Ripple effect: Experts warn that rising transportation costs would increase the prices of goods and services across the board. — YAP CHEE HONG/The Star
PETALING JAYA: The planned rationalisation of the RON95 fuel subsidy this June has raised concerns about its potential domino effect on inflation and the cost of living.
With that in mind, consumer advocates and economists urged the government to learn from past experiences and opt for gradual and targeted reforms.
Fomca CEO Saravanan Thambirajah highlighted the significant challenges subsidy rationalisation posed, particularly to the B40 and M40 income groups.
“For the B40 group, any rise in fuel prices could force difficult sacrifices, such as cutting back on food or education expenses.
“Similarly, the M40 group, while more financially stable, might see reduced disposable income, which could dampen consumer spending and slow economic activity,” he said when contacted yesterday.
Saravanan pointed out examples, such as the partial removal of fuel subsidies in 2014, which led to a noticeable increase in food prices and widespread dissatisfaction particularly in urban zones like the Klang Valley.
He warned that the ripple effect of rising transportation costs would increase the prices of goods and services across the board, disproportionately affecting small businesses and low-income households.
As such, he suggested targeted measures to support vulnerable groups, such as direct cash assistance for the B40 and M40 groups, as seen in the Bantuan Sara Hidup (BSH) programme.
He also called for investments in public transport infrastructure, which could reduce reliance on private vehicles and provide a sustainable alternative.
Prof Emeritus Barjoyai Bardai said the successful rationalisation of diesel subsidies last year offered valuable lessons for the RON95 reform.
However, he cautioned that the scale of the petrol subsidy issue presented unique challenges.
“Unlike diesel, which is used by less than 20% of vehicle owners, petrol is used by over 20 million vehicles in Malaysia.
“The widespread use makes the impact far more significant, and the system may not be equipped to efficiently handle such a large-scale shift,” he said.
Barjoyai identified smuggling and cross-border misuse as major sources of subsidy abuse, and called for stricter enforcement and compliance efforts to curb this before targeting general public subsidies.
He called for a phased approach to subsidy rationalisation with incremental price adjustments to minimise shock, and a gradual removal by increasing petrol prices between 20sen and 30sen annually.
“The impact of subsidy removal on inflation and cost of living is inevitable, but a balanced approach that addresses abuse and provides support to those in need can mitigate these effects,” he said, adding that the rationalisation of the RON95 subsidy presented a “delicate balancing act.”
Although the decision has not yet been finalised, the issue is worrying many, particularly those within the B40 (lower income) and M40 (middle income) groups.
Universiti Malaya Faculty of Business and Economics senior lecturer Dr Safiah Omar questioned if 2025 was the right time to start the RON95 subsidy rationalisation.
“The rakyat faced many tough challenges in 2024, including the diesel subsidy being rationalised, the prices of certain commodities being floated, and tariff increases for electricity use, among others,” she added in a letter to The Star.Saying the decision to rationalise the diesel subsidy was necessary because subsidies could not be supported indefinitely and also because of the smuggling issues with neighbouring countries, with Malaysia losing RM10bil annually.
“However, the situation for RON95 petrol is different. The demand for this type of petrol is not as high as that for RON97, RON100, and diesel.
“This is because RON95 is best suited to small vehicles and its use for industrial purposes is very small. There isn’t a very big black market demand for it either,” she added.
