KUALA LUMPUR (Reuters) – Malaysia will abolish subsidies for petrol and diesel from Dec 1, the government said on Friday, taking a bold step that could potentially save the government some 20 billion ringgit ($5.97 billion) annually.
Malaysia joins Indonesia and India in cutting fuel subsidies amid a sharp decline in oil prices, ending decades-long policies of cheap fuel that have contributed to fiscal deficits.
Prime Minister Najib Razak has pledged to beef up Malaysia’s public finances by cutting expenditure and subsidies, as well as expanding the tax base by implementing a six per cent goods and services tax from April next year.
The price of the widely used RON95 grade of petrol and diesel will be fixed according to an automatic managed float – a system that adjusts prices according to the market rate, the same mechanism as for the price of premium petrol RON97, the Domestic Trade, Cooperatives and Consumerism Minister Hasan Malek said on Friday.
Economists have said a window has opened up for Southeast Asia to consider dismantling generous subsidies as global crude prices sink to multi-year lows.
“It’s very positive for the (Malaysian) budget,” Edward Lee, Standard Chartered’s Regional Head of Research for Southeast Asia, told Reuters.
“Then the fiscal deficit will fall to one per cent of gross domestic product in 2015, from three per cent. And that’s quite impressive.”
In recent years, Malaysia has shielded its citizens from the full brunt of surging crude oil prices with fuel subsidies of around 24 billion ringgit ($7.34 billion) annually.
That had exacerbated the government’s budget deficit, one of the region’s biggest as a proportion of gross domestic product.
The Malaysian currency climbed 0.37 per cent against the US dollar on Friday, the highest among Asian currencies.
The benchmark stock index ended 0.72 per cent lower.
Economists said the government’s decision could drive up inflation next month but this would likely be capped due to the slump in global oil prices.
“Inflation might pick up in December but gains are likely to be transient,” ANZ said in a note.