Mozambique Food Riots: A Lesson on Subsidies for Malaysia

An overnight increase in bread prices to 33 per cent, electricity tariffs to 13 per cent and an increase in water costs resulted in deadly riots in Mozambique’s capital city Maputo in the first week of September. The riot left 13 people dead and 400 people injured. The government maintained that it was simply keeping up with increasing international food prices. As Mozambique imports a large part of its food requirements, the price hike is deemed to be essential. However the government later retracted its policy and announced that bread would revert to the previous price through the introduction of a subsidy while other subsidies would bring down water and power prices.

Countries in Southeast Asia have relied on subsidy in varying degrees in an effort to reduce poverty, contain inflation, or to gain popular votes. Malaysia for example is one of the most subsidised nations in the world with the government spending up to USD 3,700 on each household on average. Subsidy chewed up 15.3 per cent of the federal government’s spending budget in 2009. As a result, Malaysia has one of the lowest food and fuel prices in the world. However, subsidies also led to increasing budget deficit. Deficit hit a 20-year high of seven per cent of GDP in 2009.  According to Idris Jala, a minister in the Prime Minister’s Department, the subsidies were an unsustainable financial burden.

He remarked: “We do not want to end up like Greece. Our (budget) deficit rose to record high of 47 billion ringgit (USD 14 billion) last year” and warns that Malaysia “could go bankrupt in 2019”.

In an effort to cut government expenditure, widens the tax base, and halve the budget deficit, Malaysia raised prices of the most popular blend of petrol by 2.7 per cent and sugar by 15 per cent on 15 July 2010. This measure, the government hoped, will help cut the budget deficit from 7 per cent of GDP in 2009 to 5.3 per cent in 2010 and 2.8 per cent by 2015. But getting popular support proves difficult as most Malaysians considered subsidies a way of life. Student and human rights group as well as opposition parties have already issued an ultimatum to the government to reverse the policy by December 2010 or face a mass street protest. Malaysian food and drinks companies also refused to comply saying that they won’t pass on higher sugar and fuel costs to consumers.

Universal (food) subsidies although desirable can be problematic. Without proper implementation mechanism, subsidies, like any other social safety nets program, have a propensity to benefit the nonpoor more than the poor thus fuelling anger in times of crisis. And this appears to be Malaysia’s case. As it stands now, some 97 per cent of the subsidies were dispensed on a blanket basis without taking into account income levels. Also about 71 per cent of petrol subsidies went to mid- to high-income groups while 70 per cent of liquid petroleum gas subsidies were channelled to businesses instead of households.

Scrapping subsidies in its entirety is not the solution as it will fuel more anger. Instead Malaysia must rethink the way in which it carried out its subsidy policy so that it benefits those who needed it the most. This way, Malaysia can avert what has happened in Mozambique.