of households. Overall, the findings seem to constitute a case against fuel subsidy removal unless the adverse impact on the three categories of goods is mitigated in some way.