June 2, 2008 / 2:15 PM / 11 years ago

UPDATE 2-Malaysia to reform fuel subsidies

(Recasts throughout)

By Niluksi Koswanage

KUALA LUMPUR, June 2 (Reuters) - Malaysia will embark on a revamp of its fuel subsidy scheme this week that may lead to higher petrol and diesel prices later in the year, a government minister said on Monday.

Its government could become the latest in Asia to ease its ballooning subsidy bill before the pressure from record crude oil prices leaves cracks on spending, but it needs to tread carefully to avoid deepening its unpopularity.

Domestic Trade Minister Shahrir Samad told Reuters Malaysia will take the first step towards reforming its fuel subsidy system on Wednesday.

“This announcement is an incremental step towards the total restructuring in fuel subsidies in August,” Shahrir said. “Wednesday’s announcement will be an indication of the direction we will take.”

Although he declined to give details, local media have reported the proposals may include direct cash income subsidies and quotas for Malaysians.

Shahrir earlier told reporters that Malaysia will eventually raise pump prices for petrol and diesel in August but subsidies will remain for the poor.

“Petrol prices will increase,” he said, without specifying how much prices would rise.

“I think the idea is August this year when the subsidy (scheme) is restructured. The prices will rise with the proviso that subsidies will be enjoyed by all not on the basis of use, but need.”

CHEAP FUEL

Fuel prices in Malaysia are among the cheapest in Asia, with petrol selling for just 1.92 ringgit (60 U.S. cents) a litre, less than half the price in neighbouring Singapore.

Malaysia is a net oil exporter and gains from high oil prices, reaping 250 million ringgit ($77.6 million) a year in revenue for every $1 rise in crude prices.

But the government’s fuel subsidy bill also has jumped along with skyrocketing crude prices, pushing it to find ways to ease the burden on its finances.

Domestic fuel prices in developing countries remain capped despite the doubling of oil prices in the last 12 months. Subsidies allow consumers to continue guzzling oil, pushing up world prices.

But this is changing — Indonesia and Taiwan cut fuel subsidies last month and India is also poised to take action. In Sri Lanka, President Mahinda Rajapaksa proposed floating fuel prices and suspending import of vehicles for one year, local media reported.

Malaysia’s Shahrir told reporters fuel subsidies would total 55-56 billion ringgit in 2008 at current oil price levels, which are hovering around $127 per barrel.

Bond and stock traders said financial markets had already priced in a likely price hike and were now awaiting details of the new fuel subsidy mechanism.

Shahrir did not give details on how the new subsidy scheme would work or whether the reforms would involve minor changes or a major overhaul.

The minister had previously suggested requiring motorists to produce their Malaysian identification cards when filling up to ensure that only locals get the subsidies.

A sharp fuel price hike would increase inflation — which already stood at a 15-month high of 3.0 percent in April — and could further stoke voter anger against Prime Minister Abdullah Ahmad Badawi’s government, which is battling criticism that it has not been effective in cushioning Malaysians against rising prices.

Shahrir also said Malaysia would begin a temporary ban on fuel sales to foreigners from its southern Johor state, a short distance from Singapore, from June 9.

The government had already begun a similar ban at filling stations near the Thai border, he said.

Hundreds of Thai and Singapore motorists cross the border daily to fill up their tanks with cheaper Malaysian fuel. ($1=3.222 Ringgit) (Additional reporting by Faisal Aziz in KUALA LUMPUR, Shihar Aneez in COLOMBO> (Writing by Liau Y-Sing) ((niki.koswanage@thomsonreuters.com; +603 2333 8035; Reuters Messaging: niki.koswanage@reuters.net))

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