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The Associated Press July 16, 2010, 2:34AM ET

Malaysia cuts fuel, sugar subsidies in risky move

Malaysia cut fuel and sugar subsidies Friday, the first in a series of "difficult" reforms aimed at saving the government more than 750 million ringgit ($230 million) this year to curb its swollen budget deficit.

However, analysts warned the move was politically risky for Prime Minister Najib Razak, who has struggled to shore up support for his National Front coalition ahead of general elections due by 2013.

In a statement late Thursday, Najib's office said cutting subsidies was part of "difficult but long-needed economic reforms" to shrink its fiscal deficit and help Malaysia become a developed nation, without overburdening the people.

It said subsidies had become ineffective and a barrier to Malaysia's progress as it benefited foreigners, the rich and big businesses rather than the poor, as well as encouraged smuggling to neighboring countries where prices are higher.

"Moving forward, additional, gradual and reasonable changes will be made to our subsidy regime to ensure that Malaysia is able to meet its development goals," it said.

"These measures are a demonstration of our fiscal responsibility. They will enhance Malaysia's financial stability, while also protecting (people)," it added.

Fuel prices rose by about 3 percent Friday, with a liter of petrol costing 1.85 ringgit (57 cents) and diesel 1.75 ringgit (55 cents). Liquefied petroleum gas was up 6 percent to 1.85 ringgit (57 cents) per kilogram. Sugar rose 15 percent to 1.90 ringgit (59 cents) a kilogram. Higher grade petrol will no longer be subsidized.

Even after the cuts, Najib's office said the government will still spend an estimated 7.82 billion ringgit ($2.44 billion) on fuel and sugar subsidies this year, and prices in Malaysia will still be among the lowest in the region.

It gave an assurance that the government will continue to subsidize education and health care, providing training, scholarships and cheaper medical services.

Malaysia's fiscal deficit hit a 20-year high of 7 percent of gross domestic product last year. The government hopes to trim it to 5.3 percent this year and 2.8 percent by 2015 through fuel and other subsidy cuts in the next five years.

Ibrahim Suffian, director of independent research firm Merdeka Center, said Najib could face political fallout from the subsidy cuts, particularly among working-class voters.

"We will see a slight drop in support ... (but) at present it's manageable. It depends what is next," Ibrahim said.

Najib is seeking to woo back voters who abandoned his ruling coalition during 2008 general elections, denying it its usually vast victory margin amid public anger over racial and religious disputes, inflation and corruption. The next elections are due in 2013 but Najib, who took over the helm in April last year, is widely expected to call them earlier.

The economy has rebounded from a recession in 2009 and is forecast to grow 6 percent this year after expanding 10.1 percent year-on-year in the first quarter, its fastest pace in a decade.

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