Diesel prices jump 56% as Malaysia revamps decades-old fuel subsidies

KUALA LUMPUR, Malaysia (AP) — Diesel price in Malaysia jumped by more than 50% on Monday as part of a revamp of decades-old fuel subsidies to tighten government spending and save billions of ringgits annually.

The restructuring eliminates blanket energy subsidies and redirects them to the needy. They're part of economic reforms pledged by Prime Minister Anwar Ibrahim, whose government says they're needed to build a more sustainable economy and plug losses from smuggling cheap oil to neighboring countries.

The plan is bold but risky for Anwar, who took power in 2022, as it may anger working-class voters struggling with rising cost of living. He announced the unpopular decision to cut fuel subsidies last month to give time to lower-income groups to prepare for the transition.

"All prime ministers before this had agreed on the targeted subsidy, but there was no political will to implement it because of the risks involved. However, to save the country, we have no choice,” Anwar, who is also Finance Minister, was quoted as saying Monday by national Bernama news agency.

The government eventually plans to follow suit with gasoline subsidies. Essentials including fuel, cooking oil and rice are heavily subsidized in Malaysia which have strained national finances for years.

Second Finance Minister Amir Hamzah Azizan announced Sunday that diesel price will rise to 3.35 ringgit ($0.71) a liter on Monday, up 56% from its previous subsidized price of 2.15 ringgit ($0.46). He said the price will be reviewed on a weekly basis to be aligned with market prices.

The price hike will not apply to Malaysian states on Borneo island and eligible logistic vehicles, he said. Lower prices previously set for fishermen and a wide fleet of land public transport vehicles such as school buses, taxis and ambulances will also remain unchanged.

Monthly cash aid will also be given to eligible individuals with diesel vehicles including farmers and commodity smallholders, the government said. Officials said the hike shouldn't lead to drastic price inflation as subsidies are still given to targeted groups.

Despite the hike, Amir said Malaysia’s diesel price remains the second lowest in Southeast Asia, after Brunei. Diesel costs 8.79 ringgit ($1.86) a liter in neighboring Singapore and more than 4 ringgit ($0.86) in most other regional countries. It is heavily subsidized at 1.09 ringgit ($0.23) in oil-rich Brunei

Amir said the targeted subsidies will help cut the fiscal deficit, with the government expected to save at least four billion ringgit ($850 million) annually. Malaysia's diesel subsidy bill surged from 1.4 billion ringgit ($300 million) in 2019 to 14.3 billion ringgit ($3 billion) last year.

“Malaysia cannot afford to continue losing billions of ringgit due to widespread smuggling of diesel. The money is better spent on improving the people's quality of life and developing the country,” Amir said.