Malaysia axes fuel subsidies as oil prices drop

AP News
Posted: Nov 21, 2014 6:22 AM

KUALA LUMPUR, Malaysia (AP) — Malaysia's government said Friday it will completely withdraw fuel subsidies from next month following the plunge in global oil prices.

Domestic Trade Minister Hasan Malek said fuel prices will now be set at the end of every month based on a monthly average price under a "managed float" system from Dec. 1.

He said the move will allow Malaysians to enjoy the full benefits of the fall in global crude prices. Last year, the government spent 23 billion ringgit ($6.7 billion) on fuel subsidies.

The world oil price has plummeted 31 percent in just five months, a sharp drop after a four-year period of prices near or above $100 a barrel. On Thursday, benchmark U.S. crude was about $76 a barrel.

Neighboring Indonesia on Monday sharply raised fuel prices, saying costly government subsidies would be better spent on infrastructure and development.

Economists welcomed Malaysia's move, which was unexpected.

"Subsidy is a major price distortion in the economy, so it's a big thumbs-up," said Wan Suhaimi Saidie, economist with Kenanga Investment Bank. "The timing is right, there is no other better time than now to do this. The impact will not be as painful for the man on the street."

Currently, gasoline is fixed at 2.30 ringgit (69 cents) a liter and diesel at 2.20 ringgit (66 cents) a liter.

Hasan said fuel prices could be even cheaper based on the managed float system. For example, he said the average gasoline price from Nov 1-19 was 2.27 ringgit (68 cents) a liter.

While saving on subsidies, economists said the fall in oil and commodity prices was negative for Malaysia, which is a major exporter of oil, palm oil and rubber. The economy has already been under pressure due to rising domestic debt, a swollen fiscal deficit and a shrinking current account surplus.