Perception of IIUM Community Towards Gradual Removal of Fuel Subsidy in Malaysia

RUNNING HEAD: PERCEPTION OF IIUM 1

Perception of IIUM Community Towards Gradual Removal of Fuel

Subsidy in Malaysia

Nur Nadhila Bt Mohd Robi

Bachelor of Accounting

Kulliyyah of Economics and Management Sciences

International Islamic University Malaysia, Gombak

English for Academic and Writing

LE 4000 Section 2

Lecturer: Madam Mona Mazlinda bt Mokhtar

2PERCEPTION OF IIUM

5th December 2012

3PERCEPTION OF IIUM

Abstract

Fuel subsidy is a portion of fuel price paid by the government

to reduce the price burden on the consumers. Due to the rise

in global market price and problems associated with the fuel

subsidies, Malaysian government took an initiative to remove

the fuel subsidy in a phased manner. However, its removal will

adversely impact the society. This research paper is aimed to

analyze the impacts of the gradual removal of the fuel

subsidies and what the government can do to compensate for the

loss of the fuel subsidy. Questionnaire was distributed to 30

respondents. Result show there seems to be an agreement that

fuel subsidy should be gradually removed, but the removal must

be accompanied by efficient policy implemented by the

government. Public campaign to promote the understanding among

the society could be the first step by the government to

minimize the negative impacts on the society.

KEYWORDS: fuel subsidy, subsidy removal, gradual removal,

impacts, compensation

4PERCEPTION OF IIUM

Perception of IIUM Community Towards Gradual Removal of Fuel

Subsidy in Malaysia

For decades, Malaysian government has been subsidizing

the fuel prices to lift the burden of having to pay the rising

market price of fuel by the Malaysian consumers. According to

Will Hickey (2012), “Subsidies are essentially the government

buying energy at market prices and reselling it back to

citizens at lower prices” (p.1). It means that the government

covers a portion of the fuel price paid by the Malaysian

consumers. This action is to protect the consumers from the

price hikes due to the rise in global market price. However,

as the global market price is uncontrollably accelerating from

time to time, so does the subsidies borne by the government.

There are many factors that lead to the increase in the global

market price of fuel. From the economic point of view, the

increase in price of the commodity is due to the fact that

demand for the commodity exceeds its supply. The same theory

applies to the increase in price of fuel. Norasibah,

Gairuzazmi and Jarita (2009) claimed that the main reasons for

the increase in the global market price are the decrease in

5PERCEPTION OF IIUM

oil supply, increase in oil consumption, especially from third

world nation like China and India and political problem in the

countries that produce oil. Therefore, when there is increase

in demand, the price will goes up if the supply does not

increase in proportion to the increase in demand.

Despite the fact that subsidies are essential to cater to

those in need, large amount of subsidies can be quite costly

to the government. Studies have both found that subsidies lead

to market distortion, overconsumption or wastage by the

consumers, and represent a strain on annual budget as the

subsidies could have been allocated for a better use (Ariff,

2008; Prime Minister Department, 2005). The last problem with

subsidy is the most serious as in 2008 alone, approximately

RM45 billion was allocated on fuel subsidy as compared to

estimated RM40 billion amount allocated on the projected total

development expenditure (Thillainathan, 2009). The cost of

fuel subsidies even exceeds the development expenditure which

is equally important for well-being of the economy and the

people as a whole. Other studies also observed that the fuel

subsidies mostly benefit the rich more than the poor as the

rich consume more fuel for their luxury cars (Robert, Masami,

6PERCEPTION OF IIUM

2006; Thillainathan, 2008). This means the main aim of giving

out subsidies by the government is unmet as subsidies are

mainly targeted to those who are poor and in need of financial

assistance.

Due to the rise in global market price and problems stem

from the fuel subsidies, Malaysian government took an

initiative to remove the fuel subsidy in a phased manner to

cushion the effect of the increase in the fuel price. This

move by the government has led to numbers of hot debates among

those who support the move and those who are against the move.

Many researches on the gradual removal of the fuel subsidy

have been done eversince. Some researches even refer to the

cases from different countries that also impose this policy on

the fuel subsidies like in the case of Nigeria and Indonesia.

The removal of the fuel subsidies in both countries had

sparked massive protests and strike from the public. The cause

of the removal in the both countries is similar to Malaysia;

due to the increase in global market price which leads to a

costly fuel subsidy that has to be borne by the government. In

short, fuel subsidies are not sustainable in the long run.

7PERCEPTION OF IIUM

Although fuel subsidy needs to be gradually removed due

to its unsustainability in the long run, however, its removal

will adversely impact the society. This research paper is

therefore, to analyze the impacts of the gradual removal of

the fuel subsidies on the society as well as on the economic

well-being of the country and to offer possible solutions of

what the government can do to compensate for the loss of the

fuel subsidy. There are many issues related to the gradual

removal of fuel subsidy that this research paper attempts to

answer. The main issues are highlighted as below:

1. Are IIUM community aware of the gradual removal of fuel

subsidy and how do they perceive it?

2. What are the impacts of the gradual reduction of fuel

subsidy on the society?

3. What are the impacts of the gradual reduction of fuel

subsidy on the Malaysian economy?

4. How could the consumers be compensated for their loss?

Method

Participants

8PERCEPTION OF IIUM

For this research paper, 30 participants were selected

from all parts of the International Islamic University

Malaysia (IIUM) community. The participants were divided into

three categories, namely, Lecturer, Administrative Staff, and

Student. 30 participants consisted of 5 lecturers, 4

administrative staff and 21 students. Potential participants

who did not own a transportation were excluded from this study

as this study focused on those who used the fuel subsidies

because they were more affected from this gradual removal of

fuel subsidies. Also, potential participants especially the

students who owned a transportation but did not bring their

transportation to IIUM were also excluded from this research.

Materials

The perception of IIUM community on the gradual removal

of fuel subsidies as well as the impacts and possible solution

were measured and investigated by constructed and distributed

questionnaires to the selected participants. The questionnaire

consisted of 16 close-ended questions. Question number 1 to 5

were about their average usage per week and how much did they

spend on fuel, while question 6 would signal their level of

awareness in the gradual removal of fuel subsidies (whether

9PERCEPTION OF IIUM

they were aware with the gradual removal or not). Question

number 7 to 15 were aimed to find out or to measure their

level of agreement or disagreement towards statements

regarding the gradual removal of fuel subsidies by the

government. Lastly, question number 16 asked the respondents

to rank the four suggested solutions given that would help to

cushion the negative impacts of the removal on the society.

Procedure

The distribution of the questionnaire was done one-to-one

with the potential respondents. First, they were asked whether

they own a transportation or not. Next, when it was confirmed

that the respondents own a transportation, they would be asked

to complete the questionnaire given that contained several

questions on the fuel subsidies. They were informed that the

questionnaire given would be used for the study on “Perception

of IIUM Community towards Gradual Removal of Fuel Subsidies”.

A brief explanation on gradual removal of fuel subsidies was

given beforehand to the respondents. They were given ample

time to carefully answer the questionnaire in order to ensure

that the answer given were of quality. Finally, when the

questionnaire was completed by the respondent, the

10PERCEPTION OF IIUM

questionnaire was collected and separated by each category

(lecturer, staff and student).

Results

Five (5) lecturers from the Accounting Department of

Kulliyyah of Economics and Management Sciences at IIUM, four

(4) administrative staff from the Kulliyyah of Economics at

IIUM and twenty-one (21) undergraduate students from various

major and concentration under the Kulliyyah of Economics at

IIUM responded to the questionnaire. Information of the

respondents is presented in Table 1 on the next page:

Occupati

on

No. of

Respondents

Transporta

tion

Lecturer 5

Car: 4

Motorcycle

: 1

Staff 4

Car: 1

Motorcycle

: 3

Student 21

Car: 16

Motorcycle

: 5


Table 1

As for fuel, the frequently used fuel petrol in Malaysia is

divided into two, namely, Ron 95 and Ron 97. The price of Ron

95 is cheaper than Ron 97. The subsidies on Ron 95 are also a

lot bigger than the subsidies on Ron 97. Out of 30

respondents, only one respondent is a frequent user of Ron 97.

The percentage of the respondents who used Ron 95 and Ron 97

is summarized below in Figure 1:

Figure 1

Based on Figure 1, it can be concluded that Ron 95 petrol is a

popular choice among the respondents. This could be due to its

cheaper price than Ron 97. Besides that, 16 out of 30

respondents spent between RM21 to RM50 each time they filled

up their tank while 11 respondents spent below RM20. The

remaining respondent spent RM51 and above. 18 out of 30

97%

3%

Frequently Used Petrol

Ron 95 Ron 97


respondents agreed that current fuel price is affordable for

them to consume while the remaining 12 respondents claimed

that the current fuel price is not affordable or in another

word, expensive. In addition, to find out the perception of

IIUM community towards the gradual removal of fuel subsidies,

four research questions were formulated and the questionnaire

was distributed to the respondents would provide answer to the

research questions formulated.

The first research question is “Are IIUM community aware of

the gradual removal of fuel subsidy and how do they perceive

it?” which will uncover the level of awareness regarding the

gradual removal of fuel subsidy among IIUM community and their

perception towards the types of removal which was divided into

three, namely, gradual removal of fuel subsidy, abrupt removal

of fuel subsidy, and not to be removed at all. Their level of

awareness is summarized in Figure 2 below:


Aware57%

Not Aware43%

Are They Aware of Gradual Removal of Subsidy?

Figure 2Based on Figure 2, out of 30 respondents, 17 of them claimed

that they were aware of the gradual removal of fuel subsidies

by the government while the remaining was not aware of it.

Those who were not aware of the gradual removal nevertheless

knew that the price of petrol fluctuated from time to time.

Despite the fact that 17 of the respondents were aware of the

gradual removal, however, 21 of the respondents did not know

the reasons behind the government action to gradually remove

the fuel subsidies. This means that some of the respondents

who were aware of the removal did not know the reasons behind

the removal. Among reasons stated by the respondents who knew

the reason are increase in global market price, market

distortion, development distortion, national budget deficit,

Yes30%

No70%

Do They Know the Reason(s) of

Gradual Removal of Fuel Subsidy?


and government cutting down their expenses. The popular answer

among the respondents is the increase in global market price.

On the other hand, the respondents were also asked to

indicate their level of agreement on certain statements which

reflected their view or their perception on fuel subsidies

removal. Figure 3 shows the level of agreement on whether the

subsidies should be gradually removed, abruptly removed or not

be removed at all. Based on the column chart, we can observe

that majority of the respondents agree on the gradual removal

of fuel subsidies, disagree on the abrupt removal and disagree

on the non-removal of the fuel subsidies. 18 respondents (one

respondent strongly agreed and 17 respondents agreed) out of

30 respondents agreed on the gradual removal with on the

gradual removal. Meanwhile, 18 of the respondents (12 disagree

and six strongly disagree) claimed that they did not agree

that the fuel subsidies should not be removed at all. This

represents the majority voice as only the remaining 12

respondents agreed on the non-removal.


Figure 3

The second research question is “What are the impacts of the

gradual removal of fuel subsidy on the society”. Out of 30

respondents, 24 of them agreed (with eight strongly agreed

respondents and 16 agreed respondents) that the household

earnings or income will be greatly reduced by the removal of

fuel subsidies. This is due to the fact that increase in fuel

price will consequently increase the price of other

commodities and thus, affect the current rate of expenditure

by the society. Meanwhile, only 6 respondents out of 30

respondents disagreed that the earning or income of the

household would be greatly reduced by the gradual removal of

the fuel subsidies. They claimed that the gradual removal does

affect their earning; however, the amount was not that

Gradually Removed

Abruptly Removed

Not Be Removed At

All

0

5

10

15

20

Agreement on Type of Subsidy Removal

Strongly AgreeAgreeDisagreeStrongly Disagree

Type of Fuel Subsidies Removal

No o

f Resp

onde

nts


significant or high. The result is summarized in Figure 4 on

the next page:

Strongly Agree27%

Agree53%

Disagree20%

Household Earnings Will Be Greatly Reduced

Figure 4

Despite the fact that the earning of the household would be

reduced by the increase in fuel price, the earning of the

producers or manufacturers would also be affected as they also

had to pay more for their input and freight charges. They

would either bear the increase in the cost of production or

simply transferred the cost to the end consumers. Most of them

would just opt for the latter action by increasing their

product or service price. In the end, it is the consumers who


would suffer more if no price regulation or monitoring being

imposed on those producers or manufacturers.

The third research question is “What are the impacts of the

gradual reduction of fuel subsidy on the Malaysian economy?”.

In the questionnaire, the respondents were also required to

rate their level of agreement whether the allocation for fuel

subsidies should have been used for other things like for

infrastructure development, education, public transport,

highways and many more development projects. Figure 5 sums up

their level of agreement.

Strongly Agree30%

Agree50%

Disagree20%

Fuel Subsidies Allocated For Other Things

Figure 5

80% of the respondents, which represents 24 respondents (with

nine respondents strongly agreed and 15 respondents agreed),


agreed that the allocation for fuel subsidies should have been

used for other development projects from public transport to

health and education. Only 20% of the respondents disagreed

with the statement and thought that the allocation for fuel

subsidies should remain and should not be used for other

purposes.

The fourth and the last research question is “How could the

consumers be compensated for their loss”. Respondents were

asked to rank the given suggested solutions that will help to

cushion the negative impacts on the society with 4 as the

least preferred solution and 1 as the most preferred solution.

This question was aimed to identify the preferred solution for

the problems associated with the gradual removal of fuel

subsidies. Figure 6 shows the results of the findings:


Figure 6

Based on the Figure 6 above, the most preferred solution by

the respondents to the problems is for the government to

improve the quality of the current public transport. Out of 30

respondents, 22 of them voted “Improve the quality of public

transport” as the most preferred solutions, 16 respondents

voted “Give compensation in terms of voucher or coupon or

smart card that allows certain amount of fuel to be purchased

at reduced price” as the second preferred solution, 19

respondents voted “Held public campaign awareness to promote

the understanding among society on the needs of gradual

Improve the quality of public

transport

Give voucher/coupon/rebates

Public campaign

Cash transfer0

510152025 22

2 3 57

16

4 325

19

42 4 6

18

Ranking of Preferred Solutions

Rank 1 Rank 2 Rank 3 Rank 4


removal of fuel subsidies” as the third preferred solution and

finally, “Cash transfer or benefit-in-kind to the low earners”

as the least preferred solution as being voted by 18

respondents. Summarize on the ranking of the solution is as

follow:

1. Improve the quality of public transport.

2. Give compensation in terms of voucher/coupon/smart card

that allows certain amount of fuel to be purchased at

reduced price.

3. Public campaign to promote the understanding among

society on the needs of gradual removal of fuel

subsidies.

4. Cash transfer or benefit-in-kind to the low earners.

Discussion

The level of awareness and understanding among the IIUM

community on the gradual removal of fuel subsidies are still

low. This is due to the fact that based on the investigation

done; the respondents had mixed view or perception towards the

gradual removal of fuel subsidies. Only a few of them clearly

and thoroughly aware and understand the reasons behind the


removal of fuel subsidies while most of them failed to know

the reasons. What they failed to comprehend is that the

gradual removal of fuel subsidies does not simply means

increase in fuel price, but also means sharing of burden by

the government and the society where we, as part of the

society needs to learn and accept the concept of “give and

take”. The majority of the respondents still, however, agreed

that the fuel subsidies should be removed, but with gradual

removal instead of abrupt removal. Dr. Ariff (2008) stated

that “Abrupt removal of subsidies would cause considerable

pain for consumers, especially those on tight household

budget...A gradual removal, based on a clear timeline and

price formula, would do the trick” (p.1). Besides that, it is

also agreed that the gradual removal of fuel subsidies would

reduce the earning of household but the negative impact on the

society is being set off by the gain that the government will

get from the gradual removal of the fuel subsidies. The gain

from the removal of fuel subsidies that they will get could be

used for other purposes like improvement on quality of public

transport as one of the solutions to cushion the negative

impact of the increase in fuel price on the society and also


to compensate the society in terms of voucher or coupon so

that certain amount of fuel can be purchased at a reduced

price. The allocation of fuel subsidies could also be used to

improve public health and education sectors as well as to fund

the nation development project. There are indeed many ways for

the government to compensate for the loss borne by the

society. Nevertheless, the importance of gaining public

understanding on the needs to gradually remove the fuel

subsidies must not be neglected. Equipped with clear

understanding, the society would know the reasons behind the

government action and therefore avoid and prevent the

possibility of strike or demonstration by the society in case

the government has to further increase the fuel price in the

future as what had happened in Nigeria and Indonesia after

their respective government announced the removal of fuel

subsidies. A study observed that by using an effective

publicity campaign, the government can defuse potential

opposition to reducing fuel subsidies (Bacon and Kojima,

2006).

From the Islamic perspective, the government should

protect the element of maslahah which means public interest


and make it as a priority in their decision making process.

Therefore, if the government were to reduce the amount of fuel

subsidy, that removal should be accompanied by efficient use

of the public money in developing and maintaining the public

welfare.

However, there are some limitations in this research

study. One of the limitations is inadequate sample size as the

sample size is only 30 respondents. In order to get a more

accurate picture that reflects the real population of IIUM

community, a bigger sample size is recommended. The second

limitation is time constraint in conducting this research

study. Due to the time constraint, the research study cannot

be carried out thoroughly and therefore might affect the

results generated from conducting this study.


References

Hickey, W. (2012, June 7). Time to End Fuel Subsidies?

Retrieved from http://yaleglobal.yale.edu/content/time-end-

fuel-subsidies

Norasibah, M. J., Gairuzazmi, M. G., & Jarita, D. (2009). Oil

Prices and the Malaysia Economy

Bacon, R., & Kojima, M. (2006). Phasing Out Subsidies: Recent

Experiences with Fuel in Developing Countrie. (Pg. 2-3) World

Bank Group. Washington D. C.

Ariff, M. (2009). Downsizing Fuel Subsidies (Pg. 1-2)

Thillainathan, R. (2009). A Critical Review of Price Control &

Subsidies. EKONOMIKA (Vol 1) (Pg. 5)

Prime Minister Department (2005) Oil Prices and Subsidies An

Explanation (Pg. 9)

http://yaleglobal.yale.edu/content/time-end-fuel-subsidies

http://yaleglobal.yale.edu/content/time-end-fuel-subsidies

Perception of IIUM Community Towards Gradual Removal of Fuel Subsidy in Malaysia

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