Subsidies - need for a relook

SINCE the unity government took office, subsidy rationalisation has been one of its top priorities. The government took the view that a more targeted approach was necessary, as top income earners, despite being the major contributors to taxes in the country, do not deserve to be subsidised when it came to fuel purchases, especially the most widely consumed grade – the RON95.

The government launched the Pangkalan Data Utama or Padu database that would enable it to screen eligible Malaysians based on certain income criteria.

However, for now, the eligibility for the 200 litres of subsidised fuel is universal, and every Malaysian is able to enjoy subsidised petrol at RM1.99 per litre.

Car-centric nation

Malaysia is a car-centric nation with a total passenger car vehicle population of approximately 15.7 million, according to government portal data.gov.my.

Malaysia also has a large motorcycle population with some 13.4 million two-wheelers.

All in, based on the passenger car population, we have approximately 456 passenger cars per 1,000 population, and based on the 2024 Basic Amenities Survey Report, 92.3% of households owned a car, up from 89.9% in 2022.

It is no surprise that Malaysia has a fixation with cars to the extent we are again likely to see total industry volume hitting almost 800,000 units, after recording 820,752 units in 2025 and 816,747 units in 2024.

Passenger vehicles remain the most preferred mode of transport due to poor public transport, despite the billions spent on light and mass rail transit system.

Ridership on these networks, although improving, remains well below the first year’s ridership forecast, as the core transport hub connectivity is simply poor.

The over-reliance on passenger vehicles has choked our road networks. Traffic bottlenecks are everywhere, resulting in time wastage and unproductive use of vehicles and burning fuel.

In most major cities, the number one mode of public transport has always been buses that ply various routes and provide the last-mile connectivity.

However, in Malaysia, especially in the Klang Valley, buses are not efficiently deployed.

Too cheap

Although the government has taken steps to address fuel subsidy issues, the half-baked approach, whereby consumers are not really paying the full market price, has left the nation bleeding, with government coffers increasingly being redirected from critical ministries to meet the subsidy bill.

Despite being a net oil importer, Malaysia is still stubbornly subsidising fuel to consumers – RON95 here is ranked ninth cheapest in the world – as there is no clear mechanism or approach that will be palatable to the public in general.

The targeted subsidy approach, whereby consumers can buy up to 150 litres of RON95 at RM1.99 per litre, does not help the government to address the ballooning subsidy bill.

It is estimated that close to 90% of consumers use less than the monthly limit. The average consumption is at about 100 litres per month. The low price of RON95 underprices the actual cost of owning a passenger car and its running costs.

Depreciating Asset

Malaysians’ obsession with passenger vehicles is also evident when one looks at the current financing market, whereby financial institutions are willing to go the distance in terms of loan tenure of up to nine years, while the vehicle replacement cycle in Malaysia is widely believed to be in the four to five-year window.

Based on statistics provided by Bank Negara Malaysia, total financing for passenger cars hit RM235.9bil in April 2026, a 37.1% increase compared with just RM172.1bil four years ago.

As a percentage of total loan outstanding, passenger car financing stands at 9.8% against 8.8% in April 2022.

It’s a staggering figure, considering that a motor vehicle is a depreciating asset, and when it comes to the vehicle change cycle, the balance equity in the vehicle will be very low.

Typically, motor vehicles depreciate 10%-15% per annum on a reducing sum balance basis.

MoU

With the war in Iran officially ended with the signing of a memorandum of understanding (MoU) between Iran and the United States on Friday, crude oil prices have eased.

Although the Strait of Hormuz officially reopened on Wednesday as per the MoU, at least for the next 60 days, global supply remains a concern due to

the destruction of oil refining capacity.

The MoU is definitely seen as positive for Iran and the stability of the Middle East.

As part of the deal, the United States is prepared to lift all sanctions on Iran, as well as the establishment of US$300bil reconstruction fund for Iran and the release of frozen Iranian assets once the agreement is effective.

On Iran’s end, it must commit not to develop or acquire nuclear weapons, and to guarantee free and safe passage for commercial ships.

Should the United States and Iran be able to strike a peace deal based on the MoU, global oil prices are likely to moderate and hover between US$70 and US$80 per barrel, relieving the global economy from elevated oil prices as well as inflationary pressure.

Political suicide

While the pressure has been lifted from the government in addressing issues related to fuel subsidy in the immediate term, there must be a concrete plan for the government to address the elephant in the room when it comes to fuel subsidies.

As an oil-importing nation, the least Malaysia should do is to gradually move towards global market prices and in time begin collecting taxes in the form of sales and service tax or as carbon or petroleum tax.

This could start at a low rate of just 3% or even 5% to begin with, and gradually raised to up to 10% over a period of time.

For now, any changes to the fuel price mechanism or even a reduction of the monthly quota under BUDI95 are seen as political suicide; a non-starter given the consumer behaviour that demands cheap petrol and diesel, no matter how unsustainable it is.

With the general elections not too far ahead, the current mechanism will remain in place, but it is hoped that the new government that takes office will be able to address Malaysia’s obsession with fuel subsidies.

There are better ways to help those who are impacted. This can easily be done via various cash transfer schemes that the government has executed very well.

The current fuel subsidy issue is a deeply entrenched structural issue embedded in our society and must be addressed sooner rather than later.