Malaysia to cut fuel subsidies

KUALA LUMPUR (AFP) - - Malaysia's rich will have to pay more for heavily subsidised items including fuel as part of a new two-tier scheme to reduce government spending, reports said Friday.

"We need to have a good system for those who deserve the subsidy, such as the lower and middle-income groups," the second finance minister, Nor Mohamed Yakcop was quoted saying by The Star daily.

"The prime minister will announce it," he said at a press conference in Singapore without elaborating.

The scheme is expected to be introduced in a few months.

In morning Asian trade, New York's main oil futures contract, light sweet crude for July delivery was at 131.07 dollars per barrel after hitting new record highs of more than 135 dollars a barrel earlier this week.

Malaysia, a net oil exporter, pays a hefty fuel subsidy of 45 billion ringgit (14 billion dollars) based on the oil price of 120 dollars per barrel.

The government's total subsidy bill, including food items, has already hit the 50 billion ringgit mark for the year, and spiralling fuel prices will stretch government spending further, Nor Mohamed said according to state Bernama news agency.

"If we do not do anything, we will have to spend more on subsidy but we are definitely doing something," he said.

Malaysia's state oil giant, Petronas has come under fire by the opposition for not using more of its oil revenues to increase subsidies but Nor Mohamed said the country has to stop relying on Petronas.

"The income from Petronas is not going to last forever. By 2014, we may be a net importer of oil. This money has to be used in income-generating activities so that when we have no oil, we still have income from these investments," he said.

Nor Mohamed said the country's inflation rate was forecast at 3.0 percent or slightly higher from 2.0 percent in 2007.

Malaysia imposed its highest-ever fuel price rises in February 2006, citing the spiralling cost of crude oil. The move was condemned by political and civil groups, arguing it was unnecessary as the country is a net exporter of oil.