No escape from fuel price hike

Although the government can still maintain the current fuel prices, it will eventually have to increase them, analysts believe.

KUALA LUMPUR: The hotly-debated fuel price hike will eventually happen despite the government’s promise that it would not cut subsidies for RON95 petrol, diesel, and liquefied petroleum gas (LPG), economists say.

However, they think it will not happen soon due to the coming general election.

Prominent economist and director of the Asian Strategy and Leadership Institute (ASLI) Ramon Navaratnam said that the government was caught in a bind.

“On the one hand, it must take more strenuous steps to cut down the deficit, and on the other, it may not be politically proper to remove subsidies before the general election.”

He added that one possible escape from this dilemma would be to devise a system which would tax the higher income groups but exempt the lower income earners.

The government could also impose different charges for fuel consumption, with owners of cars with bigger cubic capacity paying more, he said.

Navaratnam said that another alternative was to issue green stamps for basic needs as is practised in the US.

“This isn’t a new idea; we are not asking the government to reinvent the wheel.”

‘Difficult to trim deficit’

Chris Eng, head of research at OSK Holdings Bhd, said that although the current subsidy rate could be maintained for a few more years, the cost would be great.

Prime Minister Najib Tun Razak said recently that the government has estimated the fuel subsidies to cost the economy RM11 billion this year but that the estimate had soared to around RM18 billion because of high international crude oil prices.

Najib has also said that the government aims to reduce the deficit this year to 5.4% from 5.6%, then down to 2.8% by 2015.

Said Eng: “If the government intends to lower the budget deficit, it has to get rid of the subsidies… but would it be politically sound?”

He said that although the government has promised to review fuel subsidies if crude oil prices exceeded US$110 per barrel, the review should be carried out now.

“It is quite possible that oil will exceed US$110 at some point within the next six months.”

RAM Holdings Bhd chief economist Yeah Kim Leng agrees, saying that oil price could range from US$90 to US$110.

“It is quite likely that the world oil price will increase in view of the continuing turmoil in the Middle East and potential interruption to the global supply, as well as rising demand from fast emerging economies.”

If subsidies are not cut, the government will find it exceedingly difficult to achieve its target of trimming its budget deficit from 5.6% to 5.4%, he said.

“The other option is for the government to cut back on spending in other areas, for example in operating expenditure and discretionary spending. Selling off assets, privatisation, finding other sources of revenue – these are all possibilities.”

On May 25, the government decided to maintain the prices of RON95 petrol, diesel and LPG for the time being. The prices of fuel were revised upwards last December.