Malaysia to keep cutting subsidies

Malaysia Today
12 April 2006


Malaysia to keep cutting subsidies

Malaysia’s government will keep reducing subsidies on fuel, moving
closer to allowing markets to set prices, said Effendi Norwawi,
minister in the prime minister’s department.

“The principle of this administration is to move away from subsidies
as soon as it is practical,” Effendi, 59, said in an interview. The
government wants prices to be more “market driven,” he said.

Prime Minister Abdullah Ahmad Badawi raised government-controlled
fuel prices five times since May 2004, allowing him to trim subsidies
paid to oil companies, and cut the budget deficit.

February’s fuel price increase of as much as 23% allowed the
government to lower subsidy payments by about 4.4bn ringgit ($1.2bn).
Abdullah doesn’t plan any more increases this year.

Malaysia, a developing economy, will cut subsidies in stages to avoid
driving up inflation and hurting the poor, Effendi said.

Abdullah also has reduced spending on large-scale projects the past
two years to lower the budget deficit to 3.8% of gross domestic
product in 2005 from 5.3% in 2003.

He may be back-tracking on those efforts after announcing a spending
increase in the next five years, said Joseph Tan, an economist at
Standard Chartered Bank in Singapore.

The prime minister last month forecast an 18% gain in public
development spending to 200bn ringgit between 2006 and 2010 from the
previous five-year period. The March 31 announcement of the Ninth
Malaysia Plan was Abdullah’s first five-year development plan since
taking office in 2003.

He didn’t set a target for balancing the budget, instead forecasting
the deficit would fall to 3.4% of GDP by 2010.

“This projected deficit is the first confirmation that Malaysia has
abandoned its goal of balancing the budget,” said Tan in an April 5
research note. “With these projections, it is unlikely that rating
agencies will raise Malaysia’s sovereign credit rating from current
levels in the near future.”

Standard & Poor’s raised Malaysia’s long-term foreign-currency credit
rating one level to A-, the seventh-highest of 10 investment grades,
in October 2003. – Bloomberg