The rise in crude oil prices has made Malaysia’s current package of fuel subsidies – capping RON 95 petrol at RM2.05 a litre – unsustainable. Although we are an oil producer and when the global oil price rises, so does the income, but such a huge subsidy bill that every US$1 increase in crude oil price reduces the country’s coffers by RM410 million.

A more targeted approach to fuel subsidies will continue to lessen the impact on those in need, while reducing the cost of subsidies. It is no secret that the government is looking to replace the current package style – “targeted” has been mentioned before and is now being reiterated by Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamad.

The senior minister, known as Tok Pa, said the government was still working on a suitable structure and expected it to be completed soon. For now, subsidized RON95 and diesel prices will remain the same, but he made it clear that the system will change – it’s only a matter of time.

“Those who can afford it should pay more, and those who shouldn’t (subsidies) should not be subsidized at all. The subsidy is for the poor, especially the B40 (the bottom 40% of income). The question is when it will be implemented,” Mu said. Stappa in named tv today.

He said fuel subsidies had played an important role in moderating inflation in Malaysia and the government had been able to keep price increases between 2% and 3% for the past 10 to 20 years. “However, this will put a lot of pressure on the budget. When we outlined our budget last year, the subsidy was estimated to be around RM5 billion. Now it is estimated to be around RM30 billion, which is equivalent to a six-fold increase in the amount of the subsidy,” he said.

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