2025/68 “Floating Prices, Fearing Backlash: Economics and Politics of Malaysia’s Petrol Subsidy Reform” by Lee Hwok Aun

Two workers clean the logo of Malaysian oil company Petronas at a petrol station in Bentong, Pahang, on 29 March 2024. Photo by Mohd RASFAN / AF).

EXECUTIVE SUMMARY

• Malaysia’s transition from blanket subsidies to targeted subsidies — a signature reform of Anwar Ibrahim’s Madani administration — has progressed in the energy sphere from electricity to diesel and now petrol, the most practically challenging and politically charged item.

• The reform strives to reduce the fiscal burden of subsidies and redress the regressive distribution of blanket subsidies, which disproportionately benefit high-income households, while curbing cross-border smuggling and mitigating financial strains on the populace, especially lower-income households.

• Malaysia’s approach shifted from an initial interest in a general subsidy removal with targeted cash assistance, to targeted subsidy removal with differentiated at-the-pump prices. While the diesel subsidy reform of June 2024 mainly filtered in subsidy recipients, RON95 petrol focuses on filtering out the ineligible – foreigners and “ultra-rich” Malaysians, according to the latest disclosures – while subsidising the masses.

• The policy seems to have passed the point of no return; the government is deliberating operational variations towards a rollout by end-2025. By all indications, the eventual settlement will retain subsidised petrol for the vast majority. The path forward is shaped by fear of political backlash and resulting practical compromises, as well as the lack of public transport and omission of a sustainability ethos.

ISEAS Perspective 2025/68, 15 September 2025

* Lee Hwok Aun is Senior Fellow and co-Coordinator of the Malaysia Studies Programme at ISEAS – Yusof Ishak Institute. The author thanks Chan Xinning and Leong Yong Jun for their excellent research assistance, and Francis Hutchinson and Cassey Lee for helpful feedback on an earlier draft. The usual disclaimer applies

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INTRODUCTION

Malaysia’s Madani government has promised to reduce its fiscal burden by phasing out blanket petrol subsidies. The country has, in recent decades, grappled with its expensive fuel subsidies, through drastic measures that were backtracked after fierce opposition or selective adjustments that essentially kept the status quo. In the initial policy discourses of 2023 and especially in early 2024, the government signalled a preparedness to take bold, comprehensive action. However, the scope of reform has since narrowed. According to the latest disclosures, Malaysian masses will continue to enjoy subsidised fuel, while “ultra-rich” citizens and all foreigners will pay more.

This Perspective sets out the broader policy context of fuel subsidy reform, including the impetus and past experiences in Malaysia and other countries. This is followed by an overview of the Madani government’s efforts from 2023. Reforming RON95 (Research Octane Number) petrol subsidies is the latest in a series that includes electricity and diesel, but it is the most challenging to execute due to Malaysians’ ubiquitous use of private vehicles. This article discusses the political and pragmatic factors that induced the shift from a general subsidy removal with targeted assistance to narrowly targeted subsidy removal. Malaysia has reduced its policy scope due to the expected public backlash to higher fuel prices, perceived financial and psychological inadequacies of compensating cash transfers, deficiencies in public transport, and absence of an underpinning sustainability ethos. 

POLICY IMPETUS AND PREVIOUS ATTEMPTS

Malaysians enjoy among the cheapest fossil fuel worldwide. In August 2025, petrol prices in the country were the 10th lowest out of 168 countries, at US$0.48 per litre, compared to the world average of $1.30 (Table 1). The domestic price of RON95 petrol has been maintained at RM2.05 since February 2021 and stayed under RM2.20 for most of the past eight years.[1] Diesel in Malaysia, which is subsidised for selected users and in East Malaysia, is the 21st cheapest (US$0.69; world average US$1.23). Malaysia is at the bottom end of the price table in Southeast Asia and among countries that have undertaken petrol subsidy reform in the past decade (discussed below). Mass private vehicle ownership of 17.2 million cars and 16.8 million motorcycles, and meagre 20 per cent public transport usage, have made fuel subsidy reform imperative — and seemingly intractable.

Table 1. Petrol prices (95-Octane, US$ per litre), selected countries, 11 August 2025

Source: https://www.globalpetrolprices.com/gasoline_prices/.

Governments provide subsidies for economic and political reasons. Reducing fuel prices eases the financial burden on the population; stabilising the price buffers households from price volatility, providing a simple form of social protection. These tangible benefits yield obvious political dividends that have been particularly irresistible in oil-rich countries that can funnel export earnings back to the subsidy. In such countries, the populace may also feel entitled to receive some dividends from the natural endowments. However, many countries have found fuel subsidy less tenable over time due to depleting oil revenue and regressive distribution — with the rich benefiting the most due to their higher consumption. The environmental and health detriments of carbon emissions and pollution have also led some countries to impose excise tax on fuel to account for the externalised environmental and social costs, and to reduce fuel consumption. Effective implementation of policies that raise fuel prices, especially in upper-middle-income and high-income countries, arguably hinges on the availability of reliable and often subsidised public transportation.

Malaysia’s large public subsidy bill (for fuel, utilities, food, and other basic goods) and broader commitments to fiscal consolidation have placed subsidy rationalisation on the policy agenda for many years. These logical and prudential reasons do not insulate government from backlash, as emphatically experienced by Prime Minister Abdullah Badawi, whose fuel subsidy reforms of June 2008 raised diesel and petrol prices by 40 per cent and 67 per cent, respectively, provoked public uproar and hastened his departure from office, despite the extraneous factor of soaring global oil prices. His successor Najib Razak’s administration lowered prices again when international markets cooled, and did not change fuel policy pricing until 2014, when a managed float pricing system was introduced.

Malaysia’s persistently narrow tax base and declining oil and gas revenue have sustained the case for fuel subsidy reform, with the call tending to amplify after changes of government. The oil and gas sector’s contribution to government revenue rose from 8 per cent in 1975, when Malaysia first exerted control over its hydrocarbon resources, to 30 per cent in 1985. This share has fluctuated over the years, in tandem with global prices and national oil company Petronas’ earnings, reaching 35 per cent in 2010, then settling in the lower 20s from the mid-2010s, and most recently registering 20 per cent (2024).[2]

In May 2018, the newly elected Pakatan Harapan government, under Prime Minister Mahathir Mohamed, floated the price of RON97 petrol while reintroducing a fixed, subsidised price for RON95.[3] The RON97 subsidy removal was politically feasible, since only luxury car owners tend to use the higher-grade fuel, and they can still opt for subsidised RON95. Nonetheless, it marked one milestone in the subsidy reform journey, which resumed under Prime Minister Anwar Ibrahim’s Madani government from December 2022.

COUNTRY EXPERIENCES

A few country references are instructive before we unpack Malaysia’s situation. This section summarises key fuel subsidy developments in five countries selected to represent variations in reform approaches and oil-exporting capacity, juxtaposed with Malaysia’s experience (Table 2). We omit oil-dependent economies of the Gulf region and West African countries like Angola and Nigeria. 

Table 2. Malaysia and selected countries: Key developments in fuel and energy subsidy reform and accompanying policies (In brackets: fuel exports % of merchandise exports in 2023/24)

Sources: Brazil; India;[3] Egypt;[4]  Indonesia;[5] [6] Mexico[7] fuel export data from World Development Indicators. https://data.worldbank.org/indicator/TX.VAL.FUEL.ZS.UN

The country experiences are more complex and nuanced than these summaries, but a few lessons emerge with sufficient clarity to inform Malaysia’s petrol subsidy reforms:

1. Abrupt petrol price hikes tend to trigger social protest or political capitalisation of public discontent – for example, Indonesia in 2005 and 2022,[8] and Mexico in 2017.[9] The phenomenon has been documented in multiple countries between 2005 and 2018. Additionally, fuel subsidising countries are more susceptible to unrest because fuel price adjustments tend to be more drastic, particularly when compelled by unsustainable subsidy bills at a time of high global oil prices.[10]
2. Newly elected governments, particularly with a clear mandate, tend to undertake more ambitious fuel subsidy reforms. Salient examples of significant reforms include Prime Minister Modi in India (2014), President Jokowi’s first term in Indonesia (2015), and President Lula’s second term in Brazil (2022).
3. Lower global oil prices facilitate reform rollout by buffering against large price hikes. Favourable external conditions contributed to India’s accelerated diesel subsidy removal in 2014.
4. Subsidy reforms differ in timing and scope by type of fuel, and do not necessarily eliminate subsidies completely and permanently. Most countries have sequenced subsidy reforms for diesel and petrol, and some retain subsidies for other fuels. Governments continue to regulate fuel prices through various mechanisms (Brazil, Egypt, Mexico). Some fuel subsidies are targeted by user types — e.g. transportation, logistics, and households using cooking gas — but few if any countries differentiate at-the-pump prices for the mass population.
5. Social assistance that accompanies fuel subsidy reform can help mitigate the cost, especially for low-income households. The efficacy varies across countries, but cash transfer programmes notably feature in Indonesia, Brazil, and Egypt. 

The above observations confirm what collective country experiences would predict as conducive conditions for undertaking fuel subsidy reform, and continual challenges that require responsiveness and adjustment. A 2021 UNDP report on fossil fuel subsidy reform similarly emphasised the importance of compensatory measures, and recommended a phased approach that avoids drastic fuel price hikes detrimental to the populace.[11] 

MADANI REFORM JOURNEY: EXPERIMENTS, ANXIETIES, SETTLEMENTS

Anwar Ibrahim’s Madani administration has pursued subsidy reform in stages since its formation in November 2022. In January 2023, the government rolled back electricity subsidies for high-volume consumers, in the form of a surcharge for usage above 1,500kWh per month. Subsidies on chicken were dropped in November 2023; water tariffs were adjusted in February 2024.[12]

Prime Minister and First Finance Minister Anwar Ibrahim’s first signature budget laid the groundwork for shifting from blanket to targeted subsidies.[13] His Budget 2024 speech delivered on 13 October 2023 highlighted Malaysia’s massive subsidy bill of RM81 billion, which encompasses fuel, food, and other basic goods. The PADU (Pangkalan Data Utama) central data hub was launched in January 2024 — an ambitious experiment in building an unprecedented database for comprehensively and precisely targeting social assistance. The Department of Statistics aggregated data from myriad sources to create a personal profile for 30.4 million citizens and permanent residents. But for PADU to be a reliable reference for mass subsidy targeting, each registrant in PADU needed to update their socioeconomic data across an expansive range, spanning income (from multiple sources), property, assets, and liabilities. A mass registration exercise of January-March 2024 yielded 17.65 million accounts, with a portion of the account holders updating their data.[14] No further calls for public participation were issued, despite PADU’s billing as a critical enabling factor for subsidy reforms.

The option of across-the-board subsidy rollback with targeted cash transfers based on the PADU database featured saliently in initial policy discussions surrounding diesel and petrol. Policy thinktanks had recommended this mechanism, together with the Advisory Committee to the Finance Minister, which referenced internal research that found substantial public support for higher fuel prices with added social assistance.[15] At a Cabinet policy retreat in January 2023, concerns were also raised that no country had implemented a tiered pricing system.[16]

In June 2024, the government introduced a targeted diesel subsidy regime that blended differentiated pricing and cash transfers. The subsidy was removed in Peninsular Malaysia but retained in Sabah and Sarawak, and for fishermen. On the Peninsula, transport operators could claim the subsidised rate via fleet cards, while farmers, smallholders, and low- to middle-income households owning diesel vehicles could apply for the new RM200 monthly Budi Madani benefit. Budi Madani did not utilise PADU but initiated its own registration. The diesel subsidy reform rollout did not face major glitches. The enforcement of quotas for subsidised diesel has effectively quashed diesel smuggling, saving the government RM600 million per month.[17] Nonetheless, the massive price hike from RM2.15 to RM3.55 per litre (56 per cent) triggered some public discontent and was believed to be a factor in the Unity Government’s loss at the Sungai Bakap, Penang state assembly by-election on 6 July 2024.[18]

These circumstances gave pause to RON95 subsidy reform, which was carried forward to the next year.[19] Budget 2025, tabled on 18 October 2024, provided an update on the subsidy rationalisation journey, including savings of RM4 billion from the electricity sector and another RM4 billion from diesel. The government underscored the central goal of fiscal savings and foreshadowed its policy direction by critiquing how subsidies are enjoyed by the rich and foreigners. The plans for RON95 had decidedly shifted from general subsidy removal with targeted cash assistance to a semblance of the diesel subsidy’s tiered pricing.

However, the focus shifted from filtering in the eligible to filtering out the ineligible, which introduced a new set of challenges. The Budget 2025 speech proposed eliminating the subsidy for the “T15” (top 15 per cent) highest income households — a newly defined upper crust embodying the ultra-rich. The T15 income threshold was not stated, although the Budget speech noted the Ministry of Finance’s estimates that they receive RM8 billion out of the RM20 billion subsidy.[20] Whereas the diesel mechanism demarcated some subsidy recipients by trade (fishermen, transportation) or enabled voluntary application by households based on income and vehicle ownership, RON95 subsidy would be automatically granted to the bottom 85 per cent. Requiring the T15 to register their ineligibility would surely flounder, hence the government would need to establish a credible income threshold and conscript subsidy non-recipients.

Unsurprisingly, given these complications, the RON95 subsidy rollout was reconfigured and deferred further. In May 2025, the focus shifted to foreigners and the T5 as target groups for subsidy removal. Reportedly, the 4 million foreigners in Malaysia enjoy RM3-4 billion in fuel subsidies.[21] The Ministry of Economy, which had overseen PADU’s development, also handed over all aspects of implementation to the Ministry of Finance.[22] PADU appeared to be marginalised; internal policy discussions in July scarcely referenced its data.[23]

However, Finance Minister II Amir Hamzah Azizan clarified on 4 August that PADU would inform the subsidy reform process, given that it had integrated data from multiple government sources, encompassing employment, income, education, and vehicle ownership.[24] Whether PADU can reliably determine the subsidy eligibility threshold and mark out the ineligible hinges on the scope and validity of its data. With critical policy decisions continually in flux, and petrol station operators also voicing concerns about earnings disruptions, Minister Amir Hamzah extended to September the timeline for disclosing policy details,[25] while noting the possibility that the threshold may settle between T5 and T15 – in other words, subsidising around 90 per cent of Malaysian users.[26]

It is clear enough, though, that with the onus of determining ineligibility falling on the government, the database it uses must credibly and comprehensively capture high-income earners. In this vein, the Internal Revenue Board’s (LHDN) tax records, which would be more complete for high-income individuals, stand out as an authoritative and applicable registry. LHDN data on Malaysia’s six million income taxpayers could be integrated with PADU. Channelling cash assistance to vehicle owners would most directly compensate the parties affected by fuel subsidy removal, but this approach has not materialised due to ownership by third parties or through the second-hand market, the plethora of vehicle models and engine capacities, and other implementation challenges. Removal of RON95 subsidies for luxury car owners, however, might present a narrowly targeted option aligned with the goal of ceasing subsidies for the rich.

The Madani government is committed to the MyKad chip-enabled identity card for screening citizenship and eligibility, and tracking each person’s subsidy quota (whether based on volume or cash amount). E-wallets, with secured identification and MyKad linkage, might provide a parallel choice for citizens.[27] The MyKad mode would require all pumps or petrol kiosks to be equipped with card readers, but it seems to be preferred for its simpler process and universal coverage. The addition of biometric scanning, by requiring the physical presence of MyKad holders, would curb misuse. However, such a facility would entail additional installations and expenditures.

The policy timeline is enmeshed with other practical and political fortuities. Rolling out the changes close to any peak travel period would be perilous, which suggests the next window could open after the mid-September school holidays and Malaysia Day season. The timing would also follow on PM Anwar’s People Appreciation package announced on 23 July 2025 in conjunction with Malaysia Day, which included a RON95 price cut from RM2.05 to RM1.99, effective at end-September. These handouts perceivably attempt to assuage the populace’s discontent at living costs and the expansion of the Sales and Services Tax, and to massage in the forthcoming petrol subsidy reform. Anwar may also want to defer the fuel subsidy reform until after Sabah’s state election, which is also expected by end-2025 but might stretch into early 2026.

SYNTHESIS OF POLICY OPTIONS AND DECISIONS

To help make sense of Malaysia’s fuel subsidy reform journey, it is useful to distil key policy elements (Table 3). The gravitation away from fuel subsidy removal with targeted assistance to targeted fuel subsidy, and emerging differences between diesel and RON95 mechanisms, are derived from political calculations, pragmatic considerations, and evaluations of adverse risks.

A further option of incremental subsidy reduction across the board could augment fiscal savings while facilitating a more manageable price increase and possibly containing the amount of compensatory social expenditures.[28] However, the Madani administration was predisposed against removing general subsidies. Its commitment to targeted subsidies became a de facto mandate to either provide cash payments to low- and middle-income households or to differentiate the fuel price by income group. Policy discourses were shaped by an abiding fear of popular backlash. PADU also had not attained the requisite population coverage and data comprehensiveness for targeting social assistance.

Table 3. Malaysia’s fuel subsidy reforms: Major policy considerations and decisions[29]

Fiscal savings are contingent on the net effect of lower subsidy costs and higher social expenditures. The phased approach with gradual subsidy reduction could compound this uncertainty, compared to an abrupt price float that would drastically cut the subsidy bill. Hence, a government determined to demonstrate fiscal savings may be disinclined to take the incremental approach. Moreover, expectations of social assistance would compel the introduction of extensive operational expenditures, denting the subsidy reform’s fiscal savings. Given the PADU database’s gaps, Malaysians would either register again for a programme, akin to Budi Madani, or assistance could be channelled through existing databases, most saliently the Sumbangan Tunai Rahmah (STR, or Compassionate Cash Contribution) programme which has 8.5 million registrants.[30] In either case, the added transfers could add up to a hefty sum ­ — and still run the risk of excluding vehicle owners, the most important cash assistance recipients. The alternative of removing fuel subsidies for the rich would also commit targeting errors; some high-income individuals would slip through the cracks and receive the subsidy. On the whole, though, the exclusion error of low-income households missing out on cash assistance was considered less palatable than the inclusion error of allowing some high-income vehicle users to access subsidised petrol.[31]

Regardless of the mechanics of targeted assistance and cash amounts provided, there was also a conviction that, psychologically, gratitude for cash assistance could never adequately compensate for grievance toward more expensive fuel. Notably, such views and recollections of the backlash against the 2008 fuel subsidy rollback were fervently expressed by senior civil servants, not just political leaders.[32] The spectre of knock-on inflation effects of RON95 subsidy removal, particularly when driven by profiteering, was another significant concern. However, this was not necessarily a binding constraint, given the capacity and experience of the Ministry of Domestic Trade and Cost of Living in monitoring price gouging.[33]

The government opted for the targeted subsidy mode for diesel in June 2024, and is exploring modifications for petrol, due to the greater scale of RON95 usage. The key differences are twofold. First, the RON95 policy will maintain the subsidised price as the default and filter out the ineligible by fiat, while charging diesel at market price and providing subsidies for selected users who opt in. The government hopes the mass subsidy retention will help contain public discontent. Indeed, targeting the subsidy removal at the ultra-rich could burnish Madani’s pro-people credentials. Second, RON95 is not accompanied by social assistance. By avoiding such additional expenditures, the fiscal savings are also more predictable because they do not undertake the risk of fixed social assistance expenditures alongside variable subsidy savings (due to global oil price volatility).

CONCLUDING NOTES

The reasons for the Madani path of reform are understandable. There remains a possibility that Malaysia may abandon RON95 subsidy reform, should the government deem the rollout too difficult and the fallout too severe. For the moment, though, the likelier outcome is a targeted subsidy of which the details are being negotiated.[34]

Nonetheless, the alternative of an across-the-board phased subsidy reduction should be raised, along with the omission of public transportation and sustainable development in Malaysia’s fuel subsidy policy discourses. Eliminating subsidies only for the ultra-rich and foreigners while implementing subsidised fuel quotas for the rest adds cumbersome procedures while attenuating the original objective of fiscal savings and raising ethical questions surrounding nationality discrimination and inequitable practice of treating low-wage migrants in the same manner as wealthy expatriates. Current conditions are not necessarily optimal, but global oil prices are lower and the Malaysian Ringgit stronger now than in 2023 when fuel subsidy reforms were initiated (see Appendix Figures 1 and 2). With unsubsidised RON95 costing RM2.50 per litre, circumstances arguably presented a window to raise the price, say from RM2.05 to RM2.25 by halving the RM0.45 subsidy.[35] Instead, the government has lowered the price.

The lack of alternatives to private vehicles amplifies public anxieties. Malaysia’s anaemic 20 per cent public transportation usage is an under-recognised constraint on comprehensive fuel subsidy reform. Cheaper fuel incentivises higher consumption and carbon emissions; the social and political populist objectives of subsidies militate against environmental priorities and climate crisis mitigation, as well as traffic congestion and air pollution. More fundamentally, Malaysia’s proclivity to retain the subsidy for the masses derives from the absence of a sustainability ethos to drive the process, which could provide motivation and public buy-in for undertaking transition costs. Enhanced public transportation and sustainability mindsets would not preclude social assistance for groups acutely affected by comprehensive subsidy reform, such as rural residents and commercial transporters. Targeted cash transfers could be provided on a geographic or sectoral basis.

For now, Malaysia looks set to partially reform its fuel subsidy regime. A future government will have to revisit the necessary but difficult decisions this government has deferred.

APPENDIX AND ENDNOTES

For appendix and endnotes, please refer to the original pdf document.