This article first appeared in Forum, The Edge Malaysia Weekly on August 11, 2025 - August 17, 2025

The tinkering of Malaysia’s fuel subsidy system is a political hot potato. The last prime minister who removed the subsidies found himself out of a job within 18 months.

The late Tun Abdullah Ahmad Badawi removed the subsidies for fuel in June 2008, three months after the March 2008 general election in which his ­Umno-led Barisan Nasional lost its two-thirds majority in parliament for the first time.

The subsidy removal caused inflation to spike from 2.3% in January 2008 to 8.5% in July that year.

Prior to the removal, Abdullah had approved handsome wage hikes for civil servants, a one-off cash assistance and rebates on road tax for selected cars and motorcycles. The measures were to help cushion the impact of the subsidy removal.

But that was obviously not enough to appease his party and the general public.

The rising cost of living became a heated topic of discussion among Abdullah’s political foes within and outside Umno. Among his biggest critics was his predecessor as prime minister, Tun Dr Mahathir Mohamad.

Eventually, the party used it as one of the reasons to force him out earlier than scheduled as Umno president and prime minister.

The now jailed Datuk Seri Najib Razak took over from Abdullah but never dared tinker with the fuel subsidies. He implemented a managed float system between 2014 and 2018. During this period, petrol prices at the pump were relatively steady, reflecting the depressed global prices of Brent crude.

Now, Prime Minister Datuk Seri Anwar Ibrahim is planning to tackle the blanket subsidy for the RON95 unleaded fuel.

The fuel is used by almost all of the country’s 22 million adult population, and any adjustments, if not handled well, could backfire on his government. The Anwar administration has no choice but to reform the subsidies on fuel — it is the mother of all his fiscal reforms.

This is largely because the government’s expenditure to maintain the price of RON95 constitutes the biggest chunk of the overall subsidy bill. The burden is more evident when global fuel prices are high.

In 2022, Malaysia’s total subsidy bill was RM70.3 billion, of which more than 75% was due to maintaining fuel prices at the pump at RM2.05 per litre.

Between 2012 and 2022, the government spent a total of RM223.5 billion on subsidies. According to a Treasury report, out of the amount, 71.6% went towards fuel subsidies while the rest was channelled towards subsidies for agricultural products, chicken and eggs, electricity and transport, among others.

So far, the Anwar government has implemented targeted subsidies for electricity and diesel.

Since June last year, diesel in Peninsular Malaysia has been sold at market prices. To alleviate the burden on local companies and consumers, some segments such as logistics companies, farmers, smallholders and individuals with diesel vehicles are able to purchase diesel at subsidised rates. Among those that pay market price for diesel are the manufacturing sector and foreigners.

According to industry statistics, diesel consumption in Peninsular Malaysia has dropped 30%. The decline is even higher in the northern states that border Thailand, where it has fallen an average of 40%. The drop is attributed to reduced leakage, which the government estimates will save at least RM4 billion per year.

As for electricity, the removal of the blanket subsidy for households with high usage came into effect in July 2023. Essentially, households with a monthly bill of more than RM708 are imposed a surcharge. In January this year, the rebate for households with low usage was reduced.

The opposition’s gripe over the higher electricity tariff is that it is one of the causes of the rising cost of living. But the latest numbers show a general decline in the overall electricity bills of households due to lower energy prices globally.

Bent on reducing the budget deficit to less than 3% by 2028, Anwar’s government knows that the blanket subsidy on fuel cannot be sustained if it is to meet its fiscal targets and if it continues to increase the direct financial assistance to the bottom 60% of the population. That is why it has planned for a soft landing during the removal of the blanket subsidy on fuel.

For starters, the price is set at RM1.99 per litre for all Malaysians. Mechanics of the revised RON95 petrol subsidy scheme will be announced by the end of next month. Speculation is rife that after a few months of trial runs, the targeted subsidy will be implemented by early next year.

The beneficiaries of the scheme will be identified based primarily on the data from Pangkalan Data Utama (Padu), an initiative of former economy minister Datuk Seri Rafizi Ramli. According to reports, it has gathered information on some 30.4 million Malaysians.

The information from Padu is to be fine-tuned with additional data from some 200 government agencies, including the Inland Revenue Board.

Just like for the targeted subsidy for electricity, in all probability, the top 15% will enjoy fewer benefits from the targeted RON95 subsidy than the rest of the population.

The overall objective is to prevent leakages such as foreigners enjoying the cheap fuel in Malaysia. It is also to reallocate resources as subsidised fuel benefits the rich, who have more vehicles, than the poor.

For the government, the narrative is that the removal of the blanket subsidy for fuel will release billions that it can use to increase payouts under the Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (Sara) programmes.

In 2024, a total of RM10 billion was allocated for STR and Sara. This year, the amount has risen to RM15 billion, which is a 50% increase compared with last year. This includes Sara assistance of RM100 for all Malaysians, which will cost the government RM2 billion.

In the next two years, payouts under STR and Sara will increase as Anwar prepares his party for the general election. His strategy is to hand out more to the population at large, which is an important vote bank for his Parti Keadilan Rakyat.

Anwar’s critics are not wrong for faulting him for the lack of institutional reforms, but nobody can point the finger at him for not undertaking fiscal reforms. He has implemented more fiscal reforms than any other prime minister.

Most challenging will be to remove the blanket subsidy for fuel without causing a spike in inflation. Whether he can do it and retain his position as prime minister in the next general election is something to watch out for.

The worst outcome for Anwar is undertaking the unpopular fiscal reforms but not getting to retain the prime minister’s position on account of his party failing to increase its 31 seats in parliament.

M Shanmugam ([email protected]) is a contributing editor at The Edge

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