Is It Time to End Fuel Subsidies in Malaysia?

Automologist MAC thinks it is. Here’s why…

As countries all over the world suffer from the massive increase in fuel prices, here in Malaysia we have been somewhat shielded from the pain by subsidies on RON 95 and Diesel. If you are unfortunate to have a car that needs RON 97, you would have started to feel the pain at the pumps though.

There has been a hue and cry about our neighbours down south in Singapore sneaking across the border to fill up with Malaysian subsidised fuel, but I contend that the fuel subsidy just doesn’t work and it is time to stop the subsidy and allow market forces to determine the price of our fuel.

Recent social media published images of naughty Singaporeans enjoying cheap Malaysian fuel. Note the block under the wheel in the first picture, an attempt to maximise the fuel tank’s capacity.

Firstly, remember that Malaysia is currently ranked third in the world for personal car ownership per capita with a stunning 93% of all houses owning one. Originally, the fuel subsidy was designed to benefit those people with lower income and by association, lower-end cars, and of course industries which rely on diesel. Globally, inflation in developing countries is currently running at 5.7% and in developed countries, at about 8.6%. Malaysia currently ‘enjoys’ an official inflation rate of 3.2% which is believed to be mostly due to the fuel subsidy.

The Government has allocated some RM5.3 billion (USD1.2 billion) but with the increased prices, this bill is now anticipated to run to a whopping RM28 billion (USD6.36 billion). Malaysia is also an oil-rich nation and stands to have a windfall profit from the global rise in prices rising, from about RM44 billion last year to about RM57billion, which does offset some of the increase in subsidies. But this will still mean a net increase in subsidies of about RM22.7 billion or about 0.1% of GDP.

It is not just in Malaysia. Late last year, Thailand saw rolling road protests after the government there refused to lower diesel prices.

If you think that the subsidy is a good thing and helps those with lower incomes, then you seriously need to think again. Approximately 53% of all the subsidies go to the T20 group (top 20% of Malaysians by earnings), and in reality, we all pay for the subsidy when we pay our taxes, even those without cars. It may just be that we are all suffering from a collective delusion when we believe that the subsidy is a good thing.

KAF Research believes that the subsidy is no longer tolerable. They suggest that the government should abolish the fuel price ceiling and reset the ceiling to a more manageable RM3 per litre (about 75 US cents) or a cash payment of about RM625 and then allow the price of fuel to float. It would not be the first time this has happened in Malaysia. Between 2014 and 2018, the price of all fuel was based on the automatic price mechanism and the costs of RON 95 and Diesel have not fluctuated much at all since then.

With cheap fuel, there is little incentive for Malaysians to consider more eco-friendly modes of transport, such as public transport, and they’d rather opt for driving about their daily business in gas-guzzling cars. Why buy an EV with all of that range anxiety when you can go out and get an SUV for less than USD25,000…oh, except during the recent return from Ramadan when much of the country ran out of RON 95 at the pumps.

So, fuel subsidies—they cost the nation a fortune, largely benefit the rich, increase everyone’s tax burden and are damaging to the environment. Let’s get rid of them…or have I just become a hemp-trouser-wearing tree-hugger?