The Malaysian Insider | May 25, 2011

KUALA LUMPUR, May 25 — Subsidy cuts will top the agenda when Datuk Seri Najib Razak chairs the weekly Cabinet meeting today, with many speculating it will lead to hike for RON95 petrol and electricity rates.

Cabinet sources say the government has to trim the runaway subsidy bill which could balloon to RM21 billion if nothing is done.

On the table is the scheduled plan to cut subsidies for RON95 petrol and gas for independent power producers while increasing electricity tariffs in a growing economy.

Labs run by Performance and Management Delivery Unit (Pemandu) last year proposed 15 sen hikes every six month for RON95 petrol but the government decided to stick to 10 sen, ensuring a slow rise in the fuel’s prices.

“What has happened is that the high RON97 prices has pushed more people to use RON95, increasing the subsidy bill further,” a Cabinet source told The Malaysian Insider.

RON95 petrol is now RM1.90 a litre while the premium RON97 fuel is floated at market price of RM2.90 a litre, making it a great saving for motorists but a bigger share of the national budget.

The Malaysian Insider understands it is the same for electricity tariffs which should have been increased months ago but postponed to ensure the economy keeps growing at a quicker pace.

Pemandu’s proposal last year was to initially cut gas subsidy by RM4.65 per mmbtu and then set a corresponding 2.4 sen per kWh increase in tariffs in July 2010, followed by a 1.6 sen per kWh increase every six months.

But the gas subsidy and electricity tariffs have remained the same due to long-term deals between Tenaga Nasional Berhad, Petronas and the IPPs.

“Cutting the subsidy won’t bring down electricity rates because Tenaga is already paying too much,” the Cabinet source said.

Bloomberg quoted Manokaran Mottain, senior economist at AmResearch Sdn Bhd, today as saying price hikes are inevitable.

“The government is in a difficult position,” said Manokaran, who expects the government to raise the price of RON95 petrol by as much as 20 sen a litre after the subsidy review.

“If the government does not do anything now, it has no other choice but the fiscal deficit will be widening,” he added.

Inflation rose to a two-year high of 3.2 percent in April after the government cut subsidies on fuel and sugar in December, boosting retail prices. The central bank raised interest rates for the first time since July this month.

The Consumer Sentiment Index moderated to 108.2 in the first quarter from 117.2 in the fourth quarter of 2010, partly due to accelerating inflation, the Malaysian Institute of Economic Research said April 14.