Fuel Subsidy Abolition and Performance of the Sectors in Malaysia: A Computable General Equilibrium Approach

Sze Ying Loo () and Mukaramah Harun ()
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Sze Ying Loo: School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia
Mukaramah Harun: School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia

Malaysian Journal of Economic Studies, 2019, vol. 56, issue 2, 303-326

Abstract: The attempt of abolishing fuel subsidy to alleviate the rising pressure on public finances would pose a threat to the performance of the sectors. This study, therefore, intends to identify the impact of abolishing the subsidies on domestic producers in Malaysia using a Lofgren-based computable general equilibrium (CGE) model. The findings show that the fuel subsidy abolition leads to a significant fall in the level of production, and consequently decreases output allocation for domestic and export markets. Sectors which use relatively large amounts of oil products in production would most likely be hit harder. Besides simulating the impact of abolishing the fuel subsidies, two supplementary regimes (reallocating the extra savings to the agricultural sector to assist the rural poor and transferring direct cash to those who are in need) are incorporated to deal with the decelerating growth in domestic production. Interestingly, raising agricultural investment is found to be more favourable in terms of better performance in the growth of the sector. Thus, it is advisable to include improvement of farming practices in designing policy measures. This study can further serve as a guideline in upgrading the existing subsidy abolition to ensure the performance of the sectors is wholly satisfactory.

Keywords: Agricultural investment; computable general equilibrium model; direct cash transfer; fuel subsidy abolition; output productivity (search for similar items in EconPapers)
JEL-codes: C68 H23 Q14 Q48 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:mjr:journl:v:56:y:2019:i:2:p:303-326

DOI: 10.22452/MJES.vol56no2.7

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