Economists have said the Najib administration will likely cut fuel subsidies to reduce the government’s rapidly growing subsidy bill, which is expected to double this year.
Deputy Prime Minister Tan Sri Muhyiddin Yassin said earlier today the government expects the subsidy burden to double from RM10.32 billion to RM20.58 billion this year, in what appeared to be a signal of further price hikes in the near future.
CIMB Investment Bank Bhd chief economist Lee Heng Guie predicted that that further subsidy rationalisation would most probably revolve around fuel and sugar, which made up a “big chunk” of subsidies.
He said he expected these two subsidies to be removed incrementally in stages as the government would be hesitant to add to the already strong inflationary pressure from food prices.
“They won’t let it all go up one shot and put more pressure on inflation,” he told The Malaysian Insider.
OSK Research head of research Chris Eng similarly expects the government to trim subsidies for petrol and gas used to generate electricity as these were the “two big things” on the subsidy bill.
He warned, however, that if petrol prices were not increased gradually the Najib administration would risk alienating voters ahead of snap polls, which OSK expects will be called in November or December.
“I think if you raise 5 sen per litre for RON95 it will be still acceptable,” he said. “People will understand because oil price has gone up.”
He said the cuts would be good as it would help reduce wastage and encourage efficiency but stressed that Malaysia could still afford to maintain subsidies at the current level with no cuts.
“The country’s not going to go bankrupt by 2012,” Eng said.
Affin Investment Bank Bhd economist Alan Tan said he only expects the price of RON95 to go up if global crude oil prices remain above US$110 per barrel for “an extended period of time”.
“If global crude oil prices moderate from here on, the government will most likely maintain the price of RON95,” he said.
Tan said that even with an increased operating expenditure owing to higher oil prices, the government should still be able to meet its budget deficit targets for this year as outlined in Budget 2011.
“We expect revenue collection to remain steady in view of the recovery of the domestic economy. Therefore our expectation is that the country’s budget deficit position will likely be maintained at 5.4 per cent of GDP,” he said.
Malaysia’s low purchasing power, coupled with rising prices, is putting pressure on the Najib administration to pump more public funds into existing subsidies.
The move is seen as necessary to avoid public unrest over the escalating cost of living, as well as to counter Pakatan Rakyat’s (PR) attacks on the government’s previous plans to phase out subsidies.
Prime Minister Datuk Seri Najib Razak said on April 1 that the recent surge in the cost of living may force the government to slow subsidy cuts and that, while the government was committed to reducing the nation’s deficit, “we don’t want rising prices in Malaysia to be a major burden for the people”.
He has already announced the government’s willingness to fork out an additional RM4 billion in addition to the RM10 billion allocated for subsidies this year.
Analysts and politicians believe that problems affecting the economy — distorted and inefficient markets, lack of competition, low wages and a weak ringgit — will be the biggest problem for the Barisan Nasional (BN) administration as the country heads into the next general election, speculated to be held by year end.
comments
Strange indeed that the govt has to raise the price of gasoline and further cut subsidies. Let us be reminded that petroleum prices are based on US dollars and our ringgit has appreciated against the USD. It is illogical that today's USD 1 is now only Rm.3 or less. at the height of the critical rise in petrol is was about USD 148 which translated into Rm. is Rm.518 based on exchange of USD 1 to Rm.3.5. Now Petrol price is at USD110 which is only Rm. 330 per barrel, so why, how and where did our govt got the audacity to up the price at the pump?
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