Malaysia more than doubled subsidies on sugar at the start of the year, a government source said on Thursday, a signal that Prime Minister Najib Razak is likely to hold off on economic reforms to appease voters in an election year. The source, who declined to be identified, said subsidies were raised to 54 Malaysian sen, or 18 US cents, from 20 sen to offset higher prices for imported sugar.
Malaysia's sugar imports, however, are minimal - it buys some 3 million tonnes of sugar every three years - and analysts said the subsidy increase was driven by the government's desire to avoid stoking already low inflation ahead of a general election widely expected to take place this year. Inflation stood at 3 percent in December, its weakest level since February 2011.
"Government expenditure for sugar will have to go up because there has been tightness in global supplies," the government source said. "The idea is to keep sugar prices stable and affordable for Malaysians." Najib has pledged to cut subsidies in the long-term, with the savings aimed at helping the poor who are mostly from his ethnic Malay voter base. The government has been slowly reducing subsidies since June 2010, but at the same time, subsidies on sugar rose at the end of that year, and now again in January.
"I don't think they are concerned about the fiscal deficit right now." Najib is widely expected to call for a general election in 2012, a year ahead of schedule. Analysts say his government is more likely to implement major economic reforms if it receives a strong mandate in the polls.
Last year, the government reduced its fiscal deficit to 5.4 percent of GDP and aims to slash it further to 4.7 percent this year as it holds back on developmental spending. Subsidies on sugar, fuel and flour are expected to rise to a total 33.2 billion ringgit ($10.8 billion) this year from 32.8 billion ringgit in 2011, government projections show.
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