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Malaysia commits to fuel subsidy cuts

17 Jun 2010 05:52 (+01:00 GMT)

Singapore, 17 June (Argus) — Malaysia has given the clearest signal yet that it intends to cut its costly fuel subsidies, with its latest national economic plan aiming for subsidies and price controls to be “gradually rationalised to remove market distortions”.

The 2011-15 Malaysia Plan also aims for achieving market pricing by 2015. Malaysia's subsidies, which also include food, are a major drag on the country's finances, amounting to 4.7pc of GDP.

As Malaysia's economy has stalled with the global economic slowdown, the contributions of state-owned oil firm Petronas' have become more important to shoring up the country's subsidies. Petronas, already the main contributor to Malaysia's budget, heavily subsidises domestic motor fuel and natural gas prices. This contributed to a 14pc fall in its 2008-09 profit from a year earlier to $15bn. The company had to pay $8.5bn to the government to help pay for fuel subsidies, on top of a natural gas subsidy of $5.5bn.

Malaysia's subsidy bill hit its peak in 2008 when oil prices were at an all-time high around $147/bl. The cost of fuel subsidies then rose to 53bn ringgit/yr ($16.2bn/yr), a third of government spending, forcing the administration of then prime minister Abdullah Badawi to implement unpopular energy price hikes.

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