In 2023, Malaysia’s fuel subsidies reached an unsustainable RM38 billion, with RON95 petrol alone costing the treasury RM20 billion. While such subsidies are popular, they are also unsustainable and often benefit those who least need them.

A case in point, according to the Ministry of Finance (MOF), 15 per cent of consumers, primarily wealthy individuals, foreign nationals, and businesses, received 40 per cent of the RON95 subsidy, worth RM8 billion.

In response, the government has introduced a targeted fuel subsidy mechanism under the BUDI95 programme, which officially launched on 30 September 2025. Under the new system, Malaysians with valid driving licences became eligible to purchase up to 300 litres of RON95 petrol per month at RM1.99 per litre, amounting to a subsidy of approximately RM183 each month.

This shift marks a significant policy move towards a more sustainable and equitable model of public assistance. By targeting three core issues: (1) subsidy misuse, (2) fiscal burden and (3) enforcement loopholes, BUDI95 could reshape how Malaysia manages fuel affordability.

Cutting waste and foreign fuel drain

The first area of concern is subsidy misuse. Fuel subsidies were originally intended to ease the cost of living for all. However, in practice, much of the benefit has flowed to upper-income groups. Wealthier individuals tend to own high-capacity vehicles that consume more fuel.

For instance, a 2.5-litre SUV may burn between 15 and 18 litres per 100 kilometres, compared with just five to seven litres for a compact vehicle like the Perodua Myvi. This results in the wealthy receiving more subsidies simply because they use more fuel.

Cross-border fuel tourism adds further pressure. Prime Minister Datuk Seri Anwar Ibrahim revealed that some 3.8 million foreigners, including cross-border tour agencies, have been enjoying Malaysia’s subsidised fuel for decades. He called it a clear example of policy leakage that must be addressed, particularly when public funds are involved.

The new model tackles these issues directly by linking subsidies to a verified Malaysian identity and a valid driving licence, while also capping subsidised usage. This limits access to non-citizens and ensures that only legitimate users benefit.

Beyond its core goals, the policy has also delivered an unexpected benefit, which economists call a positive externality; a side effect that helps others, even if it was not the main goal. Following the BUDI95 announcement, according to data from the Road Transport Department (JPJ), driving licence renewals rose by 53 per cent, indicating that many Malaysians are now taking steps to ensure their eligibility for the subsidy.

This behavioural shift promotes safer, more regulated driving practices and reduces the number of unlicensed drivers on the road. It is a classic case of “sambil menyelam, sambil minum air” – while pursuing one goal, another is achieved at the same time.

Reclaiming public funds for the people

The second area is the growing fiscal burden. According to the MOF, the BUDI95 mechanism could save the government between RM2.5 billion and RM4 billion a year. These savings are not merely numbers on a balance sheet. They represent real resources that can be redirected to more impactful areas like healthcare, education, and targeted social assistance. For instance, RM500 million was allocated for the construction of the Pasir Gudang Hospital in Johor, which is expected to be operable by next year.

With RM4 billion in annual savings, Malaysia could build up to eight such hospitals, expanding access to quality healthcare across underserved regions. At the same time, they allow Malaysia to reduce its fiscal deficit without removing support from the majority of citizens.

This careful balancing act is supported by data shared by the Minister of Finance II, Datuk Seri Amir Hamzah Azizan. Citing the Department of Statistics Malaysia (DOSM), he noted that at 140 litres of monthly fuel usage, 90 per cent of Malaysians still qualify for subsidies. At 180 litres, this figure rises to 95 per cent, and at the 300-litre cap, 99 per cent remain covered.

To further strengthen public trust and awareness, the system now offers full transparency at the pump. Malaysians can see exactly how much subsidy they are receiving each time they refuel. For instance, when a driver fills up 25 litres at RM2.60 per litre, the total cost would be RM65. However, after applying the government’s RM0.61 per litre subsidy, the driver only pays RM49.75, with the receipt clearly showing a government contribution of RM15.25.

By making the subsidy visible, the system encourages more responsible consumption. It also increases public appreciation for the cost of universal aid, fostering a broader cultural shift toward fuel efficiency and accountability.

Sealing loopholes and encouraging safer roads

The third area addresses enforcement loopholes. Past systems lacked the safeguards needed to prevent manipulation, resale, and misuse of subsidised fuel. Unrestricted diesel subsidies have in the past been exploited by middlemen who resell fuel on the black market or smuggle it across borders. Even income-targeted fuel subsidies risk creating a secondary market where those who receive the subsidy illegally sell it to others.

Identity verification through MyKad and driving licence requirements makes it harder for individuals to manipulate the process or claim benefits they are not entitled to. This is further reinforced by Section 25(1)(o) of the National Registration Regulations 1990 (Amendment 2007), which makes it an offence to possess someone else’s identity card without valid permission, punishable by up to three years’ imprisonment, a fine of up to RM20,000, or both.

Combined with identity verification and consumption limits, this outcome contributes to a more secure and accountable framework, one that ensures subsidies reach their intended recipients and are not diverted through syndicates or informal resale networks.

A smarter path forward for Malaysia

At its core, BUDI95 is built on sound logic. It prioritises fairness without sacrificing fiscal responsibility. It protects most Malaysians while removing longstanding inefficiencies that have burdened the nation’s budget for years.

Notwithstanding, the success of this policy will depend on a nimble and responsive implementation phase. The government should anticipate and treat initial challenges as teething problems, not failures. By closely monitoring public feedback and emerging data, the system can be continuously refined and adapted.

This agile approach will be crucial for troubleshooting issues in real-time, ensuring the rollout stabilises quickly and gains public confidence.

If implemented effectively, it could serve as a blueprint for future reforms not only in fuel policy but across other subsidy systems. It shows that Malaysia can adapt its policies to meet current challenges without compromising on equity or public trust.

-- BERNAMA

Dr Mohd Zaidi Md Zabri is the Interim Director at the Centre of Excellence for Research and Innovation in Islamic Economics (i-RISE), ISRA Institute, INCEIF University.