Govt facing tough choices as subsidy burden balloons, says expert

 Economist Lee Hwok-Aun says rising oil prices are straining Malaysia’s subsidy regime, forcing the government to weigh difficult policy trade-offs.

Putrajaya’s BUDI95 petrol subsidy – alongside increases to the Sumbangan Tunai Rahmah cash aid and Budi Madani payment programmes – has helped absorb some cost pressures on households.

PETALING JAYA:

 Malaysia’s fuel subsidy burden is rapidly escalating as global oil prices surge, placing the government in a difficult position as it balances cost pressures with political realities, an analyst says.

Writing in Fulcrum, economist Lee Hwok-Aun said the current system has provided short-term relief but is coming under increasing strain as external shocks drive up costs.

“Fuel-related subsidies have ballooned from RM700 million to RM3.2 billion per month,” he said, warning that “the costs will keep mounting as long as the Strait of Hormuz remains choked”.

The surge in global oil prices, driven by the ongoing conflict in West Asia, has pushed Brent crude past the US$100 per barrel, up sharply from around US$70 just weeks earlier.

In response, Prime Minister Anwar Ibrahim has pledged to maintain the RON95 price at RM1.99 per litre for two months under the BUDI95 programme, easing the burden for the majority of Malaysian motorists.

Lee, a senior fellow at the ISEAS-Yusof Ishak Institute, acknowledged that the measure – alongside increases to the Sumbangan Tunai Rahmah cash aid and Budi Madani payment programmes – has had an immediate impact on households.

“These measures will help relieve Malaysians’ burden of rising costs for a while,” he said.

However, Lee noted that the broader subsidy framework is facing mounting pressure, particularly as Malaysia remains dependent on imported crude.

“Malaysia’s local refineries are dependent on Gulf crude oil and this makes for a distressing outlook on future supply and prices,” he said.

Lee also pointed to knock-on effects across the economy, including the strain of rising diesel costs on tourism operators and an increased risk of fuel smuggling in Sabah and Sarawak as price gaps widen with neighbouring countries.

However, Lee said the government has limited room to manoeuvre due to political constraints.

“The Madani administration is politically locked into the subsidy regime for now,” he said, noting that subsidised fuel is “a fixture of life” and that “drastic price increases would be financially onerous and politically suicidal”.

He said Malaysia has long adjusted prices for unsubsidised fuels, but has left petrol largely exempt.

“Regular price revisions for unsubsidised fuel are already the norm, doing the same for subsidised fuel is difficult, but not impossible,” he said.

Lee suggested that a more flexible approach could help the government manage volatility more effectively.

“One way to navigate the volatile oil market is to shift the subsidy to proportional pricing from years-long rigidity,” he said, noting that RON95 prices had previously remained fixed for extended periods.

Under such a system, subsidy levels could be adjusted in line with market conditions. For example, he said, a 30% subsidy would translate into a pump price of about RM2.29 per litre, reducing the government’s subsidy bill by around 23%.

“If global oil prices fall, the subsidised price would automatically adjust downward,” he added.

Lee said the government could also explore alternative ways to share the burden, including contributions from oil companies benefitting from higher prices.

“One possibility could be for oil companies operating in Malaysia, especially Petronas, to commit part of their windfall profits to help cover the increased subsidy bill,” he said, noting that both subsidy costs and oil revenues tend to move in tandem.

Lee said the government should not rush into making firm policy decisions.

“It is too early to make concrete decisions on shouldering the subsidy load, but prudent to begin considering the options,” he said, adding that adjustments must be carefully communicated to the public.

Such measures, he said, could be framed as necessary responses to global conditions beyond Malaysia’s control, while ensuring that the government continues to absorb a significant portion of fuel costs.

“Malaysia has cushioned the oil price blow for its citizens for now but faces challenges to the fuel subsidy regime’s sustainability,” he said.

“The Madani government should consider adding agility to the system, enabling social protection and fiscal prudence in an uncertain and volatile world.” - FMT