Malaysia cuts diesel subsidies, saving US$852 million annually

KUALA LUMPUR: Malaysia will cut fuel subsidies, starting with diesel, to strengthen its fiscal position in a move that will save about 4 billion ringgit ($852 million) a year, Prime Minister Anwar Ibrahim said on Tuesday.

Anwar has repeatedly vowed to move away from blanket subsidies to a targeted system that mainly helps low-income groups.

Malaysia subsidizes items such as fuel, cooking oil and rice, but rising commodity prices in recent years have caused spending to rise, straining government finances.

Anwar said savings from subsidy cuts could be redirected to those in need, including providing cash assistance to eligible diesel vehicle owners such as rice farmers and small traders.

“I warn that any targeted subsidies should not burden the majority of people,” Anwar said in a televised address.

He said the diesel subsidy reform would only affect consumers in Peninsular Malaysia.

He did not reveal an effective date for the subsidy cuts, saying more details would be released later.

Under the 2024 budget, Malaysia expects to spend 52.8 billion ringgit on subsidies and social assistance this year, down from an estimated 64.2 billion ringgit in 2023.

The targeted subsidies come as Malaysia looks to implement labor reforms and address wage stagnation caused by rising prices.

Anwar announced this month that civil service wages would rise 13% from December and vowed on Tuesday to pursue a proposed progressive pay policy and other income-boosting measures.

Anwar said the introduction of capital gains tax and other new taxes on the disposal of unlisted shares this year is expected to increase tax revenue by 4.5 billion ringgit, while electricity subsidy reforms are expected to save about 4 billion ringgit.

Inflation is expected to rise after the blanket subsidies are removed.

Malaysia’s central bank expects headline inflation to be between 2% and 3.5% this year, and 2.5% in 2023, after taking into account planned subsidies and price control adjustments.

Malaysia’s economic growth in 2023 is 3.7%, down sharply from the 22-year high of 8.7% in 2022. The economy grew 4.2% in the first quarter, beating analysts’ expectations, driven by rising household spending and a recovery in exports.

(1 USD = 4.6900 MYR)