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Asian countries subsidizing fuel hit hard by higher oil prices

KUALA LUMPUR : Higher oil prices are creating major problems for Asian countries which subsidize fuel costs, threatening economic growth if the subsidies are kept in place and consumer outrage if they are not.

Malaysia raised the price of fuel between seven percent and 23 percent last week in a bid to cut the soaring cost of government subsidies, but analysts warned the country could face a "double whammy" in the form of a slowdown in the growth rate and a hike in inflation.

Subsidies for petroleum cost the government 4.8 billion ringgit (1.2 billion dollars) last year and would reach 8.9 billion this year if prices were not increased to help cope with rising international oil costs, the government said.

A diesel shortage crippled Malaysia's transport industry last month after the government introduced a quota system in an attempt to curb smuggling of the heavily-subsidized fuel to neighbouring Thailand.

Thailand began subsidizing fuel in January 2004, but the scheme quickly became a budget-buster as world oil prices kept rising.

Petrol subsidies were scrapped after nine months, and the government in March reduced its diesel subsidy, sending prices at the pump jumping by 20 percent.

Thailand has spent 84.7 billion baht (2.1 billion dollars) on both petrol and diesel subsidies.

In India, the government has been trying to keep a cap on inflation in the face of rising global oil prices.

Fuel cost rises can be political dynamite in a country where around one quarter of the population of more than one billion live on less than a dollar a day, but oil subsidies weigh heavily on the Indian budget and attempts to contain a soaring budget deficit.

The government resorts to "off-budget" subsidies for specific products like diesel, kerosene and liquefied petroleum gas (LPG).

It subsidizes the cost of LPG and kerosene, used largely by India's rural poor, by charging more for gasoline used by more affluent car and vehicle owners.

But that hasn't managed to cover costs as demand for the cheaper fuel grows as companies and consumers mix it with gasoline.

The government estimated the cost of the subsidy at three billion dollars in the fiscal year ended March 31.

In Indonesia, despite strong opposition from the public and in parliament, the government increased fuel prices by between 22 and 47 percent to help cut costly subsidies as of March 1.

The price of kerosene, mainly used by low-income families for cooking and so a very sensitive commodity, was not raised.

Top economy minister Abu Rizal Bakrie said after the announcement that the cash-strapped government was forced to act after having to spend some 61 trillion rupiah (6.4 billion dollars) on subsidies in 2004.

The 2005 target for the subsidies was set at 39 trillion rupiah (4.2 billion dollars).

Last year's fuel subsidy spending exceeded the initial budget amount by more than four times because of higher than expected world oil prices.

The subsidies had also led to rampant smuggling to Singapore and to East Timor, officials and police have said.

The Asian Development Bank said last month that state subsidies on oil products were doing great harm and barely any good in India, Indonesia, Malaysia and Thailand.

The Manila-based ADB urged its four member-countries to scale back subsidies and align prices with the market.

"Current market conditions should be taken as an excellent reason to push through with reform, as the fiscal costs rise and as the escalation in the oil price may be more than just transitory," it said in its annual publication Asian Development Outlook.

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