Based on the standpoint of Malaysian policymakers, subsidies are deemed essential, with billions allocated each year to aid the underprivileged.

However, subsidies are also wielded as political leverage. Successive governments have a track record of effectively utilising subsidies not only to secure votes but also to solidify their support base, achieved by steadily raising the quantum.

Over time, the escalating burden it poses on the national budget has transformed it into a looming threat that requires immediate intervention.

The unity government under the leadership of Prime Minister Anwar Ibrahim, aims to address this through a comprehensive subsidy rationalisation plan introduced under Budget 2024 that was tabled in October last year.

List of Essential Goods currently Subsidised
In Malaysia, the government subsidies the people’s spending on essential items such as chicken, eggs, rice, a selection of cooking oil, utilities such as electricity, and fuel.

Despite a 10% reduction in subsidies under Budget 2024, the total allocation remains significant at RM58 billion, positioning it as the second largest expenditure component of the budget after wages.

Fuel accounts for the largest portion of the subsidy budget. In 2022, the government allocated over RM90 billion in subsidies, and 53% of it went solely to fuel, primarily diesel and RON95 petrol.

For the record, the subsidy for the premium grade RON97 was removed in 2010.

While this has made pump prices in Malaysia among the lowest in Southeast Asia, it has also led to the country becoming a hotspot for fuel smuggling, resulting in a leakage of subsidy funds.

Efficient and Equitable Fuel Subsidies
Currently, consumers are charged RM2.15 per litre for diesel and RM2.05 for RON95.

During the tabling of Budget 2024, the government introduced a subsidy rationalisation plan for diesel this year. A similar initiative for RON95 is anticipated, possibly later in the year, though no official announcement has been made.

According to official records, as of March 24, 2024, the market rate for diesel stood at RM3.43 per litre. However, consumers only pay RM2.15 per litre, while the government bears the remaining RM1.28 through subsidy.

Besides the substantial savings the government will get from removing the subsidy, the rationale is that with higher pump prices it will become less profitable to risk smuggling the commodity across the border.

In 2023, government expenditures on diesel subsidies amounted to an estimated RM39 million daily, translating to RM1.2 billion monthly or RM14 billion annually. The savings from the rationalisation move can be diverted to meet other needs such as cash handouts to the most needy to help them defray the increase in the cost of diesel.

Targeted Subsidy Exemptions, Support Vital Sectors
As part of the rationalisation initiative, certain consumers have been granted exceptions. For instance, businesses with commercial diesel-driven vehicles will continue to receive the subsidy under the Subsidised Diesel Control System (SKDS) 2.0.

Additionally, other beneficiaries include transport service providers and specific groups of fishermen who will receive supplementary aid.

This is to prevent businesses from relying on diesel price hikes to raise prices of consumer goods.

This measure aims to prevent businesses from relying on diesel price hikes to inflate consumer goods prices.

Furthermore, it guarantees that any rise in the inflation rate remains minimal.

Rationalising Fuel Subsidies
It's important to emphasise that the elimination of fuel subsidies, though challenging for certain individuals, will bring forth several benefits too.

As highlighted by Prime Minister Anwar Ibrahim recently, affluent Malaysians, along with the 3.5 to 4 million foreigners who live and work in the country also benefit from the comprehensive fuel subsidy scheme.

Denying them the subsidy will lead to substantial financial savings that can be redirected to fund cash assistance for individuals within the B40 demographic.

During an interview with Free Malaysia Today, BIMB Securities Research analyst Amiratul Husna said, the implementation of targeted subsidies not only aids in reducing wastage but also guarantees that support reaches those who are most in need.

The Fleet Card, which was introduced for nine categories of vehicles under the SKDS 2.0 in March, will be used by eligible consumers to purchase diesel.

By digitising diesel subsidy management, the government not only boosts efficiency but also addresses the problem of smuggling.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.