Fuelling Reform: Bolder Petrol Overhaul is Malaysia’s Best Bet

Malaysia is in a tough spot when it comes to reforming RON95 fuel subsidies to reduce the country’s fiscal burden. The country needs more money: tax revenue stands at only 12.5 per cent of GDP, and oil is generating less revenue for the national coffers. Channelling money away from exorbitant expenditures would ease this strain, allowing the government to fund more critical services and investments. Fuel subsidies, which have been in place since 1983, are a logical target to tackle. In 2022, these subsidies cost RM52 billion — or 74 per cent of Malaysia’s total subsidy bill.

The MADANI government intends to replace blanket subsidies with a targeted two-tier pricing system. This seeks to remove the subsidy for high-income earners who tend to own bigger cars and benefit disproportionately from subsidised fuel. Eligible Malaysians will meanwhile continue to enjoy subsidised fuel prices.

Timing is everything. With three state elections in the pipeline and a national election due by 2027, scaling back unlimited cheap fuel could dent the coalition government’s performance at the polls. Meanwhile, backlash from July’s Sales and Services Tax (SST) expansion has made the path to RON95 reform even rockier.

No Malaysian government has fallen over institutional reforms, but fuel and consumption taxes are political landmines. Former Prime Minister Abdullah Badawi’s subsidy cuts amid surging oil prices hastened his departure as prime minister. In 2018, Najib Razak’s government collapsed under an opposition campaign that linked the Goods and Services Tax and soaring living costs to 1MDB and corruption.

To soften the blow, Putrajaya has recalibrated RON95 subsidy reforms into something more palatable in three key ways. These have gained traction around the SST expansion and its aftermath. But these political and practical compromises risk undermining the original objective of fiscal savings.

Subsidy Reforms: Watered Down

Table 1: Changes in Malaysia’s Fuel Subsidy Reform (as of 20 August 2025)

Details	Original Policy	Revised Policy
Scope	Top 15 per cent & foreigners	Top 5 per cent & foreigners
Savings	RM8 billion (RM 4 billion from the T15 + RM4 billion from foreigners)	Unknown, but smaller due to narrower scope and greater subsidies (fuel prices lowered from RM2.05/L to RM1.99/L)
Subsidy Eligibility	Complex, PADU-based criteria (e.g. household income adjusted for cost of living, such as number of dependents). Malaysians to update PADU details to better determine eligibility.	Reform roll-out delayed to the final quarter of 2025 at the earliest
Timeline	Reform slated for roll-out in mid-2025	Reform roll-out delayed to the final quarter of 2025 at the earliest

First, on 26 May — two weeks before the SST announcement — Prime Minister Anwar Ibrahim narrowed the scope of subsidy removal to the top 5 per cent of earners (T5) and foreigners, down from the initially proposed top 15 per cent (T15) and foreigners (the older scheme would have netted RM8 billion in savings; the newer scheme would lead to smaller savings, but it is not known what the exact figure would be). On 23 July, he announced a RON95 price cut for all Malaysians to RM1.99/ litre, down from RM2.05, as part of the National Appreciation Day package.

The Ministry of Finance maintains that RON95 reform remains on track, with details expected by end-September. The 23 July price cut appears to serve dual purposes: a final reprieve for higher-income Malaysians before subsidy withdrawal, and a buffer against post-SST inflationary anxiety.

Second, Putrajaya has quietly retreated from earlier plans to extensively utilise the centralised database PADU to identify low- and middle-income households that qualify for subsidies or cash assistance. Originally, Malaysians were supposed to update their particulars on PADU to better determine subsidy eligibility. However, PADU’s unpopularity among Malaysians led to inter-ministerial disagreements over PADU and its sidelining, according to former Economy Minister Rafizi Ramli. Indeed, a nationwide push or official reminders to prompt the public to update PADU data were conspicuously absent in 2025.  

PADU’s application is also being circumscribed. Finance Minister II Amir Hamzah clarified on the popular podcast Keluar Sekejap that simpler criteria, such as gross household income, will guide subsidy eligibility. This contrasts with previous intentions to base social assistance on more nuanced PADU-derived criteria, such as household income adjusted for cost-of-living variables (for example, the number of dependents).

Third, the government delayed RON95 reform from mid-2025 to 2025’s final quarter to fine-tune the identity card-based mechanism, chosen because all Malaysian citizens hold an electronic chip-enabled identity card (IC). Although Putrajaya is modelling the RON95 reform on last year’s diesel reform, which also operated via ICs, more Malaysians use RON95. The scales are wildly different, and there is a greater risk of leakages, back-end infrastructure failure and coordination errors. Haphazard implementation — and hence bad user experience — could foment greater backlash.

Foreign residents may quietly acquiesce to paying fuel prices, but the absence of any socioeconomic criteria raises moral concerns that tax-paying foreigners outside the top income brackets are unfairly targeted.

The three recalibrations may help RON95 subsidy reform survive politically, but they would likely attenuate the original objective of fiscal savings. The point of withdrawing blanket subsidies is to redirect spending towards tackling Malaysia’s fiscal deficit and funding essential services, including social safety nets. The narrower scope of the subsidies and lowering RON95 prices to RM1.99/litre add fiscal pressure and complicates progressive reform. If every unpopular policy is contradicted to avoid friction, clarity and public trust in the reform agenda and goals erode with each retreat.

The recent moves cannot be quickly undone; with more subsidies now channelled into lower fuel prices, Malaysia could consider layering a quota on top of the targeted two-tier pricing system to moderate fuel consumption. With a quota, eligible Malaysians do not receive unlimited fuel subsidies. Rather, they receive fuel subsidies up to average consumption levels and then pay market prices beyond that threshold. There is a precedent: Putrajaya already applied quotas for last year’s diesel reform, with vulnerable groups also receiving cash aid for additional fuel expenditure.  

No Malaysian government has fallen over institutional reforms, but fuel and consumption taxes are political landmines

RON95 reform must continually meet the dual imperatives of being systematically fair while achieving savings. But providing cash aid on a case-by-case basis is sub-optimal. It addresses isolated incidences of economic inequality but fails to address systemic gaps that keep certain communities disadvantaged. A more coherent, data-driven framework could instead combine information on income, location, and mobility. This framework — for example, a PADU-based mobility deprivation index — could guide cash aid as well as practical solutions, like improving last-mile connectivity and targeted investing in local economies, to tackle the root causes of location-driven inequalities.

Subsidy reform must be done — and without postponing or watering down hard choices Malaysia cannot afford to sidestep. Current conditions remain rather conducive for a more comprehensive subsidy removal, that is, the complete withdrawal of subsidies for Malaysia’s highest earners and a more limited quota-based provision of subsidies for the rest. Low oil prices could moderate the economic shock, and elections are still some way off.

This bitter pill may be easier to swallow if lessons from the SST backlash are applied. Public anger partly stemmed from perceived economic unfairness — by policy choices to tax imported fruits like apples, for instance, but levying relatively low tax rates on luxury items. Rolling out RON95 reforms alongside progressive measures, such as higher taxes on the “ultra-rich”, may ease public resistance and bolster legitimacy.

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