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May 26, 2008

Asean struggle to fight rising prices

Governments across Asean is facing a dual challenge of protecting the poor from rising costs of basic necessities and soaring inflation triggered by steadily increasing oil prices.

In Indonesia, the world's fourth-most populous country raised fuel prices by an average 28.7 percent from Saturday to help cut a surging subsidy bill that has hit the government's 2008 budget.

Indonesia has some of the lowest fuel prices in Asia, but with parliamentary and presidential elections due in 2009, the government had tried to resist cutting fuel subsidies.

In neighbouring Malaysia, the government recently said it had no plans to raise petrol and diesel prices despite the mounting cost of subsidies and instead try to better manage its subsidy scheme to prevent abuse, according to Domestic Trade Minister Shahrir Samad said.

Yet Malaysia is unlikely to hold on for long and eventually will have to cut subsidies despite fears of unrest as inflation spikes food costs rise.

Malaysia appears to be changing its stance on subsidies - approaching 15 billion dollars or a massive seven percent of GDP - despite setbacks to the government in March elections.

Kuala Lumpur is now reportedly considering a two-tier pricing system to make the rich pay more and cap the subsidy bill at more acceptable levels.

“In Asia generally, those countries that subsidise oil will be under pressure to remove their subsidies while those that don't will be under pressure to do something for low-income earners,” Royal Bank of Scotland economist Euben Paracuelles was quoted as telling AFP from Singapore.

As oil touched 135 dollars a barrel on Friday, countries which analysts had criticised for failing to adjust to the new oil price reality were starting to change course.

Ifzal Ali, chief economist of the Asian Development Bank, said concerns about how US sub-prime problems would affect the region had been overtaken by the spike in food prices, which was linked to high oil prices.

Therefore, how Asian countries deal with rapidly rising prices would ultimately determine their economic performance.

Ali believes high food prices are not temporary as rice will never drop back to the range of $200 a tonne, though it may drop below the current $1,000 range.

Inflationary pressure is most noticeable in Asean countries such as Indonesia and in Vietnam, where the annual inflation rate reached 20.3 percent in March. In Thailand, the surging oil price is seen as pushing the country into a dangerous zone of stagflation - high inflation with sluggish economic growth.

One of Asean’s most affluent members, Singapore is not immune from inflationary pressure. Minister Mentor Lee Kuan Yew has warned that problems (of rising prices) cannot be solved by giving subsidies, but by having a dynamic economy.

Speaking at the Tanjong Pagar Day celebrations at the Queenstown Stadium on Sunday, Lee drew lessons for Singapore from how countries in the region are tackling their problems.

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