Higher usage could mean less aid under gradual subsidy reform
KUCHING: A tiered petrol subsidy system that gives greater support for basic consumption could help Malaysia manage the fiscal strain if global oil prices remain elevated for the next two to three years.
Universiti Malaysia Sarawak (UNIMAS) economist Dr Dzul Hadzwan Husaini said maintaining petrol subsidies at current levels over a prolonged period could become increasingly costly, particularly if the gap between subsidised and market prices widened substantially.
“If the market price of petrol approaches RM4 per litre while eligible consumers continue to pay around RM2 per litre, the price gap absorbed by the government becomes substantial,” he told Sarawak Tribune.
Dzul said subsidies were useful as a temporary buffer against higher living costs and inflation when oil price increases lasted only several months.
But if elevated prices persisted for two or three years, maintaining the same level of support could put greater pressure on public finances and complicate efforts to reduce the fiscal deficit.
“If the deficit reduction target is maintained, fiscal space will have to be created elsewhere, either through additional revenue or adjustments in government expenditure,” he said.
He cautioned that spending on energy subsidies should not come at the expense of healthcare and education, which were important investments in human capital, productivity and long-term economic development.
Instead of a sudden petrol price adjustment, Dzul proposed a gradual, progressive and predictable approach.
One option would be to provide a higher subsidy for the first 200 litres of fuel consumption to cover basic mobility needs, followed by a lower subsidy for consumption between 200 and 400 litres.
Usage beyond a certain threshold could progressively move closer to market prices.
“The principle is straightforward: basic consumption receives stronger protection, while the subsidy gradually declines as consumption increases,” he said.
Dzul stressed, however, that consumption alone should not determine how much support households receive.
Income, geographical location and occupational requirements should also be factored into the mechanism to ensure low- and middle-income households and those with genuine transport needs remain protected.
He said geographical differences were particularly important for Sabah and Sarawak, where longer distances and limited public transport meant private vehicles were often a necessity.
Higher-income households, meanwhile, could receive progressively lower subsidies.
Dzul also cautioned against treating pick-up trucks automatically as luxury vehicles because they were commonly used by rural communities, farmers, small and medium-sized businesses and workers in Sabah and Sarawak.
“In many cases, they are productive assets and essential tools for employment rather than indicators of luxury consumption,” he said.
Dzul said public acceptance would also depend on how clearly the government explained the reform, including the cost of subsidies, who benefited from them and where the savings would go.
“If households can see that part of the savings is being redirected towards strengthening healthcare, education, public transportation and assistance for households that genuinely need support, the reform will be easier to understand and accept,” he said.
If elevated global oil prices persisted for another two or three years, he said the debate would ultimately be about more than petrol prices, extending to fiscal sustainability, fairer subsidy distribution and safeguarding public spending for future generations.
