PETALING JAYA: Economists back the government’s proposal on targeted diesel subsidies to curb leakages and improve government spending efficiency as Malaysia moves to tighten the system using a Budi95-style approach.
BIMB Securities Sdn Bhd chief economist Imran Nurginias Ibrahim said the proposed targeted approach, similar to Budi95, signals a shift towards more disciplined and efficient fiscal management, although its macroeconomic and distributional implications will depend heavily on execution.
“From a macroeconomic perspective, better-targeted subsidies are broadly positive, as they reduce leakages and improve resource allocation without materially suppressing aggregate demand,“ he told SunBiz.
He said by narrowing eligibility to genuinely vulnerable groups and key sectors, the policy helps contain excessive fuel consumption and limits distortions in relative prices.
“At the same time, while there may be some near-term cost pass-through, particularly in logistics and transport, the targeted nature of the policy should help contain broader inflationary pressures.”
Imran said the government retains flexibility to calibrate support and cushion second-round effects, thereby preventing a more persistent inflation spiral.
In terms of fiscal sustainability, he said the reform is clearly constructive as fuel subsidies have historically been a significant and volatile component of government expenditure, particularly during periods of elevated global oil prices.
“A more targeted system reduces fiscal leakages, improves expenditure efficiency, and enhances budget predictability. This creates additional fiscal space that can be redeployed towards productivity-enhancing investments or social protection, while also supporting Malaysia’s medium-term fiscal consolidation path and debt dynamics.”
Imran stated that the reform is a positive step towards long-term efficiency, as a targeted approach would enhance equity and promote more efficient energy use, thereby supporting Malaysia’s broader structural goals such as the energy transition and subsidy rationalisation.
“However, the success of the policy will hinge on the robustness of the targeting mechanism, administrative capacity, and the government’s ability to minimise exclusion and inclusion errors. Clear communication and gradual implementation will also be critical to maintaining public acceptance and avoiding unintended disruptions,“ he said.
“Overall, even though some temporary price increases are unavoidable, a properly implemented targeted subsidy plan should ultimately make the economy stronger, improve how policies work, and help keep inflation expectations stable in the medium term.”
IPPFA Sdn Bhd director of investment strategy and country economist Mohd Sedek Jantan said in an environment where every ringgit of public spending matters, the government’s move to study a targeted diesel subsidy mechanism, such as Budi95, is a timely and necessary policy reset rather than just another reform exercise.
“At its core, the shift tackles two structural issues head on. First, it aims to plug longstanding leakage embedded in blanket subsidy systems that disproportionately benefit unintended segments.
“Second, it seeks to shield consumers from cost-push inflation, given diesel’s critical role across logistics and supply chains where price shocks can quickly cascade into broader consumer prices,“ he said.
In his view, this marks a more calibrated approach that balances fiscal consolidation with price stability, ensuring support remains where it is most needed without distorting market signals.
“From a fiscal sustainability perspective, targeted subsidies enable more disciplined and responsive expenditure management, particularly in a high oil price environment, while reinforcing policy credibility among investors.”
Mohd Sedek said the impact should become more visible over the next two to three years, as the reform improves allocative efficiency by reducing distortions and encouraging more rational energy consumption, although execution, especially targeting precision, database integrity, and enforcement, will be decisive.
“Ultimately, this strengthens Malaysia’s ability to contain leakages, manage inflation risks, and preserve fiscal space in an increasingly volatile global landscape.”
According to Universiti Tunku Abdul Rahman professor Chia Fah Choy, the Finance Ministry’s review is likely to lead to a more integrated and digital mechanism.
“By reducing the lag associated with manual cash transfers and moving towards a real-time verification system, the government can create a more responsive operating environment. For the construction sector, this kind of digitalisation aligns with ongoing efforts to improve data tracking, fuel management, and cost transparency,“ he said.
“We will be watching the details of the proposed Budi Diesel integration, and we hope the final framework will streamline claims for logistics providers and contractors who support our project sites.”
Independent macro strategist Suresh Rama said that it is a good idea, given the fact that transport and logistics play an important role in contributing to the economy.
“My concern is whether it is fiscally sustainable given that the consumption of diesel is large in the transport sector. We may be forced to adjust upwards our fiscal deficit target for this year, but it will not likely be drastic given high oil prices are also beneficial to our revenue stream since we do export crude oil,“ he said.
“I don’t see it as a permanent feature, a retargeted diesel subsidy, but it will help mitigate the current sporadic shortages of diesel in certain petrol kiosks.”
The move, ordered by Prime Minister Datuk Seri Anwar Ibrahim, comes amid heightened concerns over subsidy leakages and smuggling, with the Finance Ministry tasked to review the mechanism and table its findings as early as this week.
Authorities have deployed enforcement personnel at more than 150 high-risk petrol stations nationwide following abnormally high fuel sales, while recent reports indicate syndicates have shifted tactics by sourcing subsidised diesel through intermediaries, including local fishermen.
A shift towards a Budi95-style mechanism would change how diesel subsidies are delivered, moving away from the current cash-based assistance under schemes such as Budi Individu towards a more targeted, consumption-linked system.
This comes against a backdrop of elevated global oil price volatility and rising fiscal pressures, with fuel subsidies historically forming a significant and unpredictable component of government expenditure.
At the same time, the government is advancing complementary measures, including increasing biodiesel blending rates from B10 to B15, as part of broader efforts to strengthen energy resilience and improve subsidy efficiency.
