(Bloomberg) -- Malaysia will have to unwind blanket state support for its most widely used gasoline by this year for the government to meet its own subsidy spending target, according to the World Bank.
The government is set to save about 7.9 billion ringgit ($1.8 billion) this year from the subsidy reforms it has already announced, the World Bank said in a report Tuesday. That’s still short of its aim to cut subsidies and social assistance programs by 11.5 billion ringgit this year, the World Bank said.
Prime Minister Anwar Ibrahim’s promise to replace broad subsidies with targeted assistance is key to his pledge to narrow the 2024 budget deficit to 4.3% of GDP, from 5% last year. But Anwar, who doubles as finance minister, has yet to specify a time line for the RON95 gasoline subsidy cuts after hiking diesel prices in June. He said on Monday the government is committed to such reforms even if they spelled disaster for politicians.
Malaysia currently absorbs much of the price of fuel and cooking oil for its population, a move that was estimated to cost 81 billion ringgit last year. Its fiscal position is further weighed down by its limited revenue, Apurva Sanghi, the World Bank’s lead economist for Malaysia, said at a briefing on Tuesday.
“Malaysia is not collecting enough revenue to meet its spending needs,” Sanghi said in Kuala Lumpur. “This is not sustainable.”
At some point, the government will have to contend with reintroducing the goods and services tax to tackle this, he said.
A combination of progressive taxes, well-targeted subsidies and adequate cash transfers can collectively benefit low-income groups while improving fiscal space to finance Malaysia’s longer-term spending needs, according to the World Bank.
The lender also raised its forecast for Malaysia’s growth this year to 4.9% and trimmed the inflation outlook to around 2% — within the government’s official estimates.
“Malaysia’s economy is in a good place,” Sanghi said.
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