KUALA LUMPUR (Sept 30): Malaysia needs to rationalise subsidies for RON95 petrol next year or risk greater fiscal burden after the government decided to raise civil servants’ salaries, said the Australia & New Zealand Banking Group.

Subsidy burden has declined compared to the previous year but remained elevated, the research firm said in its fourth quarter economic outlook report. The salary hike for civil servants announced by the government will add to its operating expenditures next year, ANZ noted.

“The removal of RON95 blanket fuel subsidy will need to be implemented to avoid the risk of a greater fiscal burden,” the research house warned.

Malaysia's government revenue contracted 6.3% in the first six months of 2024 from a year earlier, while expenditures rose 1.3% year-on-year during the same period.

On May 1, Prime Minister Datuk Seri Anwar Ibrahim announced an increase in civil servants’ salaries by at least 13% effective Dec 1 this year. The increase would cost the government an additional allocation of over RM10 billion.

Malaysia has been trying to lower a long-running fiscal deficit that stretches back to the 1998 Asian Financial Crisis. A blanket subsidy on diesel was recently removed and the rationalisation for RON95, the most widely-used petrol grade currently capped at RM2.05 per litre, is expected to follow suit.

For 2024, the government may still be able to hit its own target of narrowing the budget deficit as a percentage of gross domestic product to 4.3% from 5.0% in 2023, ANZ said, as it draws comfort from strong economic growth and low crude oil prices.

“Any increase in inflation owing to the subsidy rationalisation will be viewed as a one-time price adjustment by Bank Negara Malaysia and should not warrant any policy rate action,” the research house said, noting that current monetary policy settings are considered to be supportive of growth.

ANZ said it expects the overnight policy rate to remain unchanged at 3.00% till end-2024, in line with the consensus. The policy rate has been unchanged for more than one year now since it was last raised in May 2023 by 25 basis points.