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Mon, Aug 23, 2004 - Page 12 News List

Aid may hurt regional growth

FUEL SUBSIDIES Some pundits say that employing fuel-subsidy schemes will cost governments too much and will only lead to excessive use of dwindling oil supplies


As Asia grapples with global oil prices racing towards US$50 a barrel, regional governments are facing skyrocketing fuel-subsidy costs.

China, India, Indonesia and Thailand -- home to nearly half the world's population -- all say their subsidy schemes are necessary to dampen the shock of record-high fuel prices.

"Oil prices have now reached such levels that it's costing governments too much money to subsidize them," said analyst Michael Stead of Kim Eng Securities in Bangkok.

"The subsidies are criticized because they keep high costs from people who would obviously cut back on fuel use if prices were at more realistic levels," he said.

Some "experts" say the subsidies will encourage a surge in fuel consumption.

In China, the second-largest consumer of oil after the US, rising oil prices are now expected to slow the country's economic growth by at least 0.8 percentage points as it pays more for its crude imports, senior State Information Centre economist Niu Li was quoted as saying by the China Daily.

If oil prices were to remain at current levels, China, a net importer of oil, would have to pay an extra US$8.8 billion to import its planned 880 million barrels of oil this year, Niu said.

Beijing's price caps on refined oil products such as gasoline and diesel fuel have so far protected the consumer, but many of the country's midstream producers have been forced to shoulder the burden of higher crude prices.

Companies tend to pass on price increases to the consumers, leading to inflation and potentially slowing consuption.

"If crude prices do go to US$50 a barrel then Beijing will have to increase prices for the consumer as well," Liang said.

High oil costs may also harm consumption in India, whose government has agreed to absorb spiralling prices by cutting customs duty on petrol and diesel to 15 percent from 20 percent and slashing excise duty on petrol in a bid to control inflation.

The duty cuts and fuel subsidies will cost the Indian government over 25 billion rupees (US$543 million) in fiscal 2004-2005, according to finance ministry sources.

Analysts have already trimmed growth forecasts for India to 5.5 percent to 6.5 percent from 7 percent to 8 percent for the financial year ending in March 2005.

Indonesia, a member of the OPEC oil producers' cartel, has earmarked 14.5 trillion rupiah (US$1.56 billion) for subsidy spending this year, and 21 trillion rupiah for 2005.

Government officials say the annual subsidy may eventually rise to 50 trillion rupiah.

Thailand is prepared to shell out a minimum total of 70 billion baht (US$1.9 billion) for its oil subsidy, particularly of diesel, which began in January and is due to end in April 2005.

"If the government does not subsidise diesel then there will be more repercussions," the kingdom's Prime Minister Thaksin Shinawatra warned in a national radio address Saturday.

The governor of the central Bank of Thailand reportedly acknowledged the "political reason" for the subsidy, which comes ahead of national elections early next year that Thaksin is tipped to win.

But analysts warned that the subsidy program has damaged Thailand's trade balance. Bank of Thailand statistics show a trade deficit of US$308 million in March and US$357 million in April, largely due to high oil imports, they said.

Thai oil imports in June surged 22 percent in volume and 63 percent in value over the same period last year, according to reports.

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