PUTRAJAYA, Malaysia - Malaysia said Wednesday it will raise gasoline prices by 40 percent to reduce the government's massive subsidy bill, a move that is expected lift the inflation rate to 5 percent.
The pump price of gasoline will rise on Thursday to RM2.70 (US$0.87) a liter, or 10.23 ringgit (US$3.30) a gallon, from 1.92 ringgit (US$0.61) a liter now, Prime Minister Abdullah Ahmad Badawi told 
reporters.
"We cannot naturally keep subsidizing at the current rate," Abdullah said.
He said the government will also give a yearly cash rebate of 625 ringgit (US$201) per year to owners of cars with an engine capacity of 2,000 cc or less to offset their burden from the massive hike. The money will be distributed to owners through post offices.
Subsidies have kept the price of fuel in Malaysia - a net exporter of oil - among the lowest in Southeast Asia. But the government says it can no longer afford to fund the subsidies, which are expected to cost the treasury more than 45 billion ringgit (US$14 billion) this year.
Abdullah said diesel prices will rise by 1 ringgit to 2.50 ringgit (US$0.80) per liter, a 67 percent increase.
Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad earlier indicated that further price increases were planned to bring fuel prices in line with global market cost.
"The long term plan is to increase it to market price," he said, suggesting gasoline prices could rise to 3 ringgit (US$1) a liter by August.
He said the move will save the government 4 billion ringgit (US$1.29 billion) a year. Shahrir said the hike in gasoline prices will likely increase the inflation to 5 percent.
Inflation hit a 15-month high of 3 percent in April, and was forecast at 2.5 percent to 3 percent for the full year before the new fuel prices were announced.
Fuel prices in Malaysia had been unchanged since February 2006, and economists have warned any move to abandon fuel subsidies completely may spark protests, push inflation sharply higher and weaken consumer spending - a bane to an already slowing economy.
The central bank has cut its 2008 economic growth forecast to 5 percent to 6 percent, from 6 percent to 6.5 percent previously.
But the govt does not expect any protest or public anger, Shahrir said. "We are still giving a subsidy" to less wealthy people, he said.
Still economists were not convinced.
"This is quite a drastic measure," said Gundi Cahyadi, an economist with Singapore-based economic think-tank IDEAglobal. "In the long-run, it's good but the immediate impact will be negative. You can expect a slowdown in the economy to below 5.5 percent this year and probably into next year," he said.
He noted that Malaysia's gasoline price hike was the steepest in percentage terms among Asian countries such as Indonesia, Taiwan and India that have recently cut fuel subsidies.
It will relieve the government's financial burden over the long term but will also push up inflation and depress consumer spending and business investment, he said.
Cahyadi said the new fuel price is a "great risk" to Prime Minister Abdullah Ahmad Badawi, who is fighting for his political survival after his ruling coalition suffered election losses in March partly due to the rising cost of living.
