The move comes as the country maintains some of the lowest fuel prices in Southeast Asia thanks to long-standing government support.
Prime Minister Anwar Ibrahim on Monday defended the decision, stressing that it would not impact most Malaysians and is crucial to ensure government resources are better used to benefit lower-income groups.
“There are a lot of negative campaigns about RON95 (fuel subsidy rationalization)… and I would like to reiterate that there’s no issue of the RON95 increase affecting 85 to 90% of our people,” he said, as quoted by the New Straits Times.
Anwar explained that the upcoming cuts are aimed at affluent individuals and foreigners in the country, whom he said account for 40% of the subsidy usage. The government projects that the rationalization could save as much as 8 billion ringgit (US$1.9 billion).
In Malaysia, drivers currently enjoy a fixed rate of 2.05 ringgit (50 US cents) per liter of RON95 gasoline, one of the lowest prices in Southeast Asia, as the fuel is partially subsidized to keep it affordable for lower-income groups.
However, the public has voiced concerns that the subsidy cuts, which could come as early as July, might spark inflation in a country where vehicles outnumber people, especially if consumers must start paying market prices for fuel, the South China Morning Post reported.
The timing could further squeeze household budgets, as Malaysia is also set to expand its sales and service tax (SST) from July 1.
Specifically, a 5–10% sales tax will be applied to non-essential and luxury items such as king crab, salmon, imported fruits, racing bikes, and antique art, while basic goods will remain tax-exempt, according to Reuters.
The services tax will be broadened to cover more sectors, including rentals or leasing, construction, financial services, private healthcare, education, and beauty services.
The Malaysia Retail Chain Association has warned that the expanded SST, especially an 8% tax on rentals, will add pressure to already rising operating costs, which could result in higher prices for consumers.
Stan Singh, a council member of the association, said businesses are no longer able to absorb the added costs.
“Eventually cost increases will be passed to consumers,” he said, adding that other pressures are already weighing on them, including increased minimum wages and newly introduced contract-related charges.
Economists, however, suggest that the broader scope of the SST is unlikely to weigh heavily on the average consumer.
CGS International Research noted that the expansion primarily targets luxury goods and non-essential services, many of which are consumed by foreigners, The Star reported.
It projected a temporary uptick in inflation, with prices expected to climb 0.5% month-on-month in July and reach 2.2% year-on-year, up from 1.8% in June, before peaking around 2.4% in September.
Even so, the firm kept its full-year CPI forecast unchanged at 2%, citing subdued global commodity prices—particularly oil and palm oil—as a cushion against inflationary pressure.
While the blanket fuel subsidies have long helped Malaysians cope with the rising cost of living, they have also led to overconsumption, smuggling, and a disproportionate benefit to higher-income groups.
Dr. Mohamad Idham Md Razak, Universiti Teknologi Mara’s Malaysian Academy of SME and Entrepreneurship Development coordinator, said: “By selectively removing subsidies for foreigners while maintaining them for Malaysians, the government could enhance fiscal efficiency through reduced subsidy leakage.
“This targeted subsidy approach supports equity by ensuring that subsidised fuel benefits those most impacted, rather than enabling cross-border arbitrage.”
