The government is not expected to raise petrol pump prices by more than 8 sen, as anything higher would risk triggering inflationary pressures, an analyst said today.

Gauging from historical price hikes, the analyst said this year's cumulative increase, taking into consideration the previous 2 sen hike on May 1, should not be more than 10 sen, bringing retail rates up to between RM1.45 to RM1.47.

This, he said, would mirror similar price increases in 2000 and 2001 when world oil prices jumped by about US$10 per barrel.

When oil prices jumped to RM29.85 per barrel in 2000 from RM19.25 in 1999, the government increased retail rates by 10 sen - the highest since the mid-1990s. The same increase was levied in 2001.

From the government's viewpoint, a savings on the oil subsidy is necessary to maintain fiscal flexibility, especially given uncertainties over whether current growth rates can be sustained in the coming year, the analyst said.

"The government knows it won't be able to achieve its growth targets of 7.5 percent per year under the Eighth Malaysia Plan because of the economic slowdown, especially since the rate over the last few years have not been great," he said.

"As for now, the outlook is healthy, but what is worrisome is next year, with the slowdown in China and the hike in US interest rates."

Slower recovery

A university-based expert agrees, saying: "The government is expecting a slower rate of recovery in the external sector. This is a conservative approach which seems reasonable given the external uncertainties for the past two years."

According to Bank Negara Malaysia, real GDP growth increased to 7.6 percent in the first quarter of 2004, from 6.6 percent in fourth quarter of 2003, due largely to strong growth in industrial output and manufacturing.

Bernama last week reported that the government is looking into gradually decreasing its subsidies on petrol, diesel and liquefied petroleum gas, and hiking up retail petrol rates in order to save about RM4 billion, which would be used to pump-prime the economy.

The money would partially fund the RM10 billion development allocation approved by the cabinet last week.

Experts, noting that the allocation was made ahead of Umno elections in September, have said a big part of the rationale was to counter concerns among Umno-linked businessmen that the government's spending tap is gradually being turned off.

While doing so, the government is also unwilling to move away from its stated objective of achieving a balanced budget by 2007 through a more disciplined approach to spending - hence only allocating RM10 billion to be stretched over two years, they noted.