KL scraps decades-old fuel subsidy policy
22 Nov 5:50 AM
Kuala Lumpur
MALAYSIA will abolish subsidies for petrol and diesel starting next month as falling oil prices provide Prime Minister Najib Razak the opportunity to end a decades-old policy of cheap fuel.
The cost of the widely used RON 95 grade of petrol and diesel will be based on a managed float system from Dec 1, the government said in a statement on Friday. The ringgit rose.
A decline in global fuel prices is giving countries including Malaysia, India and Indonesia the chance to scale back subsidies that have contributed to fiscal deficits. Reduced borrowing requirements may help emerging markets weather capital-flow disruptions as the US moves towards raising interest rates next year.
"This is a great move," said Chua Hak Bin, an economist at Bank of America Merrill Lynch in Singapore. "This is a very small window of opportunity given the collapse in international fuel prices, which have basically fallen to the subsidised domestic fuel prices. So if you do it now, it doesn't show up in the sticker price at the pump."
The Malaysian ringgit rose 0.3 per cent against the US dollar on Friday, the biggest gainer among Asian currencies. It has declined about 5.5 per cent in the past three months as strategists cut their forecasts for the currency on concern that the nation is vulnerable to a selloff. The FTSE Bursa Malaysia KLCI Index of shares dropped 0.7 per cent.
Mr Najib has pledged to improve Malaysia's fiscal position through cuts in subsidies and government expenditure, and by broadening the tax base. Inflation in Southeast Asia's third-biggest economy is accelerating, and the central bank forecasts price gains will quicken with the implementation of a goods and services tax from next April 1.
"Through the managed float, the average change in the cost of the product will determine pricing for the next month," according to the Ministry of Domestic Trade, Co-operatives and Consumerism. "This means that if the market price of crude oil increases, the retail price of RON 95 and diesel will also increase. And vice versa."
Malaysia narrowed the fiscal deficit to 3.9 per cent of GDP in 2013, and Mr Najib wants to further trim the gap to 3.5 per cent this year and 3 per cent in 2015, heading towards a balanced budget by 2020. Bloomberg
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