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RON95 Petrol Subsidy: M40 Hit The Hardest

Malaysia government announces RON95 petrol targeted subsidy for 2024

Earlier this week (27 November 2023), Economy Minister Rafizi Ramli finally announced the long-awaited RON95 petrol subsidy programme that will be introduced in the second half of 2024.

RON95 petrol subsidy: impact on M40

This is part of its targeted subsidy programme to replace the current blanket policy which in Rafizi’s words, “has allowed the top 20 per cent (T20) households to become 53 per cent of the recipients, and is deemed unsustainable.”

The transition to targeted subsidies is seen as a crucial step in strengthening the country's fiscal position, especially in light of soaring global crude oil prices. The government, having shouldered a substantial subsidy burden in the past, views this shift as a necessary measure to maintain economic stability.

In 2022, the subsidy expenditure for fuel and energy was notably high at over RM80 billion, with the T20 group benefiting from a significant portion of this expenditure. Currently, RON95 costs RM2.05 per litre – a subsidised price and is available to everyone regardless of household income.

How will the government implement the RON95 petrol and diesel targeted subsidy?

According to NST, the RON95 petrol as well as the earlier-announced diesel targeted subsidy is set to roll out following the completion of the Central Database Hub, Padu.

Padu, which is currently 60% complete, is designed to offer a comprehensive view of a household's economic situation by considering factors beyond income, such as household size, education levels of dependents, location, and vehicle ownership. This system aims to minimize errors in subsidy allocation and ensure that assistance reaches the most deserving groups.

As The Edge and NST put it, the government plans to implement the (subsidy) programme using three mechanisms: #1 Subsidy Based on Individual Net Income

The first method involves providing subsidies based on an individual's net income. This will be determined through a social protection scheme, ensuring that those in need at the individual level receive the necessary support.

#2 Subsidy Based on Household Net Income

The second approach looks at the net income of households. This method will combine aspects of social protection and social assistance, offering a more holistic view of a household's financial status to determine subsidy eligibility.

#3 Combined Individual and Household Net Income Eligibility

The third method integrates both individual and household net income criteria. Here, a card subsidy system will be implemented, likely simplifying the process of subsidy allocation and ensuring that it reaches the right beneficiaries.

The decision to implement these methods follows extensive preparation, including a nationwide survey conducted in June to ascertain the most suitable methods for subsidy rollout. In addition to public input, the government has been in discussions with various ministries and financial bodies since May including the Finance Ministry, the Domestic and Consumer Affairs Ministry, the Prime Minister's Economic Planning Unit, and Bank Negara Malaysia (BNM).

However, the final plan for subsidy implementation will be announced following cabinet approval set to occur in November.

What do experts think of this move?

Most economists commend the government for this move – although it took longer than expected, however, most of their concerns lie with the implementation of the targeted subsidy.

As reported by NST, Putra Business School economic analyst Associate Professor Dr Ahmed Razman Abdul Latiff and Professor of Economics, Geoffrey Williams from the Malaysian University of Science and Technology said Padu needed to be comprehensive and well-tested before the (subsidy) programme roll-out.

Williams also suggested three alternate ways the Madani government can roll out the programme: Suggestion #1: Gradually eliminate all RON95 petrol subsidies, increasing prices for everyone, but compensate low-income earners through cash transfers.

Suggestion #2: Differentiating petrol prices based on income levels. This could involve either charging higher-income earners more for RON95 petrol or providing low-income earners with reduced prices through the use of discount cards or vouchers. This will be the likely way that the subsidy will be implemented, as previously mentioned in this article.

Suggestion #3: Implement a tiered pricing system where the cost of RON95 petrol increases with higher consumption, effectively targeting subsidies and encouraging the use of electric vehicles for environmental benefits. Williams favoured this approach for its efficiency and eco-friendliness.

RON95 petrol targeted subsidy: A good thing or bad for M40 and B40?

In my view, while the RON95 petrol targeted subsidy reflects a commendable effort by DS Anwar Ibrahim’s unity government to adopt a more sustainable and equitable approach to fuel pricing for the rakyat, its effectiveness will largely depend on the government’s ability to accurately identify and assist those in need.

According to The Edge, experts have said that targeted fuel subsidies could hit the middle-income group (M40s) the hardest, as the top 20% of income earners (T20) will be better able to absorb the higher fuel costs while the bottom 40% of households (B40) will be eligible for handouts to buffer the resulting higher inflation.

And I agree with this.

While the targeted subsidy aims to provide relief to the lower-income group, its impact on the M40 group raises concerns. There is a risk that the middle-income group might face a squeeze in their spending power due to the removal of blanket subsidies and the rising cost of living.

I think then, the government’s challenge will be to balance the need for fiscal prudence with ensuring equitable support for all segments of the population, particularly the M40 group, which forms a substantial part of Malaysian society.

What do you think of the RON95 petrol targeted subsidy programme? We would love to hear from you.

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