Malaysia revamps energy price system, risks backlash
By Soo Ai Peng
The Guardian, UK
Wednesday June 4 2008
PUTRAJAYA, Malaysia, June 4 (Reuters) - Malaysia announced on Wednesday a broad overhaul of its energy price system, sharply raising fuel and gas prices but taxing palm oil and power producers in a move that would drive inflation to a 10-year high.
The reforms would save the government 13.7 billion ringgit ($4.23 billion) but risk further stoking public anger against Prime Minister Abdullah Ahmad Badawi, already fighting for his political survival. Petrol prices would rise 41 percent to 2.70 ringgit a litre and diesel 63 percent to 2.58 ringgit from Thursday, Abdullah said, in a reform that would eventually lift Asia's second-cheapest pump prices to market rates.
Power distributor Tenaga Nasional's tariffs would go up by as much 26 percent while the price of gas supplied by state oil firm Petronas to the power sector would be more than doubled, he said.
"We try our best," Abdullah told reporters in the country's administrative capital near Kuala Lumpur.
"This is not an attempt to be popular, we cannot satisfy everybody, naturally people will not be happy."
The government has said it plans to start using global market rates for fuel in August to prevent subsidies from eating up a third of its budget.
Malaysia would save 4 billion ringgit on fuel subsidies and twice as much by raising the price of natural gas, Abdullah said. That would lift inflation this year to between 4 percent and 5 percent, he added, making it the highest rate since 5.3 percent in 1998. Inflation last year was 2 percent.
"Malaysia started with one of the lowest inflation rates in the region, so maybe they can be a bit more patient, but I think by the end of the year, they'll probably have to raise interest rates," said economist David Cohen of Action Economics.
Annual inflation hit a 15-month high of 3.0 percent in April. Malaysia's key policy rate is one of the region's lowest.
Malaysia follows other countries such as Indonesia and India in lifting fuel prices, in a nod to the growing strain of record oil prices on state finances.
SUPPORT
The government would also impose a windfall tax on independent power producers and palm oil millers, which could affect plantation firms such as Sime Darby and IOI Corp. To cushion the blow on a population accustomed to pump prices less than half those in neighbouring Singapore and significantly lower than in the United States, the government is planning cash handouts for motorcyclists and small car owners, Abdullah said.
Still, Tricia Yeoh, director of the Center for Public Policy Studies in Kuala Lumpur, said the increase in fuel prices could spark dissatisfaction among Malaysians.
"We may see protests similar to the ones that took place in March 2006, when petrol prices were last raised.
"The masses obviously would not be happy with this despite the fact that the government needed to do this," she said. "People do not see this being matched by a plan that will help them meet the growing cost of living."
Oil's rise to records above $130 a barrel has forced governments from Jakarta to New Delhi to risk public discontent and consider reforms to subsidies that are draining their coffers.
India raised fuel prices by 10 percent on Wednesday in the biggest increase this decade.
In Asia only Myanmar has slightly lower pump prices than Malaysia, although sales in Myanmar are rationed to two gallons per car a day. Domestic Trade Minister Shahrir Samad said on Wednesday all fuel price controls would be scrapped by August. Based on the latest floating market prices in Singapore, the Asian oil trading hub, Malaysian prices would have to rise 69 percent to 86 U.S. cents a litre of petrol and 157 percent to $1.08 for diesel.
Malaysia is a net oil exporter and earns 250 million ringgit a year in revenue for every $1 rise in crude prices.
Shahrir had earlier said the fuel subsidy would cost the government as much as 56 billion ringgit this year based on current crude oil prices, or about a third of government expenditure in 2008. ($1=3.242 Malaysian ringgit) (Reporting by Liau Y-Sing; editing by Neil Fullick and Jerry Norton)
By Soo Ai Peng
The Guardian, UK
Wednesday June 4 2008
PUTRAJAYA, Malaysia, June 4 (Reuters) - Malaysia announced on Wednesday a broad overhaul of its energy price system, sharply raising fuel and gas prices but taxing palm oil and power producers in a move that would drive inflation to a 10-year high.
The reforms would save the government 13.7 billion ringgit ($4.23 billion) but risk further stoking public anger against Prime Minister Abdullah Ahmad Badawi, already fighting for his political survival. Petrol prices would rise 41 percent to 2.70 ringgit a litre and diesel 63 percent to 2.58 ringgit from Thursday, Abdullah said, in a reform that would eventually lift Asia's second-cheapest pump prices to market rates.
Power distributor Tenaga Nasional's tariffs would go up by as much 26 percent while the price of gas supplied by state oil firm Petronas to the power sector would be more than doubled, he said.
"We try our best," Abdullah told reporters in the country's administrative capital near Kuala Lumpur.
"This is not an attempt to be popular, we cannot satisfy everybody, naturally people will not be happy."
The government has said it plans to start using global market rates for fuel in August to prevent subsidies from eating up a third of its budget.
Malaysia would save 4 billion ringgit on fuel subsidies and twice as much by raising the price of natural gas, Abdullah said. That would lift inflation this year to between 4 percent and 5 percent, he added, making it the highest rate since 5.3 percent in 1998. Inflation last year was 2 percent.
"Malaysia started with one of the lowest inflation rates in the region, so maybe they can be a bit more patient, but I think by the end of the year, they'll probably have to raise interest rates," said economist David Cohen of Action Economics.
Annual inflation hit a 15-month high of 3.0 percent in April. Malaysia's key policy rate is one of the region's lowest.
Malaysia follows other countries such as Indonesia and India in lifting fuel prices, in a nod to the growing strain of record oil prices on state finances.
SUPPORT
The government would also impose a windfall tax on independent power producers and palm oil millers, which could affect plantation firms such as Sime Darby and IOI Corp. To cushion the blow on a population accustomed to pump prices less than half those in neighbouring Singapore and significantly lower than in the United States, the government is planning cash handouts for motorcyclists and small car owners, Abdullah said.
Still, Tricia Yeoh, director of the Center for Public Policy Studies in Kuala Lumpur, said the increase in fuel prices could spark dissatisfaction among Malaysians.
"We may see protests similar to the ones that took place in March 2006, when petrol prices were last raised.
"The masses obviously would not be happy with this despite the fact that the government needed to do this," she said. "People do not see this being matched by a plan that will help them meet the growing cost of living."
Oil's rise to records above $130 a barrel has forced governments from Jakarta to New Delhi to risk public discontent and consider reforms to subsidies that are draining their coffers.
India raised fuel prices by 10 percent on Wednesday in the biggest increase this decade.
In Asia only Myanmar has slightly lower pump prices than Malaysia, although sales in Myanmar are rationed to two gallons per car a day. Domestic Trade Minister Shahrir Samad said on Wednesday all fuel price controls would be scrapped by August. Based on the latest floating market prices in Singapore, the Asian oil trading hub, Malaysian prices would have to rise 69 percent to 86 U.S. cents a litre of petrol and 157 percent to $1.08 for diesel.
Malaysia is a net oil exporter and earns 250 million ringgit a year in revenue for every $1 rise in crude prices.
Shahrir had earlier said the fuel subsidy would cost the government as much as 56 billion ringgit this year based on current crude oil prices, or about a third of government expenditure in 2008. ($1=3.242 Malaysian ringgit) (Reporting by Liau Y-Sing; editing by Neil Fullick and Jerry Norton)