[NST news]Price Watch: Expert: Economy can bear 40-sen rise in petrol price

By : Chong Pooi Koon

KUALA LUMPUR: Malaysia can raise petrol prices by 30 to 40 sen a litre in the short term without hurting economic growth, an expert with the London School of Economics and Political Science said.
Malaysian-born Professor Danny Quah, department head at the UK institution, said over the longer term, fuel subsidies should be done away with because it hid the true cost of this scarce and non-renewable energy, and discouraged better use of resources. "The economy can withstand an increase of petrol prices by 15 to 20 per cent, or 30 to 40 sen, a litre. But the government has to quickly move with a direct compensation system." Quah said fuel subsidies should be removed in stages to let society adjust to the more expensive petrol. At the same time, the money saved from providing the subsidies needed to be transferred back to help the poor quickly and effectively.
"Those affected most by the move should also be made to understand that they will be compensated in other forms. "You'll have to get people used to the idea, in particular that they are going to be compensated by transfers or other kind of direct payments once these subsidies come off. "It's obvious that once these subsidies come off, prices will rise. For the very poor, goods that are expensive but are essential will place them in dire straits. "So the government should get people used to the idea that as the subsidies are progressively dismantled, people will see compensation for that," he said. He said inflation would stabilise after a while, although consumer prices may spike immediately after the subsidies were removed. "In the short term, shocks can hit the system. A removal of subsidies may raise inflation to five to six per cent in that particular year, but it will not be an on-going inflation," he said here yesterday after giving a luncheon talk to LSE alumni. He earlier held discussions with the Domestic Trade and Consumer Affairs Ministry.It is understood that the government has consulted Quah on the different aspects of inflation, the problems of subsidy and the ways to reduce poverty. Quah said the government was studying how best to remove petrol subsidies without hurting the poor. Social unrest in countries like Indonesia also suggested that this issue be dealt with care. Oil prices reached another record of US$135 (RM472) per barrel last week. Fuel subsidies are expected to cost the government RM56 billion this year.