Where do we stand on subsidies?

When Prime Minister Anwar Ibrahim tabled Budget 2026, he laid out a clear, disciplined strategy for structural reform, allocating an initial RM15 billion for petrol and diesel subsidies.

This was an ambitious and necessary fiscal target at the heart of a subsidy rationalisation policy designed to help Malaysia make the transition away from the inefficiencies of blanket subsidies.

The Madani government is the first administration to have tackled this directly.

In parliament recently, Anwar revealed just how dramatically the baseline has shifted, driven by the surge in oil prices due to the Middle East conflict.

In January and February, under the rationalisation policy, the subsidy bill was just RM800 million per month. By March and April, it had surged to RM5 billion monthly, touching RM7.5 billion at its peak.

If oil prices remain around US$80 to US$90 per barrel, Malaysia’s total petrol and diesel subsidy bill for 2026 could spiral toward RM40 billion, or RM25 billion more than the initial budget.

Faced with the same external shock other administrations around the region have panicked, either by abruptly removing safety nets, introducing rationing or completely abandoning fiscal consolidation.

Instead, Anwar and second finance minister Amir Hamzah Azizan with their economic advisory council have managed to insulate ordinary Malaysians from the worst effects of global inflation while simultaneously keeping the structural reform agenda alive.

Under the unified BUDI Madani framework, eligible citizens continue to get RON95 at a highly protected RM1.99 per litre price through BUDI95.

Now, the newly rolled out MyKad-linked BUDI Diesel subsidy system streamlines the identity-card based system at the pump.

The previous diesel reforms had already moved aggressively to cut around RM10 billion in leakages and curb cross-border smuggling and the new scheme is estimated to save RM1 billion more.

The government is responding to data and experience on the ground. Following early feedback, immediate recalibration extended diesel quotas to 300 litres for over 30,000 small traders and rural service providers and allowing seamless intra-family eligibility transfers.

By successfully capturing early savings from reduced leakages, the government is now able to adjust the retail price for BUDI Diesel users downward to RM2.10 per litre for 200 litres for an extended number of 700,000 eligible diesel users.

The main lesson from this crisis is that blanket subsidies are no longer sustainable because they leave fiscal plans completely exposed to international supply shocks.

Had the government not already started the institutional architecture for targeted rationalisation last year, a sudden RM40 billion exposure would have devastated the fiscal deficit targets and threatened Malaysia’s sovereign debt rating.

Unforeseen global headwinds mean that fiscal consolidation paths may require difficult, flexible adjustments but the direction remains absolutely correct.

Anwar and Amir have proven they can balance fiscal prudence with social equity, ensuring that the vulnerable are never left to bear the brunt of global market chaos.

The good news is that with the tentative opening of the Strait of Hormuz, oil prices are hovering in the US$70 to US$80 range and if they remain low the RM40 billion cost may be a worst-case scenario.

Nonetheless, the price has already been paid in the last four months and the savings from the earlier subsidy rationalisation programmes have been diverted from priorities such as health, education and social protection.

In the long-term, the health of the Malaysian economy requires this deep structural subsidy adjustment to continue.

Now more than ever, the public must look past short-term noise and support the government in this rationalisation process.

It is a necessary journey toward building a resilient, self-sustaining economy that spends its revenue on nation-building rather than burning it at the pump.

The views expressed are those of the writer and do not necessarily reflect those of FMT.