Published by TheStar and MySinchew image by mof.gov.my
The government’s new BUDI95 programme is not a minor policy tweak. It is a high-stakes national stress test. On the surface, it is about fuel pricing. At a deeper level, it touches every nerve of Malaysia’s governance system: fiscal stability, cost of living, political legitimacy, and the integrity of national data infrastructure. How this policy unfolds will be a defining measure of whether Madani governance can move beyond rhetoric into credible delivery.
Malaysia’s fuel subsidies have become fiscally untenable. At their peak, subsidies topped RM50 billion. Even today, RON95 alone drains around RM20 billion annually, with much of it benefiting wealthier households, foreign motorists, and smugglers. Reform is economically unavoidable.
Under BUDI95, Malaysians with an active driving licence can buy RON95 petrol at RM1.99 per litre, up to a monthly cap of 300 litres, by verifying their MyKad at the pump. Foreigners will pay the unsubsidised rate of around RM2.60. Those with higher legitimate needs, such as e-hailing drivers, can apply for additional quotas through their firms.
In future phases, the government has floated the idea of excluding the top 15 % income group (T15) from the subsidised RON95, thereby making them pay the full market price.
The government expects to save between RM2.5 and RM4 billion annually, depending on global oil prices. These funds are to be redirected to programmes such as Sumbangan Asas Rahmah (SARA).
But subsidy rationalisation is not just a fiscal adjustment. Malaysia is now the world’s ninth largest importer of refined petroleum, bringing in USD27.1 billion in 2022, mostly from Singapore. Subsidising imports in this way worsens the current account balance and depresses Petronas’s dividends to the government, since higher purchase costs cannot be fully marked up. Continuing blanket subsidies is therefore doubly costly: fiscally and externally.
In principle, BUDI95 strengthens fiscal discipline while still protecting the majority of households. Yet the central tension remains: will the burden of adjustment be passed directly onto households and businesses already struggling with high living costs?
The government cites data showing that 99 per cent of motorists consume less than 300 litres a month, with the average just 80 litres. On paper, the quota looks generous. But averages conceal Malaysia’s spatial reality. In the Klang Valley, chronic traffic jams and long commutes from Shah Alam, Selayang and beyond mean many families burn far more than 300 litres monthly. For them, paying unsubsidised prices on the margin could drive up living costs sharply.
Fuel prices are the most visible signal of bread-and-butter politics. A few sen up or down at the pump resonates more than any fiscal ratio. The government is therefore wagering its political legitimacy on BUDI95.
Global examples show how combustible this issue can be. Nigeria’s attempt to remove fuel subsidies in 2012 triggered nationwide “Occupy Nigeria” protests and forced a retreat. When subsidies were finally ended in 2023, pump prices tripled overnight, sparking fresh unrest. By contrast, Indonesia’s reforms in the 2000s paired subsidy cuts with immediate cash transfers (Bantuan Langsung Tunai), cushioning the blow and preserving political stability.
Malaysia’s design—retaining subsidies for all citizens while excluding foreigners—may be more politically palatable than targeting based on income thresholds. But its success depends on smooth execution. Any glitch in MyKad verification, any perception that ordinary commuters are unfairly squeezed, could quickly erode public trust.
The fiscal savings themselves are modest relative to the political risk. Even RM4 billion a year is small compared to the RM50 billion once spent. If citizens see their costs rising without visible benefits, the backlash could outweigh the gains.
Perhaps the most fascinating dimension is governance. Subsidy reform forces Malaysia to confront hard questions: who “deserves” cheap fuel, and how is that entitlement defined?
The government has chosen a universal individual quota—300 litres per citizen with a licence—rather than a means-tested model. This is simpler, but cruder. Its effectiveness hinges entirely on the integrity of PADU, JPN and JPJ systems. If databases do not sync seamlessly, legitimate citizens will be excluded. System outages, unreadable MyKads, or failed e-KYC checks could breed frustration from day one.
The rationale is strong. Diesel subsidy costs alone ballooned tenfold between 2019 and 2023, from RM1.4 billion to RM14.3 billion, with consumption surging 70 per cent to 10.8 billion litres—an increase largely attributed to smuggling. After diesel subsidies were rationalised, border sales fell by 40 per cent. The same dynamics apply to RON95: leakages are real, and plugging them requires tight verification.
The policy’s credibility also rests on how savings are redirected. Without transparent governance mechanisms—such as a widely adopted Input-Output-Outcome-Impact (IOOI) framework—citizens may doubt that the billions saved are truly being channelled into schools, healthcare, or other projects benefiting many.
The government points to last year’s diesel subsidy rationalisation, which did not trigger inflation (the rate remained at 1.8 per cent). But RON95 is more deeply embedded in household budgets and business logistics. Even if pump prices remain stable in aggregate indices, secondary effects are likely: higher logistics costs, passed down to consumer goods, and additional administrative burdens on firms seeking extra quotas.
Moreover, as EMIR Research has previously highlighted, “sellers’ inflation” is a persistent risk: businesses use moments of policy transition to justify price hikes, regardless of actual input costs. Landlords’ relentless rent increases in urban centres further amplify cost of living pressures. This means the inflationary consequences of subsidy reform may have less to do with petrol itself than with how market actors exploit the moment.
The question therefore lingers: is BUDI95 the only and best way to curb leakages and smuggling? It is certainly the most direct, but unless complemented by counter-inflationary measures, the risk is that fiscal gains come at the price of higher household stress.
Global experience offers three clear lessons. First, sequencing and communication are decisive. Indonesia succeeded because compensation was rolled out simultaneously with subsidy cuts. Malaysia has SARA, but communication must be crystal clear to prevent confusion and resentment.
Second, avoid Iran’s pitfall. Initial popularity there gave way to discontent when inflation eroded cash transfers and the government failed to adjust quickly. Malaysia must be agile—ready to revise quotas for vulnerable groups and transparent about where savings go.
Third, heed Nigeria’s warning. Political backlash can overwhelm fiscal logic if reforms are perceived as unfair. Malaysia’s bet is that a universal citizen benefit will be seen as fairer. Whether this holds will depend on how well the government manages edge cases: the commuter who drives 500km a week, the e-hailing driver navigating system delays, the rural household with unreliable internet access.
Beyond subsidies: the bigger challenge
Even if BUDI95 succeeds, subsidy reform cannot be Malaysia’s only fiscal strategy. Reducing leakages addresses one side of the equation. The other is enhancing revenues and investing in long-term resilience: improving public transport, expanding renewable energy, and building productivity. Malaysia cannot cut its way to prosperity.
Current global volatility—from oil price shocks to the fragility of the US dollar system—will only increase the pressure. Shielding Malaysians from these forces requires more than technocratic tweaks. It demands a coherent growth strategy that raises the ceiling of national capacity while raising the floor of household welfare.
The Automatic Pricing Mechanism (APM), in place since 1983, will continue to structure how retail prices are smoothed. BUDI95 layers a new targeting mechanism on top, but price stability ultimately depends on how Malaysia navigates external oil markets. With Malaysia already a net importer, continued subsidies imply opportunity costs—lower Petronas margins, reduced dividends to the state, and weaker external balances.
Seen in this light, subsidy reform is not just fiscal housekeeping. It aligns with Petronas’s Energy Transition Strategy and the National Energy Transition Roadmap (NTER), which commit to achieving net zero by 2050. Rationalising subsidies is part of rebalancing national energy priorities away from entrenched consumption patterns toward sustainability.
The rationale for moving away from blanket subsidies is economically unassailable. But BUDI95 is also a high-risk manoeuvre. Its success will not be measured by the RM2.5–4 billion in annual savings, but by the government’s ability to:
- manage the transition smoothly, avoiding glitches and exclusions,
- mitigate inflationary pressures decisively, and
- demonstrate tangible benefits by transparently reinvesting savings into high national impact venues.
If these conditions are met, BUDI95 could mark a landmark achievement in modernising Malaysia’s welfare state. If not, the political and economic backlash will be severe.
The implementation of BUDI95 is therefore not just an economic policy. It is Malaysia’s high-wire act: a stress test of fiscal discipline, political legitimacy, and the capacity of Madani governance to deliver measurable improvements in people’s lives.
Dr Rais Hussin is the Founder of EMIR Research, a think tank focused on strategic policy recommendations based on rigorous research.
