Fuel Subsidy for petrol cut to 200 litres per month of RON95: is it a fiscal fix or a consumer burden?

The subsidy policy of RON95 gasoline has always been a controversial issue in Malaysia and it has recently turned into a more critical juncture. The new policy has just been implemented by the federal government, which considerably decreases the monthly quota for fuel subsidy of eligible citizens. The initial amount of the quota is 300 litres, which will be reduced to 200 litres from April 2026. The subsidised retail price of the fuel is still the same at RM1.99/litre, but this cutting its allocation is certainly a significant change in government's policy on fuel management subsidy and a definite sign of increasing pressures on the domestic economy and the continued tensions in the world's fuel market.

But to appreciate why this is a sensible decision, it is best to first acknowledge the challenges encountered by the Malaysian government. Global crude oil prices have been volatile, ranging from $85 to $105 per barrel, as a result of the uncertainty of energy demand in the world and issues in the Middle East impacting supply chains. Malaysia's fluctuations have directly contributed to a huge increase in subsidy spending, thus placing huge pressure on the national budget. Pre-quota, the government had been spending as much as RM4.2 billion in subsidies for RON95 gasoline each month, which amounted to nearly 7% of the total operating expenditure by the federal government.

The official policy document says the two aims of lowering the quota from 200 liters are firstly to relieve the burden on the government and secondly, to enable the subsidies to reach the vulnerable groups. The BUDI95 targeted subsidy program talks about the fact that subsidy quotas are given only to registered Malaysian citizens, and that there are strict consumption monitoring systems in place at gas stations nationwide which effectively monitor the consumption of car owners. If the quantity of water exceeding 200 litres per month is charged at the non subsidized prices. RM3.85 is the current market price of RON95 gasoline, which is nearly double the subsidized price.

The government says it's not a price hike, but it's to crack down on the misuse of subsidies, boost efficiency and use the money saved in a ‘fair’ manner for welfare security, medical education and infrastructure development, but it has been criticized by consumer rights organizations and the public that depend heavily on RON95 gasoline. For those commuters who have to travel long distances from home to work and back, the cut of the quota of fuel consumption to 100 liters would lead to a direct rise in their monthly cost of living. If the fuel usage per month is more than the subsidy ceiling, the normal dual employee self driving family has to pay RM300-RM400 monthly for fuel alone. It is an additional cost that is definitely a huge economic burden for those that depend on vehicles to keep their businesses running.

More importantly, the effect for rural communities is bigger, as they travel long distances to work, school, and to get what they need. They tend to exceed the subsidy limit of 200 litres faster and significantly add to the burden on the cost of living. Critics also note that the government's “more precise targeting” has loopholes, and in fact, even high fuel consuming groups like ride hailing drivers, food delivery riders were ignored and no dedicated quota was identified for them. While the government says the majority of car owners in Malaysia use less than 200 litres of RON95 gasoline a month, it does not account for regional and social discrepancies. Those with short commuting times may not be impacted, but those who live in underdeveloped states or have jobs will be facing a tremendous economic burden, which will only make their lives difficult.

Figure 1: Malaysia may cut RON95 subsidy quota to 200 litres as fuel costs surge ( Source: Google Images)

Economists, on the other hand, applaud the government's move, saying it is a must to attain fiscal stability. The inefficiency and inequity of Malaysia's fuel subsidy system has long been criticised by the international financial institutions due to the government’s distribution favouring high income groups as compared to low income families. The government's new policies of cutting down quotas and offering targeted help are aligned with good practice among global social welfare spenders. Experts also noted that the ceiling price of RM1.99 per litre of petrol has given the consumers a margin of safety and has buffered the effects of oil price hikes in the world.

With the implementation of the new quota policy, the Malaysian government is also facing significant challenges: how to balance fiscal responsibility and people's well-being, and find the best balance point between the two. Signals to the public have been released to the relevant departments to further optimize the subsidy policy in the future. This policy change has also sensitized the ordinary Malaysian to the strong linkages between government expenditure and their daily cost of living, and helped to develop a more rational view on the amount of fuel they consume, while also hastening the drive to improve the national public transport system.