The impact of higher fuel cost


  • Business
  • Thursday, 05 Jun 2008

MALAYSIANS today are bracing themselves for a hike in petrol and electricity tariffs that will send prices skyrocketing; and a bigger hole in their wallets.

Since most expected the fuel hike to be effective in August, it came as a nasty shock to learn that the Cabinet meeting yesterday decided the 41% and 63% increase in petrol and diesel prices would take effect today.

Tenaga Nasional Bhd (TNB), having to pay more for gas now, is allowed to raise electricity tariffs by 18% for residential premises and 26% for companies from July 1.

Meanwhile, planters have been slapped with hefty windfall taxes as the cooking oil cess is now abolished. Independent power producers (IPPs) are also now subject to a windfall tax.

Coupled with increases in food prices, the higher cost of energy would have a huge knock-on effect on prices of goods.

Coupled with increases in food prices, the higher cost of energy will have a huge knock-on effect on prices of goods

Although the Government indicated that inflation might rise to 4% to 5% this year, the real inflation effect could be considerably larger.

Malaysia's petrol prices were deemed among the lowest in the region, average salaries are not among the highest.

“These are drastic moves, which would lead to erosion in consumers' disposal incomes and sentiment turning cautious,” said Bank Islam Malaysia Bhd senior economist Azrul Azwar.

He said consumers were likely to cut back on travel and vacation, and eating out in restaurants and hold back spending on “big ticket items” like property and cars.

Since consumer spending supported the gross domestic product (GDP) growth in the last couple of quarters amid the softer external environment, the moderation in consumption would hit the economy, Azrul said.

Sectors like retail, consumer, property and automotive would also be negatively impacted, he added.

While it remains to be seen how the windfall taxes would benefit the rakyat, Azrul suggested that the monies from IPPs be used to subsidise the cost of producing electricity so that TNB would not have to raise tariffs.

As inflation was driven by rising cost and not demand, it would be a tough call for Bank Negara to curb the pressures, he said.

“I hope the central bank would not increase interest rates as it would affect the economy and consumer spending further,” Azrul added.

Meanwhile, an industry observer said the Government's measures were “too much, too soon” as even before the people could come to terms with the recent surge in food prices, their purchasing power has been further eroded.

“They (these measures) could have been staggered to ease the people's burden,” he said.

Also, instead of imposing windfall taxes, the Government could have encouraged the companies to use the profits to increase productivity, which would trickle down into the economy.

“It's not the companies' fault that their margins improved because of better prices,” he added.

On a positive note, an industry player said: “At least there will be more demand for kap cais (small motorcycles) and motorbikes now!”

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