Malaysia to Cut Fuel Subsidy `Soon,' Raising Costs

Malaysia said it plans to announce cuts to a 53 billion-ringgit ($16.5 billion) fuel subsidy in ``in a couple of months,'' a move that may raise costs and fan accelerating inflation.

The government wants to introduce a new petroleum subsidy arrangement ``as soon as possible'' to reduce the bill, Second Finance Minister Nor Mohamed Yakcop said today.

Malaysia's inflation rate is at a 14-month high, and voter dissatisfaction with rising prices contributed to the government's worst election result in March. Still, the cost of the handout deprives state oil company Petroliam Nasional Bhd. of funds as the country runs out of oil reserves.

``We cannot give it all away as subsidies,'' Nor told reporters in Singapore. ``This income from Petronas will not last forever. By 2014, we could be a net importer of oil.''

Crude oil today rose to a record above $135 a barrel in New York after U.S. stockpiles unexpectedly dropped. Oil has risen 19 percent this month. The government's subsidy bill would reach 53 billion ringgit this year with oil at $130 a barrel, Nor said.

A spokesman for Petronas, as the oil company is known, didn't immediately reply to a message left on his phone or to an e-mail. Petronas spokesmen typically can't be named.

Neighboring Indonesia, which also subsidizes fuel, plans to increase prices for the first time in almost three years to trim its subsidy bill.

Budget Deficit

The cost to the Malaysian state of keeping domestic natural gas, petrol and diesel prices artificially low in 2007, including direct subsidies and taxes foregone, was 35 billion ringgit, the government has said.

Surging fuel costs may also make it harder for Prime Minister Abdullah Ahmad Badawi to narrow the government's budget deficit to 3.1 percent of gross domestic product this year.

The cost of providing fuel subsidies was the biggest problem facing Malaysia and inflation was not a ``major issue,'' Nor said today.

Inflation is likely to exceed 3 percent this year, the minister said. Consumer prices increased 3 percent in April from a year earlier on rising food costs. The central bank forecast in March inflation in Southeast Asia's third-largest economy would average 2.5 percent to 3 percent in 2008.

Steel, Rice

Malaysia's government this month eased import restrictions on steel and capped the price of more types of rice to contain inflation.

The government may consider imposing a ``windfall tax'' to curb inflation, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad said yesterday, without elaborating. Nor said today he isn't aware of the windfall tax proposal.

Prime Minister Abdullah, facing calls from some of his own party members to step down, has avoided increasing local fuel costs so far this year even as record oil prices force the government to pay more in subsidies to keep pump prices low.

Instead, the government said in April it may introduce more expensive gasoline that isn't subsidized as much as lower grade fuel to reduce its subsidy costs.

Nor didn't give details on the new subsidy arrangements, saying the mechanism still needs to be worked out.

Jean Chua
Bloomberg
Singapore