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SINGAPORE: The recent move by various countries in the region to cut subsidies on fuel and food prices has been welcomed by market observers. But some countries like the Philippines look set to step up fuel and food subsidies to rein in inflation.
Economists said such subsidies keep prices at artificially low levels and will only push inflation higher. They said subsidies also remove the incentive to save and encourage excessive consumption.
Selena Ling, head of Treasury Research & Strategy, OCBC Bank, said: "Subsidies actually tend to distort market behaviour. With the subsidies, certain oil-rich countries end up using more, rather than less of the scarce resource."
Despite this, governments in the region continue to subsidise the cost of fuel to soften the effects of inflation in the short term. But economists said the move will weigh down government expenditure in the long term, leading to years of fiscal deficit, especially for countries like Singapore.
Alvin Liew, an economist at Standard Chartered Bank, said: "When you look at rising oil prices and food prices, if you put subsidies on them, the country will benefit in the short run as inflation is kept artificially low.
"But with no natural resources of our own, this is not a sustainable solution, and once subsidies are removed, inflation will go up. At the same time, we would already have depleted a large part of our country's reserves."
According to some estimates, the cost of oil subsidies in Indonesia and Malaysia may reach US$15 billion in each of the countries this year. In China, the cost could hit a staggering US$40 billion.
With continued excessive consumption, this would push up the cost of subsidies even more. Some observers believe that subsidies should be avoided at all costs.
Manu Bhaskaran, a partner at Centennial Group, said: "Fuel prices rise and then the cost of the subsidy - even in oil-rich countries - becomes too great to bear. I think the lesson one learns from that is – don't ever get into this problem from the beginning if you can avoid it."
In Singapore, the government gives out rebates instead of applying direct subsidies. This, according to economists, is a more sustainable alternative and does not distort market prices.
- CNA/so
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