Malaysia Raises Fuel Prices as Najib Seeks to Narrow Deficit

By Manirajan Ramasamy

Malaysia raised fuel prices for the first time in more than a year as Prime Minister Najib Razak seeks to narrow the budget deficit.
The price of the widely used RON 95 grade of gasoline rose by 20 sen to 2.30 ringgit ($0.71) a liter effective today, while diesel climbed by the same amount to cost 2.20 ringgit a liter, the government said in a statement yesterday. Even with the increases, Malaysia said it will spend more than 21 billion ringgit this year on fuel subsidies.
Najib has pledged to improve Malaysia’s fiscal position through cuts in subsidies and government expenditure, and by broadening the tax base. Inflation (MACPIYOY) in Southeast Asia’s third-biggest economy accelerated at
the fastest pace since 2011 earlier this year, and the central bank forecasts price gains will quicken with the implementation of a goods and services tax from April 1.
“The move is in line with the larger fiscal consolidation plan Malaysia has been pursuing,” said Rahul Bajoria, a Singapore-based economist at Barclays Plc. “While it will lead to short-term increase in inflation, from a long-term perspective, it gives significant room to run counter-cyclical fiscal policy.”

Ringgit Surge

The ringgit advanced as much as 0.7 percent to 3.2510 against the U.S. dollar today, leading gains in Asian currencies. It had the biggest monthly drop in more than two years in September as the greenback surged on signs the Federal Reserve is moving closer to raising U.S. interest rates. The decision to raise fuel prices should help the ringgit stabilize over coming weeks, Bajoria said.
Malaysia will increase cash handouts to the low-income under the BR1M program to help them cope with higher costs when the budget for 2015 is unveiled next week, the government said yesterday. It may boost such transfers by 2 billion ringgit to 3 billion ringgit, Citigroup Inc. economist Kit Wei Zheng wrote in a report today.
“The fuel price increase will help reduce leakage and smuggling activities by irresponsible groups,” the government said. “These measures will result in savings that can be put to more productive use such as spending on education and health care, a better and wider public transportation system, and on the country’s security.”
Before the latest adjustment, Malaysia was among the 10 cheapest places to buy gasoline in a Bloomberg ranking of 61 countries using data as of April. Malaysians use about 2.4 percent of their income on fuel, the data showed.
The inflation rate was 3.3 percent in August, quickening from a 3.2 percent pace in July. Malaysia’s central bank kept its benchmark interest rate unchanged last month after an increase in July and said it will assess the balance of risks between the outlook for growth and inflation when considering further policy moves.
Malaysia narrowed the fiscal deficit to 3.9 percent of gross domestic product in 2013, and Najib wants to further trim the gap to 3.5 percent this year and 3 percent in 2015, heading toward a balanced budget by 2020.