Malaysia cuts fuel subsidy

Malaysia cuts fuel subsidy Jed Yoong

04 June 2008

The half of Kuala Lumpur’s budget that was going to energy support is no longer sustainable Driven by skyrocketing fuel prices that the government can no longer afford, Malaysia Wednesday dared the possibility of further political trouble for the ruling national coalition at best and civil unrest at worst and slashed hefty fuel subsidies that would have cost RM56 billion this year, about half of the government’s revenue. The government announced Wednesday evening that petrol prices would rise by 78 sen (US24¢) at midnight -- a 41 percent jump from RM1.92 per liter to RM2.70. That means those spending RM2,000 per month to fill the tanks of their BMWs will now be paying RM2,820. Regardless of income levels, it is likely most Malaysians will feel the pinch. To soften the blow and possibly to fend off civil unrest, the government is also passing out cash handouts to owners of motorcycles and cars below a certain engine size – thus replacing subsidies with cash. Most Malaysians own cars with small engines from local carmakers Proton and Perodua. The net effect of the subsidy cut remains to be seen. Prime Minister Abdullah Ahmad Badawi, already besieged after the National Front, or Barisan Nasional (BN), lost the two-thirds parliamentary majority that it held since independence in 1957, made the unpopular move as crude prices continued to spiral above US$130 per barrel, diverting funds from much-needed development projects. "It (the fuel subsidy) is five billion ringgit more (than the development budget), we need to look for more money," Badawi told Bernama, the national news agency, on May 10. "When the prime minister tables the Ninth Malaysia Plan on March 31, and analysts look at the figures, they will find that the biggest amounts are subsidies. So, what is the conclusion? They will see Malaysia adopting a macro fiscal policy that is not prudent, not practicing good governance and not in accordance with a stable financial system. This does not reflect well on our efficiency," Deputy Prime Minister Najib Razak told reporters. The government hopes to channel the savings into improving public transportation, as it promised many years and elections ago but with little to show. In Kuala Lumpur, despite having a light rail train service and monorail, public transportation is expensive and inconvenient. Worse, intercity travel is still being serviced by old and slow trains, and accident-prone buses. Record crude prices have also pushed other countries to cut fuel subsidies and price controls. Indonesia has hiked fuel prices by an average of 29 percent, saving about 34.5 trillion rupiah and kicking off a series of street demonstrations. To help the poor who will feel most of the pinch, the Indonesian government will distribute 14.1 trillion rupiah (US$1.52 billion), in cash handouts to about 19 million families. Similarly, after slashing subsidies, Taiwan will distribute US$659 million to middle and low-income families. The latest to raise oil prices is India, whose government announced Wednesday that gasoline and diesel prices will increase by 10 percent. Analysts have welcomed the end of market-distorting subsidies and controls but also cautioned possible political unrest, especially if price spikes make food too expensive for too many. "Price caps, government subsidies and bans on food exports can cause other, less obvious, distortions. They reduce the incentive for local producers to increase supply and for consumers to curb demand. This encourages smuggling and hoarding, prolongs the global supply-demand imbalance, and keeps global commodity prices higher for longer. By keeping local energy and food prices artificially low, consumers have no incentive to reduce demand, so the import bill can mushroom," according to the weekly Asia Ex-Japan Economic Monitor for May 30 by the Lehman Brothers investment bank To curb inflationary pressures, Duncan Wooldridge, an economist at UBS Investment Research, suggests tightening monetary policy -- decreasing money supply by increasing interest rates. "Loose monetary policy is driving inflation up, in our view. It is not just food and energy prices. The belief that food inflation or energy inflation should continue to be accommodated is misplaced, in our view. There is a difference between food prices or oil prices rising for a few months and rising for a few years," he wrote in a report. Bank Negara, the central bank, however, has reportedly said that it will not adjust interest rates to curb inflationary pressures and will let an appreciating ringgit do the job instead. So far the ringgit has risen slowly, by 2.4 percent in 2008 to RM3.244/US$1. Asia has the benefit of robust economies driven by exports while costs increase as fuel subsidies are cut. Things are bleaker for OECD countries like the United States, Japan and some European countries, which includes the biggest economies in the region like United Kingdom, Germany and France. "Several quarters of weak growth lie ahead for most OECD economies. At the same time, headline inflation could remain high for some time to come," according to the OECD Economic Outlook released on June 5. Most analysts believe that fuel prices will begin to moderate as more supply comes on line and refinery capacity increases and as motorists cut back on car usage. Crude fell to a three week low Wednesday to US$123.15 in London. Consumption in the US fell by 4.7 percent last week year-on-year. Until it does come down, however, Malaysians, whose love affair with their cars has been growing for years, may have to learn to walk 500 meters to the market.