Current Affairs

Oil price plunge : What is government’s contingency plan?

minyak_naik-650x400With regard to the government proposal to reduce oil prices, DAP urged Prime Minister Najib Razak to go one step further and produce a contingency plan for three scenarios of crude oil prices.

Following the latest statement by Deputy Finance Minister Ahmad Maslan announcing that oil prices in Malaysia would drop below the current RM 2.30 per litre in the case of a fall in global crude oil prices between US 75 and US 70 per barrel, Kluang MP Liew Chin Tong asked that the government also consider the likelihood of three different prices between USD 80 and USD 60 per barrel in a revised Budget 2015.

According to Liew, who welcomed the announcement by Ahmad Maslan, the government had estimated its 2014 revenue with the crude oil price at USD 110 per barrel and USD 105 per barrel for 2015.

However, since crude oil price per barrel had hit USD 79.41 last Friday, Liew has asked that the government come up with a contingency plan for scenarios with prices at USD 80, USD 70 and USD 60.

“Petroleum income tax constitutes 21 % of the federal direct tax revenue and it does not include other forms of revenue contributed by Petronas. It is widely estimated that petroleum income constitutes about 30% of total revenue,” said Liew.

He hit out at Deputy Finance Minister Chua Tee Yong who said that the government could not provide the estimate crude oil prices because he “did not know if the price would be going down or maintain”. Chua said that the impact of the declining crude oil prices would be negligible prices are not far off from the original estimation for 2014; and that this could also be mitigated by low fuel subsidies.

“Chua was plainly wrong,” Liew opined, citing The Edge Financial Weekly’s report that estimated RM650 loss in revenue for every USD 1 per barrel drop in crude oil prices.

Liew added that the decline of crude oil price by USD 25 (from the USD 105 estimated for 2015) to USD 80 per barrel will result in a reduction of revenue of RM16.25 billion (6%); at USD 70 per barrel. This, he said, would mean a loss of RM22.75 billion (8.3%); at USD 60 per barrel, a loss of RM 29.25 billion (10.6%)

“We have been calling for lower pump prices if the crude oil price falls below the current price to prevent “stagflation” – inflation caused by fuel hike and the introduction of GST which depletes the already meager disposable income of Malaysians and depresses demand for goods and services,” said Liew.

He explained that this was the same reason why Japanese Prime Minister Shinzo Abe is likely to postpone the increase of the country’s sales tax initially scheduled for October next year. It is believed that the shock recession in Japan is caused by reduced consumer spending following the introduction of a sales tax increase early this year.

“When growth is fragile globally, governments should be extremely careful not to tax away any residual disposable income and end up with a recession,” Liew said.

He added that anyone following international financial news would by now agree that these are possible scenarios that we have to grapple with. -The Rocket

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