Najib Razak cuts subsidies in effort to plug Malaysia deficit

December 31, 2013 1:39 pm

Najib Razak cuts subsidies in effort to plug Malaysia deficit

By Jeremy Grant in Singapore

The prime minister of Malaysia, Najib Razak, has sought to draw a line under the country’s decades-old reliance on energy and food subsidies, saying they were “no longer sustainable” as his government embarked on an austerity drive including cuts to civil servant perks.Starting on New Year’s day, government ministers’ entertainment allowances will be cut by 10 per cent, while new applications to renovate government offices will be frozen. There will also be restrictions on food and beverages at official government functions. Many civil servants will be banned from business class flights and restrictions will be slapped on gift-giving.

While the moves carry an echo of a similar austerity drive in China under President Xi Jinping, the Malaysian cuts highlight how Mr Najib is under pressure to tackle the country’s public debt which, at around 53 per cent of gross domestic product, is one of the highest in Asia.

Protests were planned for central Kuala Lumpur, the capital, against the subsidy cuts, as well as an almost 15 per cent hike in electricity tariffs, which also comes into effect on Wednesday.

In a New Year message on Tuesday, Mr Najib sought to allay popular concern over a rise in cost of living – the result of a package of subsidy cuts first announced in anOctober budget, his first since the election in May.

That included the abolition of sugar subsidies and a cut in fuel assistance, as well as a 6 per cent sales tax from early 2015.

“We would not sign off any subsidy cuts or rate rises that were not absolutely necessary,” Mr Najib said.

“Subsidy programmes have benefited people for many years, but as our population grows and our nation develops, they are no longer sustainable and it is time to move on. We need to rationalise subsidies and target them to those in most need.”

The government’s “commitment to development expenditure has grown”, Mr Najib added, “and we have to manage our fiscal position to ensure the stability of our economy”.

Wong Chen, a member of parliament for the opposition People’s Justice party – headed by veteran opposition leader Anwar Ibrahim – said he did not expect the planned protests to draw big crowds. But he predicted popular frustration would probably rise early next year once the electricity price hikes kicked in.

He conceded that some of the government’s cuts were needed “but we would like to see a gradual subsidy cut, not as deep as what the government has envisioned”.

The IMF estimates that the phased reduction in fuel subsidies will prompt an almost one percentage point rise in inflation to nearly 3 per cent in 2014, compared with the level in 2013.

Earlier this month Moody’s, the rating agency, upgraded its outlook for Malaysia’s long-term debt, saying that while subsidy reform “will be politically and administratively challenging, it will result in narrower deficits that will stabilise the country’s debt dynamics”.

Malaysia, the third largest economy in the Association of Southeast Asian Nations (Asean) after Indonesia and Thailand, is expected to have notched up relatively solid economic growth of 4.5 per cent this year, according to the International Monetary Fund, buoyed by exports of crude oil, palm oil and electronics.