Malaysia raised the price of petrol by seven percent and diesel by 23 percent today in a bid to cut the soaring cost of government subsidies and the smuggling of diesel fuel but analysts warned the move could hurt the economy.

The country could face a "double whammy" in the form of a slowdown in the growth rate and rising prices if expectations of inflationary pressures from the fuel price hikes are not prudently managed, economists said.

Petrol will cost 10 sen a liter more at the pumps, taking the price for premium to RM1.52, while diesel goes up by 20 sen a liter to RM1.081, the Prime Minister's Office said in a statement.

Subsidies for petroleum cost the government RM4.8 billion last year and would reach RM8.9 billion this year if prices were not increased to help cope with rising international oil costs, the statement said.

With the new rates, the expected subsidy this year will reach RM6.7 billion, saving the government RM2.2 billion.

"Although the rise in petrol and diesel (prices) will reduce the government's subsidies and help the government manage its budget deficit, the government should also be prudent in managing rising inflation expectations," said CIMB Securities' chief economist Lee Heng Guie.

"If consumers see inflation rising, they are likely to save more and this will slow down spending and may lead to a double whammy in the economy," Lee said, adding that he was raising his forecast for 2005 inflation to 2.8 percent from 2.6 percent previously.

Strongest hike

ECM Libra economist Wong Chee Seng described the 20 sen hike in diesel prices as "a shocker, firstly because of its (size), which is the strongest hike since 1993, and secondly (because) of the high energy intensity in industrial and commercial usage."

Given the difference which still exists between market and subsidized prices, estimated at about 40-60 sen per liter, Wong said another round of upward adjustments was likely in coming months.

The opposition Keadilan party said some 100 supporters planned a demonstration in Kuala Lumpur later today to protest the hike in fuel prices.

"A lot of people are angry but they feel helpless so they have asked us to demonstrate to show their unhappiness to the government," party vice-president Tian Chua told AFP .

The government said that even with the new prices, fuel in Malaysia will still be cheaper than in most member states of the Association of Southeast Asian Nations (Asean).

Subsidies created distortions in the market and could lead to the smuggling of fuel to neighbouring countries where prices are higher, in effect resulting in taxpayers' money benefiting people outside the country, it said.

Diesel shortage

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

Diesel from the pumps was also being sold to industrial users who were not entitled to the subsidy, officials said.

The increased diesel prices would narrow the difference between market and subsidized prices and reduce abuse and smuggling, the government said.

The government increased the price of diesel by 5.0 sen two months ago while the last increase for petrol, also by 5.0 sen, was made in October last year.