Malaysia cuts fuel subsidies to fund welfare

KUALA LUMPUR, Malaysia (AP) — Malaysia’s government said Monday it will cut fuel subsidies for the first time in nearly two years to save 3.3 billion ringgit ($1 billion) annually as part of crucial budget reforms.

Prime Minister Najib Razak said the reductions are needed to trim the budget deficit and strengthen economic fundamentals to boost investor confidence. The financial markets of some Asian countries have come under pressure as the anticipated scaling back of U.S. monetary stimulus spurs capital outflows from the region.

Najib, who is also finance minister, said the government will cut the gasoline subsidy by 20 sen (6 cents) to 63 sen (19 cents) a liter and diesel by 20 sen to 80 sen a liter from Tuesday.

Malaysia spends 24.8 billion ringgit a year on fuel subsidies. The reductions announced Monday will reduce that bill by 1.1 billion ringgit for the four months through December and 3.3 billion ringgit next year.

Najib said savings from the subsidy cut will help fund handouts for people on low incomes, which will be announced in the 2014 budget in October.

“It’s a process of fiscal consolidation. The market will feel more confident if we can bring down our fiscal deficit,” he said.

Malaysia’s economy and financial markets face risks from rising domestic debt, a swollen fiscal deficit and a shrinking current account surplus. The central bank recently cut the country’s growth forecast this year to 4.5-5 per cent, while Fitch Ratings lowered Malaysia’s credit rating outlook to negative from stable, citing a lack of fiscal reforms.

The budget deficit hit 4.5 percent of gross domestic product last year.

Najib said the central bank is closely monitoring the Malaysian ringgit, which has shed more than 7 percent against the U.S. dollar this year.

“It is not giving us any undue stress for the time being. What we believe in is to focus on strengthening the fundamentals of the economy,” he said.

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