The decision triggered massive queues on Wednesday night outside petrol stations in the final hours before the midnight deadline when the subsidies were dropped.

 

Around the world rising oil prices have triggered escalating protests.

 

Recent days have seen demonstrations by truck drivers in Europe and South America demanding a cut in taxes on fuel, while in Indonesia a 30 per cent hike in the price of fuel at the end of last month triggered mass street protests.

 

Rising costs

 

"God willing ... I hope Malaysians will not  demonstrate.

Abdullah Ahmad Badawi,
Malaysian PM

Speaking to reporters on Wednesday Abdullah called on Malaysians to accept the news calmly and avoid taking to the streets.

 

The prime minister is fighting for his political survival after his ruling coalition suffered unprecedented electoral losses in March, partly due to the rising cost of living.

 

"God willing ... I hope Malaysians will not demonstrate. It is better to spend time in the offices or factories rather than worsen the situation," Abdullah said.

 

He dismissed suggestions that the belt-tightening will send his popularity plummeting further.

 

"We are trying our best. This is not an attempt to be popular. We cannot satisfy everybody," he said.

 

Along with the petrol price hike, the government has also introduced rises in electricity tariffs on a varying scale, depending on usage.

 

Commercial and industrial users are expected to see power bills go up by more than a quarter.

 

Subsidies have kept the price of fuel in Malaysia, a net exporter of oil, among the lowest in Southeast Asia, with only Myanmar having lower pump prices.

 

Subsidies are expected to cost Malaysia's treasury more than $14bn this year.

 

Sweeteners

 

Petrol prices have jumped by
40 per cent overnight [AFP]
Under the new measures, the pump price of petrol will rise to $0.87 a litre from $0.61 a litre to bring it closer to the global market price.

 

Diesel prices have risen to about $0.80 a litre, a 63 per cent increase.

 

The government said it would introduce some sweeteners to offset the tough economic measures, providing an annual cash rebate of $201 to owners of cars with an engine capacity of 2,000 cc or less.

 

Gundi Cahyadi, an economist with Singapore-based economic think tank IDEAglobal Cahyadi, told the Associated Press the decision to scrap subsidies was a "great risk" to Abdullah.

 

"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 per cent this year and probably into next year," he said.

 

Malaysia's virtual elimination of the subsidies is in line with similar steps taken by other governments reeling from record high global oil prices.

 

In addition to Indonesia's recent removal of fuel subsidies, Taiwan and Sri Lanka have also raised fuel prices, while India announced sharp hikes in energy prices on Wednesday.

 

Malaysia's government expects the restructuring of fuel and electricity prices will save the government $4.41 bn this year.

 

Malaysian shares opened sharply lower on Thursday with the benchmark Kuala Lumpur Composite Index falling 1.5 per cent in early trade.

 

Economists say the petrol price hike is expected to push the inflation rate to 4-5 per cent this year, up from 3 percent currently, weakening consumer spending and putting further strain on an already slowing economy.