The rise in crude oil prices is making Malaysia’s current blanket fuel subsidy – which caps RON 95 petrol at RM2.05 per litre – unsustainable. Although we’re an oil producing country and there’s increased income when global oil prices go up, such is the size of the subsidy bill that every US$1 increase in crude prices chips away RM410 million from the nation’s coffers.

A more targeted approach to fuel subsidy would continue to cushion the impact for those who need the help, while reducing the subsidy bill. It’s no secret that the government is looking to replace the current blanket style – ‘targeted’ has been mentioned before, and is now being reiterated by minister in the PM’s department (economy) Datuk Seri Mustapa Mohamed.

The veteran minister known as Tok Pa said the government is still working on a suitable structure and expects it to be completed soon. For now, subsidised RON95 and diesel prices will remain, but he made it clear that the system will be changed – it’s a matter of time.

“Those who can afford should pay more and the people who do not deserve (the subsidy) should not be given the subsidy at all. Subsidies are meant for the poor people, particularly the B40 (bottom 40% income group). The issue is the timing of when it is going to be implemented,” Mustapa said on Bernama TV today.

He said that fuel subsidies has played an important role in moderating inflation in Malaysia, and the government has been able to maintain price increases of between 2% and 3% for the last 10 to 20 years. “However, it will be a big strain on the budget. When we outlined our budget last year, the estimate was about RM5 billion in subsidies. Now the estimate is somewhere around RM30 billion, representing a sixfold increase in the amount of subsidies,” he said.

So, if blanket is to make way for targeted, what would be a good way to implement fuel subsidies that will benefit the intended recipients, with minimal leakage? More on the topic of high crude oil prices and fuel subsidies here.