Malaysia Aims To Hold Fuel Prices Steady

Malaysia pledged on Tuesday to keep fuel prices unchanged under a review of energy subsidies to be finalised this year, which will look at ways to curb waste and fuel smuggling.

Cheap energy underpins the economy, but Malaysians' addiction to subsidised fuel has led to pollution and waste. It's common, for instance, for office buildings to keep lights and air conditioners running during the night after workers have left for the day.

"We have to think of how to cut out wastage, how to cut out abuses and therefore the subsidy is better spent," Domestic Trade Minister Shahrir Samad told Reuters in an interview.

"The idea is to keep the pump price level at the same level but reduce the subsidy by improving the system," he said, adding one option could be to impose quotas on fuel purchases.

Subsidies keep Malaysian pump prices among Asia's lowest but they have ballooned as world crude oil prices soared to record levels, putting pressure on government finances. Benchmark U.S. crude prices hit a fresh record above $112 a barrel on Tuesday.

The state's resolve to restructure fuel subsidies had been in doubt after voters punished the government for rising prices during the March 8 poll, which saw the ruling coalition suffer its worst ever election setback.

But Shahrir said the authorities would push ahead with a review this year and were studying ways to ensure subsidies went only to the deserving. The government wanted a system "so that the subsidy becomes more targeted, more focused and goes to the groups who actually deserve it," he said.

The minister said subsidies would be aimed at lower-income Malaysians and the transport sector to help keep retail prices down.

SPENDING THREAT

That could help take some of the sting out of inflation, which was running at a one-year high of 2.7 percent in February owing to the global phenomenon of rising food prices, although economists suggest inflation will rise further this year.

The prospect of steady fuel prices eased inflation concerns and helped to support bond prices, said a bond trader with a local bank.

Malaysia is a net oil exporter and the government gains an extra $75 million a year in revenue for every $1 rise in the price of crude.

But higher oil prices also means more government spending on subsidies. The government has warned that it may have to forgo spending on some development projects to pay for rising subsidies.

Shahrir said that with oil at $110 per barrel, Malaysia would spend 18 billion ringgit ($5.70 billion) this year to maintain fuel subsidies, more than double last year's spending of 8.7 billion ringgit.

The inflation threat from rising oil prices could also threaten economic growth, some analysts have said, as consumers and businesses reduce spending.

Domestic demand has been a key factor in propping up Malaysia's economy, which expanded 7.3 percent in the fourth quarter of 2007 from the same year-earlier period -- the strongest growth in more than three years.

CHEAP FUEL

Shahrir said the government would save half a billion ringgit in subsidy costs if it could eliminate fuel smuggling and fuel purchases by foreign motorists.

However, it will be a struggle for the government to eliminate smuggling if it keeps pump prices at current levels, said HSBC economist Robert Prior-Wandesforde. "Relative to Singapore or relative to Thailand, prices are going to become more and more out of line so the danger of smuggling must presumably increase under those circumstances," he said.

Shahrir said options being considered to ensure subsidies benefit only the needy include requiring Malaysians to produce their national identity cards when they buy fuel and the imposition of quotas on purchases.

"With the fuel subsidy, there is no accompanying strategy to conserve the use of fuel," Shahrir said. "We subsidise the fuel, yet we don't encourage Malaysians to be more thrifty in the use of fuel. It's self-defeating."

The minister said the government was working on a plan to ensure adequate supply of food items to help keep prices stable.

The authorities would need to budget about 5 billion to 10 billion ringgit for food subsidies this year, he said.

In 2007, food subsidies were minimal, with the government spending 30 million ringgit a month to subsidise flour and white bread from October, Shahrir said.

"We have to be prepared to have a food subsidy plan, a food subsidy budget so that we can absorb the increase in prices," he said.
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