RON95 subsidy to stay, but economists urge caution over long-term impact

New Straits Times

24-05-2025

KUALA LUMPUR: The government's decision to maintain the subsidised price of RON95 petrol for Malaysians is expected to shield lower- and middle-income households from immediate inflationary pressures.
However, economists warn that the long-term implications of blanket subsidies could strain national finances and encourage illicit activities such as fuel smuggling.
Universiti Teknologi Mara's Malaysian Academy of SME and Entrepreneurship Development coordinator, Dr Mohamad Idham Md Razak, said the continued use of blanket subsidies distorts resource allocation, weakens incentives for energy efficiency, and diverts funds from essential sectors such as infrastructure and education.
He said that while maintaining the current system may serve short-term political interests, it risks worsening budget deficits, potentially forcing future tax hikes or cuts to critical public services.
"The decision to keep RON95 petrol prices stable prevents immediate inflationary effects on lower- and middle-income Malaysian households, who are significantly affected by fuel price changes.
"By selectively removing subsidies for foreigners while maintaining them for Malaysians, the government could enhance fiscal efficiency through reduced subsidy leakage, potentially saving up to RM8 billion annually.
"This targeted subsidy approach supports equity by ensuring that subsidised fuel benefits those most impacted, rather than enabling cross-border arbitrage," he told the New Straits Times today.
Idham added that targeted policies help curb wasteful spending and avoid direct financial burdens on domestic consumers, while also reducing inflationary risks.
To address enforcement challenges, including smuggling and resale, he proposed mechanisms such as dual pricing or MyKad-based identity verification.
"When properly implemented, such a system allows savings to be redirected towards social programmes or infrastructure projects, promoting broad-based economic growth.
"This policy should be part of a wider subsidy reform strategy to avoid sudden market disruptions and ensure long-term stability in the energy sector," he said.
Echoing his views, Universiti Putra Malaysia Business School economist Dr Ida Md Yasin said the inflation risk remains low, as most goods and services linked to RON95 prices are currently unaffected.
However, she pointed to a more pressing concern, the wide gap between Malaysia's subsidised fuel price and global market rates.
"The world market price of RON95 is around RM5 per litre, while the domestic retail price stands at RM2.05. This significant price difference encourages smuggling.
"People are smuggling petrol out of Malaysia to sell it elsewhere, meaning the subsidy ends up benefiting non-Malaysians instead of Malaysians," she said.
Earlier today, Prime Minister Datuk Seri Anwar Ibrahim assured that the government would not raise RON95 petrol prices for Malaysians.
He said a proposal to raise the price had previously been presented to the cabinet, but he had rejected the suggestion.
During the tabling of Budget 2025 on Oct 18, Anwar announced plans for targeted RON95 subsidies, expected to be implemented by mid-year.
He said the measure could save up to RM8 billion annually, noting that 40 per cent of RON95 subsidies are currently enjoyed by foreigners and the ultra-wealthy.
The savings, he added, would be channelled towards improving the people's well-being through investments in education, healthcare, and public transport.