How international oil price fluctuations affect Malaysian government’s fiscal positions?

Abstract

Malaysian government fiscal dependency on oil revenues from its national oil company, PETONAS, and huge government expenditure on fuel subsidies to its citizens has major influences on the country’s fiscal policy agenda. On average, almost 35% of the Malaysian government revenues come from tax and dividend payments from PETRONAS, and averagely, 7% of the government revenue is spent on fuel subsidy. Since oil profit and fuels subsidies payments depend heavily on international oil price, this paper estimates how international oil prices volatility affect Malaysian government’s fiscal position and ultimately, how high dependency on PETRONAS’s revenue to finance government budget affect the whole economy in general. The interactions between volatility of international oil prices from 2000 to 2011 and government budgets, in term of energy subsidies, and oil revenues have been analyzed to study the effect. The main results show that there are direct relationships between changes in oil price and 1) PETRONAS revenue 2) government revenue 3) government expenditure (in term of fuel subsidies payment) and 4) government debt. Additional analysis reveals that large fuel subsidies payment and high dependency on PETRONAS’s revenue to finance government budget have negative impact on Malaysian economic growth since both of these components are very susceptible to oil price shocks. In order for Malaysia to prevent the volatility effects of oil prices and avoid mismanagement of its natural resource revenues, it will need to make significant decision by increasing its tax base, reducing its fuel subsidies and establishing sovereign wealth fund to properly manage country’s natural resources.

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