Malaysia Cuts Petrol Subsidies Despite Concerns of Triggering Inflation

In a country like Malaysia, with more cars than people, this proposal raises worries among residents that it will trigger inflation if consumers are forced to pay the market price for petrol.

Malaysia is committed to reducing petrol subsidies in the second half of the year despite growing opposition to government plans to cut expenses and increase taxes.

The government may slash expensive gas subsidies as early as July, a move that Prime Minister Anwar Ibrahim said is necessary to reduce the country’s multi-billion-dollar subsidy bill and ensure that the savings reach those who are vulnerable.

In a country where there are more cars than people, this proposal raises worries among residents that it will trigger inflation if consumers must pay the market price for petrol.

Analysts predict that these subsidy cuts could come back to haunt them later, as voters may not handle this situation well, especially with the administration facing a series of elections over the next two years.

Anwar, who is halfway through his five-year term, faces a two-way road. The lawmakers push the government to delay the move and other fiscal policy changes that they believe will dampen business confidence and increase consumer expenses.

However, reducing the subsidies is essential to meet the government’s promises to reduce the country’s budget deficit.

Anwar stated that the wealthiest 15% would have to pay the market cost for petrol, whereas the rest would continue to enjoy the benefits of the current subsidized price.

Anwar, who is also the finance minister, reassured Malaysians’ concerns by stating a result from government research that showed 80% to 90% of the population will not be affected by the proposed subsidy cut. A drop in global oil prices has made it easier for policymakers to proceed with the politically delicate step, given that US President Donald Trump’s tariffs affect trade, thereby Malaysia’s economy.

Officials are trying to negotiate a deal with Washington during the 90-day pause on additional tariffs. The Trump administration slapped a 10% more duty on goods from Malaysia and other trading partners.

Anwar defended the proposal by saying that removing blanket petrol subsidies would free up funds to help the impoverished and improve the standards of healthcare, education, and other public services.

Regarding the subsidized fuel grade, he told the reporters that there is no issue with the RON95 increase affecting 85 to 90 percent of residents.  

The two most often used petrol grades in Malaysia are RON95 and RON97.

The most popular among the people is the RON95 due to its extensive subsidy. Drivers currently pay a fixed price of 2.05 ringgit (50 US cents) per litre (0.26 gallons) at the pump, one of the lowest prices in Southeast Asia. In contrast, prices for the unsubsidized RON97 can range from 3 to 4 ringgit per litre.

According to Anwar, the planned cuts are targeted towards the wealthiest and 4 million foreign nationals, who would consume 40% of the country’s current subsidies. With this, the government anticipates annual savings of up to 8 billion ringgit (US$1.9 billion).

However, the new consumer tax on imported products, including apples and salmon, which will take effect in July, will even more stretch the wallets of people.

Last June, the government removed all the petrol subsidies, which Anwar’s government acknowledged contributed to the defeat in the by-election the following month.

The government anticipated that the diesel subsidy cuts would reduce the annual subsidy cost by up to 7.5 billion ringgit. However, the companies that do not come under targeted assistance were affected by higher operating expenses, including tour bus operators, who were dealing with sluggish demand recovery.

In 2023, the Anwar administration scrapped the monthly electricity bill subsidies, which angered residents and resulted in the opposition minority winning the polls in Selangor, a state dominated by his alliance.