A staggered phasing out of petrol and diesel subsidy will ensure that the inflation rate is maintained, said economists.

Malaysian Institute of Economic Research (Mier) executive director Prof Dr Mohammed Ariff said that taking away the petrol and diesel subsidy is not the solution in dealing with the matter.

"The best way to do it is gradually reduce it, but not totally take it (subsidy) away," he explained, when contacted today.

"Removing subsidy is not feasible. There is still room for subsidy," he said, adding that this move will protect the vulnerable.

He noted that it is impossible for the government to absorb the cost, as the cost of oil per barrel had increased.

Acknowledging that the authorities were anxious of keeping to a balanced budget, he said it was also important not to transfer the burden to the poor.

"It is necessary to strike a balance. At the moment, inflation is not so serious," he said, adding that the price of transportation cost will most likely increase but it is less probable for other goods.

Sudden increase

In the recent past, there have been indications from the government that it will continue to increase the fuel prices and further slash its subsidies, causing fears among the public that this will result in an untenable inflation.

This comes on the heels of a sudden government decision on May 4 to increase fuel prices. Petrol rates went up 10 sen per liter, taking the price for premium to RM1.52, while diesel went up by 20 sen a liter to RM1.081.

The government said the hike would reduce its subsidies, arguing that it would have to foot a subsidy bill of RM8.96 billion and forego RM7.85 billion in tax exemption. The government would then incur a loss of RM16.8 billion.

With the hike, the government would only need to pay RM6.7 billion in subsidies, saving RM2.2 billion a year, which the authorities said would be best to channel it to help the poor and certain sectors.

Some economists have also expressed concerns that the country could face a "double whammy" in the form of a slowdown in the growth rate and rising prices if expectations of inflationary pressures from the fuel price hikes are not prudently managed.

Coupon system

Universiti Kebangsaan Malaysia (UKM) Economy and Business Faculty Head Professor Dr Mansor Jusoh said inflation could not rise because there would not be a continuous process of goods price hike.

"The price of goods will increase, but it will not increase continuously to cause inflation," he added.

He suggested that the coupon system be introduced. The system would allow affected industries, such as the transportation industry, the privilege to use the coupon in order to have access to diesel.

He did not deny that this system could spur smuggling. According to him, the implementation cost could be high, and it is necessary to conduct a detailed study first.

"If the government totally abolishes subsidy, (the authorities) need to remember there are certain quarters that will be affected, like the poor," he said.

He also suggested that the authorities consider reducing the road tax cost of those affected, particularly the transportation industry.