The proposed reduction in the petrol subsidy need not automatically translate into higher retail price of fuel, since global crude oil prices are also falling currently, said an economist.

With crude oil prices falling from the peak of US$42.45 on June 2, the level of petrol subsidies in Malaysia will automatically drop, said the analyst with a bank-backed securities company.

"So it would be a half-truth for the government to state that it is reducing the subsidy when it does not have to do anything but allow the impact of dropping world oil prices to take its natural course," said the economist who declined to be named.

National news agency Bernama , quoting government sources last Thursday, had forewarned of a gradual reduction in the petrol subsidy to raise RM4 million to offset additional expenditure of RM10 billion for development projects under the revised Eighth Malaysia Plan (8MP).

Minister in the Prime Minister's Department Mustapa Mohamed was later quoted as saying that the allocation would enable Barisan Nasional election promises to be met, but that this would still be subjected to fiscal prudence and approved according to the socio-economic benefits.

However the economist said a further decline in crude old prices would mean that it will not be necessary to increase the pump prices of petrol.

Oil futures dropped to a two-month low yesterday

and traders expect this to fall further, following the restoration of exports in Iraq and the end of strike action in Norway, Bloomberg reported.

Brent crude for August settlement fell to US$34.56 a barrel on London's International Petroleum Exchange, while on the New York Mercantile Exchange, crude for August delivery declined to US$37.07 a barrel.

Possible reasons

The economist said the move to save money by reducing the petrol subsidy is perhaps to let the market know that the country is not incurring more borrowing than needed in order to finance new development projects.

"Even so, borrowing for the extra allocation, which works out to only RM5 billion a year, would not be much," he said.

And at the same time, he cautioned against reading too much into recent announcements on the government's intention to trim the budget deficit.

"Any government can incur a deficit over a long time, and maybe even indefinitely, as long as other vital parts of the economy remain healthy," he added.

"But people want to hear about what the government is doing about it. So it responds by showing that the market is healthy and ensure that our ratings remain good."

Another economist contacted said the additional expenditure was announced to achieve two aims - to placate Umno-linked companies as the party prepares for elections in September, and to ensure there is no sudden dearth of projects as the government pulls away from spending on big-ticket items.

"At the same time, the government is not willing to move away from its 8MP spending plan. It does not want to nurse the economy, preferring instead to let the private sector take on the role of the engine of growth," he said.

The government, he said, also needs to convince the market that it is practising prudent spending and that the economy is capable of withstanding a global slowdown, if the US decides to hike interest rates.

"This is why, on the oil issue, the government is expecting end-users to pick up the tab. It is only a matter of time before retail oil prices go up...the question now is by how much," he said.

However, he expressed surprise over the proposal to reduce the subsidy when government spending has been lower this year than in previous years.

In the first six months, the government only spent RM1.4 billion, compared to RM6.8 billion last year, RM4.3 billion in 2002, RM7.4 billion in 2001 and RM8.4 billion in 2000.

Petrol prices last went up in Malaysia on May 1, rising 2 sen per litre to RM1.37 (RON97) and RM1.33 (RON92) respectively because of a rise in world oil prices.