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Malaysia hikes fuel rate to cover rising subsidies

This file photo shows a man filling up his car with gasoline at a petrol station in Kuala Lumpur. Malaysia raised the price of petrol by 7 percent and diesel by 23 percent yesterday in bid to cut the soaring cost of government subsidies. PHOTO: AFP

Malaysia raised the price of petrol by 7 percent and diesel by 23 percent yesterday in a bid to cut the soaring cost of government subsidies and the smuggling of diesel fuel but analysts warned the move could hurt the economy.

The country could face a "double whammy" in the form of a slowdown in the growth rate and rising prices if expectations of inflationary pressures from the fuel price hikes are not prudently managed, economists said.

Petrol will cost 10 sen (US$0.26) a liter more at the pumps, taking the price for premium to 1.52 ringgit (US$0.40), while diesel goes up by 20 sen a liter to 1.081 ringgit, the Prime Minister's Office said in a statement. Subsidies for petroleum cost the government 4.8 billion ringgit last year and would reach 8.9 billion this year if prices were not increased to help cope with rising international oil costs, the statement said.

With the new rates, the expected subsidy this year will reach 6.7 billion ringgit, saving the government 2.2 billion.

"Although the rise in petrol and diesel [prices] will reduce the government's subsidies and help the government manage its budget deficit, the government should also be prudent in managing rising inflation expectations," said CIMB Securities' chief economist Lee Heng Guie.

"If consumers see inflation rising, they are likely to save more and this will slow down spending and may lead to a double whammy in the economy," Lee said, adding that he was raising his forecast for this year's inflation to 2.8 percent from 2.6 percent previously.

ECM Libra economist Wong Chee Seng described the 20 sen hike in diesel prices as "a shocker, firstly because of its size, which is the strongest hike since 1993, and secondly because of the high energy intensity in industrial and commercial usage."

Given the difference which still exists between market and subsidized prices, estimated at about 40-60 sen per liter, Wong said another round of upward adjustments was likely in coming months.

The opposition People's Justice Party said some 100 supporters were planning to demonstrate in Kuala Lumpur yesterday to protest the hike in fuel prices.

"A lot of people are angry but they feel helpless so they have asked us to demonstrate to show their unhappiness," party vice-president Tian Chua told reporters.

The government said that even with the new prices, fuel in Malaysia will still be cheaper than in most member states of the Association of Southeast Asian Nations (ASEAN).

Subsidies created distortions in the market and could lead to the smuggling of fuel to neighboring countries where prices are higher, in effect resulting in taxpayers' money benefiting people outside the country, it said.
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