PUTRAJAYA (July 28): Malaysia is on the right path with subsidy rationalisation, though the programme should be entirely scrapped in favour of targeted cash assistance, a multilateral institution said.

Doing away with fuel subsidies would not only boost public finances but also speed up the transition towards cleaner energy while freeing up spending for priorities such as education, infrastructure and social protection, according to the Organisation for Economic Co-operation and Development (OECD).

Malaysia’s recent Budi95 rationalisation is “a step in the right direction", said its director of country studies Luiz de Mello. "But we encourage Malaysia over time to gradually step out of that and use other mechanisms, [such as] direct transfers to the truly needy, rather than having more general subsidies that are not as well targeted as direct cash transfers.”

The remarks come as the government grapples with a ballooning fuel subsidy bill due to elevated energy prices following the conflict in West Asia. Monthly fuel subsidies alone are expected to cost nearly 10 times the amount allocated by the government before the war.

De Mello was speaking to reporters after the launch of the OECD Economic Survey of Malaysia 2026 on Tuesday. Headquartered in France, the OECD comprises 38 mostly advanced economies — a club of rich countries.

The OECD's latest survey recommends that Malaysia continue rationalising energy subsidies and replace broad-based support with targeted assistance, arguing that universal fossil fuel subsidies are costly, distort price signals and undermine efforts to reduce greenhouse gas emissions.

The report also said subsidy rationalisation would help narrow the fiscal deficit by creating room for higher spending on education, healthcare, infrastructure and climate-related investments while improving the efficiency of public expenditure.

During an earlier fireside chat, de Mello said fossil fuel subsidies were not merely a fiscal issue but also a structural obstacle to Malaysia's long-term energy transition to deal with climate change.

Malaysia spent about one-sixth of total government expenditure on energy subsidies last year, resources that de Mello said could instead be redirected towards education, infrastructure and strengthening the social safety net.

"What we are encouraging you to do is to go one step further and gradually phase out those subsidies,” he said. “Use the money alternatively, it will help with deficit reduction, it will help with improving the composition of your spending.”

Addressing concerns that subsidy removal could hurt lower-income households, de Mello said Malaysia now has the necessary data infrastructure to deliver targeted assistance more effectively.

He pointed to the Central Database Hub (Padu) and other government datasets as platforms that are able to provide a much clearer picture of households' socioeconomic circumstances, enabling aid to be directed to those who need it most.

"Malaysia has it. So we would argue that since you have the tool, go the next step and phase out those subsidies," he added.

Malaysia currently subsidises RON95 petrol and diesel under the Budi95 programme, allowing eligible Malaysians to purchase the fuels at below-market prices.

Read also:
Malaysia’s reliance on GLCs weighs on productivity, says OECD
OECD urges Malaysia to prioritise capability over ownership in Bumiputera policy
Malaysia prioritises wage growth over GST return, says economy minister after OECD call
OECD urges Malaysia to expand public university access, strengthen merit-based admissions