Fuel Price Hikes


Economic News

22 Jul 2010
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The Malaysian government has refused to reverse its unpopular and controversial increase in fuel prices. On June 5, the pump price of petrol was increased by 41% to $0.87 a litre, while diesel was hiked 63% to $0.80 a litre.

The next day, Shahrir Samad, the domestic trade and consumer affairs minister, defended the increase, saying that it was a necessary move to normalise fuel prices after many years of subsidies that have kept fuel prices artificially low and devoured around a third of the government's budget.

"I don't personally think it has been a mistake to raise fuel prices by a substantial amount," Shahrir was reported as saying. "I think it's wise. It's the first time ever we can come to grip with the subsidy system."

However, he issued a reassurance that further price rises had been ruled out in the immediate future, with the government shouldering the cost of any further increases in oil prices. He did not, though, give a specific timeframe, saying only that the price would be frozen for "a while". The government's long-term policy is still thought to be bringing pump prices up to market levels - even with the recent increases, fuel remains cheaper in Malaysia than in Singapore, Thailand and India.

Malaysia's fuel subsidy regime would have left the government footing a $17bn bill by the end of the year, given recent soaring oil prices, which have topped $130 a barrel. The decision to increase the prices, which the government estimates will save it $4.23bn, has been condemned by the political opposition and has met with popular protest. Opposition parties have formed an organisation called PROTES with the stated aim of campaigning against inflation. To the irritation of Prime Minister Abdullah Ahmad Badawi, PROTES has called for a rally in Malaysia's capital city, Kuala Lumpur, on July 12. Demonstrations on June 5, however, remained low-key.

The opposition may be looking to increase pressure on Abdullah, who is feeling the heat after his ruling National Front coalition suffered its worst election results for decades at a snap poll in March, losing its two-thirds majority in parliament (while retaining its absolute majority) and the control of five state assemblies. The opposition hopes that inflation generally, and the fuel price increases specifically, could gain them valuable traction, given the fact that they are expected to hurt the pockets of less well-off Malays who form the basis of the National Front's support. Reports in the local press have stated (admittedly without supporting evidence) that the increases could cost half a percentage point of gross Domestic growth (GDP) growth this year, while adding 1% to inflation, which the central bank estimates will hit 5% in June, and average 4.2% over 2008 - a 10-year high.

Nonetheless, the National Front, which has ruled since Malaysia's independence in 1957, won more than half of the popular vote and still has a commanding parliamentary majority, and Abdullah has faced down calls to resign thus far.

The government is trying to sweeten the bitter pill by extending some $250m in loans on favourable terms to small-and-medium-sized enterprises (SMEs) on the premise that the firms will be able to cope with the large increase in fuel prices. More than half of the country's workforce is employed by SMEs, according to Trade Minister Muhyiddin Yassin, who announced the package. There will also be rebates for owners of smaller cars and extended subsidies for trucks and buses, which should ease the pressure on the less well-off (and, cynics might point out, the government's constituency).

Despite the unpopularity of the move, the consensus among the authorities seems to be that increasing fuel costs is a necessary evil to improve the government's finances, and sporadic outbreaks of protest a price worth paying for shifting towards market prices and reducing the share of the government budget lavished on subsidies. While Malaysia is an important hydrocarbons producer, the government aims at making consumers aware that oil is very much a scarce resource.

Central Bank governor Zeti Akhtar Aziz has indicated that interest rates will be frozen this month at least, indicating that monetary policy makers do not believe that fuel price hikes will necessitate counter-inflationary moves in the immediate future. Inflation of just over 4% seems very low in an economy expected to grow at around 5% over the next two years. Continuing the previous subsidy regime might have been the more popular move, but with soaring oil prices, surely unsustainable.

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