MALAYSIA'S GREAT SHIFT: NAVIGATING THE HIGH STAKES OF TARGETED SUBSIDIES

Barnama

01-05-2025

The government's plan to gradually remove blanket subsidies – beginning with diesel and potentially extending to RON95 petrol – has sparked public concern and policy debate.
KUALA LUMPUR, April 23 (Bernama) -- As Malaysia embarks on one of the most ambitious reforms to its economic framework in recent decades, the issue of targeted subsidy for diesel has taken centre stage.
'We have been subsidising fuels and essential goods across the board for decades. But the reality is, much of this has benefited those who do not need it. Roughly 35 per cent of fuel subsidies go to the top 20 per cent (T20) income group. That is not efficient or fair,' he told Bernama in an interview.
But beyond the noise lies a compelling economic case backed by fiscal necessity, long-term sustainability, and a more equitable approach to welfare.
These savings, he noted, have already been reflected in expanded allocations to direct financial aid programmes such as the Sumbangan Tunai Rahmah (STR) and Sumbangan Asas Rahmah (SARA), which together amount to over RM13 billion in 2024.
The government's targeted subsidy for diesel was implemented in phases from last year and is expected to save up to RM4 billion annually.
Ahmed Razman argues that by rationalising subsidies, Malaysia can redirect billions in savings to more impactful areas such as infrastructure development, social welfare, education, and healthcare — sectors that benefit society more broadly.
During the tabling of Budget 2025, Prime Minister Datuk Seri Anwar Ibrahim said the move had proven effective in curbing leakages due to smuggling and usage by the ineligible business sector.
Since the implementation, subsidised diesel sales have dropped by 30 per cent, resulting in savings of over RM600 million per month, even though subsidies are still provided for public transport, fishermen, and the logistics sector.
Impact of sweeping US tariffs on Malaysia
The urgency of Malaysia's targeted subsidy is further amplified by mounting global economic uncertainties, including the resurgence of trade tensions and volatile energy markets.
On April 2, United States (US) President Donald Trump announced reciprocal tariffs on its trading partners, imposing a 24 per cent tariff on Malaysia.
However, seven days after that, he announced a 90-day pause for the reciprocal tariffs, allowing affected countries to negotiate.
While this may offer short-term relief, the broader impact of rising US-China trade tensions looms large.
International Islamic University Malaysia (IIUM) Associate Professor of Economics Dr Muhammad Irwan Ariffin said a coordinated response is crucial to safeguard economic resilience and maintain public confidence.
'Malaysia's best course is to act in concert with ASEAN partners, leveraging collective strength to manage global trade headwinds,' said Muhammad Irwan, adding that targeted subsidies are necessary to ensure long-term fiscal sustainability and to free up resources for better-targeted social protection and development spending.
'It is therefore timely and necessary to move towards a more targeted, data-driven approach. Targeted petrol subsidies should be part of a broader strategy to build a stronger and fairer economic model,' he added.
Ahmed Razman echoed this, saying that Malaysia had already planned for targeted subsidies, and the tariff war would probably provide more justification for the move so that deserving groups continue to receive assistance from the government.
Apart from that, the decline in global oil prices also offers an opportunity for the government to move forward with targeted fuel subsidies.
At the time of writing, Brent crude was 1.50 per cent lower at US$66.87 per barrel.
Moving from Blanket to Targeted Aid
Muhammad Irwan said the issue was not whether Malaysia should remove subsidies, but how it should be done.
He emphasised that the shift to targeted aid is essential to ensure fiscal discipline while protecting vulnerable groups.
Muhammad Irwan pointed out that targeted subsidies must go hand-in-hand with structural reforms to uplift incomes, especially in the middle-income group.
'Direct cash transfers can cushion the blow in the short term, but they won't solve the median income squeeze. We need upskilling, progressive wages, and industry-education alignment to help Malaysians move up the income ladder,' he added.
To further alleviate the burden of high prices, the MADANI government has expanded SARA to benefit 5.4 million recipients starting April 1, a significant increase from the current 700,000 beneficiaries.
SARA is a targeted assistance approach, redistributing part of the nation's increased revenue and subsidy savings to those genuinely in need.
Starting this year, the distribution of SARA via MyKad has been extended to Sabah, Sarawak, and Labuan. Last year, usage was limited to Peninsular Malaysia.
Taming Inflation and Ensuring Enforcement
Among the most common public fears associated with targeted subsidies for diesel is inflation. Both academicians acknowledge this as a valid concern, but one that can be managed with the right strategy.
'RON95 rationalisation will have an inflationary effect, no doubt. But our current inflation rate is still around 1.8 per cent, well below historical averages. With strong enforcement of price controls and technological monitoring, the increase should remain within the 2.0–4.0 per cent range,' Ahmed Razman said.
Muhammad Irwan noted that inflation must be tackled from both ends: controlling unnecessary price hikes and supporting household purchasing power.
'We must ensure that necessities such as food, utilities, and basic transport remain affordable. Enforcement must be strengthened, and not just manually. We need artificial intelligence (AI)-driven systems, e-wallet tracking, and integrated monitoring to prevent profiteering and smuggling,' he said.
He stressed that price control efforts should prioritise essential goods, even if producers justify increases by pointing to higher fuel costs.
'This is where the principle of amanah (trust) in Islamic economics comes into play. Public wealth must be managed with integrity,' Muhammad Irwan said.
A Digital Infrastructure for Fair Distribution
At the heart of any successful subsidy rationalisation effort is one crucial ingredient: accurate data, which allows the government to pinpoint exactly who needs help and ensure support reaches the right people.
While Malaysia has made encouraging progress with its Central Database Hub (PADU) database, both academicians agree that it remains a work in progress.
'PADU is promising, but we need full adult registration. Right now, only about half are in the system. Without a complete and accurate database, you risk exclusion errors -- missing people who actually need help,' Ahmed Razman said.
Muhammad Irwan noted that a more seamless registration and application process, especially via smartphones and digital ID systems like MyKad, would be crucial to delivering aid swiftly and fairly.
The use of MyKad to distribute SARA is not only efficient but enables the public to use the aid simply by swiping the card at participating stores.
It is not only fast but also secure, allowing a smooth buying experience without hassle.
The RON95 Test: Lessons from Diesel Reform
While the targeted subsidy for diesel has affected a relatively narrower user base, RON95 petrol presents a much more complex challenge.
It is used by the vast majority of Malaysians across all income groups. Implementing a fair and efficient RON95 rationalisation requires careful planning, extensive simulations, and a robust rollout mechanism.
'This is going to be a massive logistical undertaking. We're talking about thousands of petrol stations and millions of users. It can't be rushed,' Ahmed Razman said.
He noted that the government had been preparing for this shift for years, introducing digital payment habits through e-wallet incentives and piloting aid distribution mechanisms, but challenges persist.
Finance Minister II Datuk Seri Amir Hamzah Azizan previously said that a two-tier pricing system for targeted RON95 implementation in June would involve the use of MyKad to facilitate the targeted petrol subsidy.
Currently, the mechanism for the RON95 targeted subsidy is being fine-tuned to ensure it is secure, efficient, and reliable upon rollout.
Amir Hamzah also gave assurance that about 85 per cent of Malaysians will continue to enjoy subsidised petrol, reflecting the true intent of a targeted subsidy, which is to channel support to those who genuinely need it.
Shifting the Narrative: From Resistance to Responsibility
Beyond policy and systems lies perhaps the greatest hurdle — the public sentiment. To succeed, the government must not only execute the policy well but also win over the hearts and minds of the people.
'Malaysians need to understand why this is happening, and how it benefits them in the long run. Communication is key—not just through official announcements, but also through social media, influencers, and community leaders,' Ahmed Razman said.
Meanwhile, Muhammad Irwan believes that values-driven messaging could help frame the issue in a more constructive light.
'In Islamic economics, there's a strong emphasis on intergenerational justice. Are we willing to enjoy unsustainable subsidies today and pass on debt to our children? That's not ethical,' he said.
Conclusion: A Chance for Reform, A Moment for Unity
Targeted subsidies are not a magic bullet, but they may represent Malaysia's best chance at realigning its economy toward sustainability, equity, and resilience.
If executed with care and supported by well-crafted policies and strategies, the pain can be short-lived and the rewards lasting.
'This is not just a fiscal adjustment. It is a chance to rebuild trust, improve targeting, and reform the way we support Malaysians in need.' Ahmed Razman said.
Muhammad Irwan added that it is a painful exercise, but one that must be done — and done right — for future generations.
All in all, the MADANI Framework enhances livelihoods by replacing blanket subsidies with targeted assistance, ensuring vulnerable groups receive the support they need.
It also fulfils the 'Raising the Floor' pillar of the MADANI economy framework, through which the government aims to improve income and living standards for the rakyat, while expanding social protection
-- BERNAMA