The impacts of fuel subsidy reform on producers and households in Malaysia: A Computable General Equilibrium (CGE) assessment

High fiscal deficit and rising national debt in Malaysia have set the fuel subsidy removal in motion, largely because they constitute a major government expenditure. Nonetheless, this initiative posed a risk for producers and households regarding the high price level especially during the transition period. A strategically placed mitigating measure became critical to deal with those possible distorting effects brought by the removal. Otherwise, the government’s attempt to reach sustainable economic growth with the removal might have been unachievable. This thesis focused on the impact of the fuel subsidy removal on producers and households, with particular attention to two selected saving reallocations to preserve control of the situation. A static International Food Policy Research (IFPRI)-based computable general equilibrium (CGE) model was deployed in conjunction with a constructed Malaysian social accounting matrix (SAM) and input-output (IO) tables benchmarked to 2010. The complex mathematical functions in the model were then solved using the GAMS software. The findings showed that the magnitude of the impacts differed between sectors under the subsidy removal. Producers with high reliance on petroleum products for fuelling plants and equipment in production operations were greatly hit, affecting their level of production and producer prices. Sectors with falling growth rates of production reduced their import demand which, in turn, had an impact on its output allocation. All income groups of households were badly hurt due to substantial losses of consumption expenditure, together with falling real incomes. With the direct cash transfer targeting the vulnerable, it was going well with improvement in consumption expenditure; yet it made no effort to promote domestic production. In contrast, the additional funds directed to the agricultural sector had the merits of rising domestic production and improving the overall consumption loss of the households. The ultimate results can serve as a useful guideline for the redesigning and the upgrading of the existing subsidy reform.