By Chan Quan Min
Another round of mid-year petrol price hikes is inevitable, economists say, if the government is to meet its 2014 Budget promise to cut RM7.3 billion or 16% in spending on subsidies this year.
“We anticipate further reduction in petrol subsidy in mid-2014 in line with the government’s subsidy rationalisation plans,” AmResearch economist Patricia Oh Swee Ling said today, reiterating similar statements made in March.
Oh’s prediction is for a 20 sen a litre increase in the price of diesel and RON95 petrol, similar to the increase put through by the government last September.
For prime minister Najib Abdul Razak, who has often been apprehensive on painful but necessary reforms to narrow the fiscal deficit, the time could not be more ideal.
Inflation rates have stabilised over the past few months, making further subsidy cuts more palatable.
“The stabilising rates will allow the government to add price pressure to the system,” prominent economist and Malaysia University of Science and Technology dean of business school Yeah Kim Leng said.
Inflation rates started increasing in October 2013 after the first round of post-election subsidy rationalisation measures involving the elimination of the sugar subsidy and the 20 sen petrol hike to current rates. This was followed by a Jan 1 adjustment of electricity tariffs.
Between February to April inflation rates have averaged at or just under 3.5%.
Lower allocation for subsidies this year
Najib’s government has budgeted a lower amount of RM39.4 billion to go towards subsidies this year and could blow that budget if further subsidy cuts do not go according to plan, Oh told KiniBiz.
In March, Oh estimated savings of RM2.2 billion from a possible mid-year petrol price hike of 20 sen a litre. Together with savings from an earlier cut in September 2013, total savings could amount to approximately RM5.2 billion, not far off from the government’s budget promise of a RM7.3 billion cut in spending on subsidies this year.
Other avenues to meet the reduction in the subsidies bill could be cutting food subsidies, but fuel costs make up over half of spending on subsidies.
Also as inevitable as further subsidy cuts this year is a spike in inflation resulting from those same cuts.
“Monthly headline inflation will likely soar during the middle of the year before prices ease towards the later part of 2014,” Oh said.
This is because transport costs has a heavy weightage on the consumer price index of 15%, Oh shared.
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