EIU: Inflation to follow subsidy cuts

PETALING JAYA: The Economic Intelligence Unit’s (EIU) latest report on Malaysia has confirmed that consumer price inflation will closely follow the government’s move to slash subsidies.

The London-based research arm of the Economist weekly anticipates inflation to accelerate to an average rate of 3.3% this year and 3.5% between 2012 and 2015.

Earlier this week, Prime Minster Najib Tun Razak announced a power tariff hike of 7.1% as the country’s subsidy bill doubled to nearly RM20.83 billion this year. While fuel subsidies remain untouched for now, analysts are certain that a price increase is on the cards.

The EIU attributed the impending inflation mainly to higher global prices for crude oil and non-oil commodities but added that government efforts to rationalise the extensive subsidy scheme was a strong contributor.

“Another source of inflation will be the new Goods and Services Tax (GST) which the government will attempt to introduce early in the forecast period,” the report said.

However, it added that these factors would be balanced out by equally strong disinflationary influences including the removal of trade barriers and greater regional economic integration.

“As a country that is heavily dependent on international trade, Malaysia will not be able to escape the effects of growing competition and import penetration in its domestic market,” the report noted.

“Another factor that will help to keep inflation in check will be the forecast appreciation of the ringgit against the US dollar in 2011-2015. Since most of the country’s imports and exports are denominated in US dollars, imports will consequently become cheaper.”

The report held more good news in its prediction of a more stable economic growth path within the next five years as real GDP growth is projected to average 5.6% a year. But it added that the government would make slow progress in bringing its finances close to balance during this time.

“In its budget plans for 2011, the government is targeting a deficit equivalent to 5.4% of GDP,” it said. “This would represent only a small improvement compared with a shortfall of 5.6% of GDP in 2010.”

“We expect the government to adhere fairly successfully to its budget plans for 2011, which feature an increase in spending of just 2.8%. Although the government intends to rationalise its subsidy programme within the next five years, it will continue to spend heavily on subsidising in 2011 .” - FMT