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Malaysia subsidy pumps prices

KUALA LUMPUR, June 3 (Reuters) - Malaysia said on Tuesday it would scrap fuel price controls in August in a move that could double Asia's second-cheapest pump prices and stoke inflation already at 15- month highs.

The government will flesh out plans on Wednesday to overhaul a fuel subsidy system that eats up a third of the budget of Asia's largest net oil exporter. Price controls could be replaced by quotas or cash handouts, the domestic trade minister said.

Oil's rise to records above $130 a barrel has forced governments from Jakarta to New Delhi to risk public discontent and consider reforms to subsidies that are draining their coffers.

Malaysians, accustomed to pump prices that are less than half those in neighbouring Singapore, will start paying market rates from August, Domestic Trade Minister Shahrir Samad told reporters.

Based on the latest floating market prices in Singapore, the Asian oil trading hub, Malaysian prices would have to rise 69 percent to 86 U.S. cents a litre of petrol and 157 percent to $1.08 for diesel.

"If Malaysia does go for global market rates, using Singapore's prices as comparison, it would mean that the full amount of petrol price increase could easily be more than 100 percent," said Alvin Liew, a Singapore-based economist with Standard Chartered.

In Asia only Myanmar has slightly lower pump prices than Malaysia, although sales in Myanmar are rationed to two gallons per car a day.

The Myanmar government's decision to raise fuel prices last year sparked protests as did Indonesia's move to raise the subsidised price of fuel this year. Taiwan also cut fuel subsidies last month and India is debating fuel price reforms.

A fuel hike could stoke public anger against Prime Minister Abdullah Ahmad Badawi at a time when he is trying to arrest a slide in public support against the government and fend off a challenge to his leadership.

GUZZLING OIL

"You can't have a price increase without giving some form of subsidy to Malaysians," Shahrir said. Details would be announced on Wednesday, he said.

Shahrir had earlier said the fuel subsidy would cost the government as much as 56 billion ringgit this year based on current crude oil prices, or about a third of government expenditure in 2008.

Malaysia is a net oil exporter and earns 250 million ringgit ($77.6 million) a year in revenue for every $1 rise in crude prices.

Domestic fuel prices in many developing countries remain fixed despite the doubling of oil prices in the last 12 months, allowing consumers to continue guzzling oil, which in turn pushes up world crude prices.

Apart from the political fallout, governments are holding back on subsidy reform because of the risk stoking inflation.

Analysts say Malaysia's average inflation this year could surpass the central bank's forecast of 2.5-3.0 percent.

"Inflation could peak at 5 to 6 percent a month and the 2008 average could rise above 3-4 percent," said Azrul Azwar Ahmad Tajudin, a senior economist with Bank Islam.

"But we need a clearer picture of the fuel subsidy mechanism before we can gauge the impact."

Annual inflation climbed to 3.0 percent in April, a 15-month high, due to soaring food prices.

Electricity and fuels with housing and water have a weighting of 21.4 in the consumer price index. Transport accounts for 15.9 percent of the gauge.

"After the govt announces what the nature of the changes are to subsidies and other prices, we will make a comprehensive assessment," Malaysia's central bank chief, Zeti Akhtar Aziz, told reporters.

She ruled out using currency policy to tame prices.

"The ringgit has been and will continue to be determined by the market," she said. "In so far as the ringgit appreciates, this of course will contain imported inflation, but the central bank will not use it as a tool of monetary policy."

The currency is up 2.6 percent against the dollar so far this year.