Malaysia: targeted subsidies and the RON95 question
Malaysia's fuel subsidy system has historically covered RON95 petrol (the grade used by most private vehicles) and diesel. The government of Prime Minister Anwar Ibrahim has been gradually shifting toward a targeted subsidy model — retaining support for lower-income households while removing it for higher earners.
In mid-2024, Malaysia began the first phase of diesel subsidy rationalisation, removing price controls for commercial users and foreign-registered vehicles. Retail diesel for private vehicles was later adjusted. The headline RON95 price — long held at RM2.05/litre — is the political third rail: any change to it affects every driver and feeds directly into the cost of goods transported by road.
The government's preferred approach is a means-tested cash transfer to replace the blanket subsidy, modelled on Brazil's Bolsa Família and similar programmes. The IMF's working paper on fuel subsidy reform sets out the international evidence base for this approach.
RON95 refers to petrol with a Research Octane Number of 95 — the standard grade at most Malaysian petrol stations. See the glossary entry on RON and AKI for how octane ratings work globally.
Indonesia: Pertamina and the pertalite dilemma
Indonesia's fuel subsidy runs through the state oil company Pertamina, which sells subsidised "Pertalite" (RON90) and "Solar" (diesel) at below-market prices. The government compensates Pertamina for the difference, a cost that World Bank Indonesia Economic Prospects reports has fluctuated between $10–25 billion annually depending on global crude prices.
The 2022 subsidy reform — which raised Pertalite prices by 30% and Solar by 32% in a single announcement — triggered street protests and a visible CPI spike. The Joko Widodo government cushioned the impact with direct cash transfers (Bantuan Langsung Tunai) but the episode illustrated the political sensitivity of pump price changes in a country where motorcycles are the primary mode of transport for millions of lower-income households.
The new Prabowo administration, which took office in October 2024, has signalled it will continue the rationalisation agenda but at a pace that does not risk social instability ahead of regional elections in 2025.
The fiscal arithmetic
The IMF's fossil fuel subsidy estimates — which include both explicit subsidies (direct budget transfers) and implicit subsidies (foregone taxes, unpriced externalities) — put Indonesia's total implicit+explicit subsidy at over $100 billion annually in 2022 at high crude prices. Malaysia's was around $15–20 billion.
Removing explicit subsidies frees that budget for healthcare, education, and infrastructure — or simply reduces the deficit. But the distributional impact matters: in both countries, lower-income households spend a higher share of income on transport, making fuel price increases regressive without compensating transfers.
| Country / fuel | Subsidised price (approx.) | Market price equiv. | Subsidy per litre |
|---|---|---|---|
| Malaysia RON95 | RM 2.05 (~$0.44) | ~RM 3.50 (~$0.75) | ~RM 1.45 |
| Indonesia Pertalite | IDR 10,000 (~$0.63) | ~IDR 14,500 (~$0.91) | ~IDR 4,500 |
| Indonesia Solar | IDR 6,800 (~$0.43) | ~IDR 13,000 (~$0.82) | ~IDR 6,200 |
Lessons from other reform attempts
Countries that have successfully transitioned from universal to targeted fuel subsidies share some common features: strong administrative capacity to identify and reach low-income households, a cash transfer system already in place, and political will to absorb short-term pain for long-term gain.
Iran's 2010 subsidy reform — which raised petrol prices fivefold overnight while distributing $40/month cash payments — is studied as a partial success: the fiscal savings were large and the cash transfers offset most of the impact for lower-income groups. But the payments were not well-targeted and inflation remained elevated. See our guide on why some countries have very cheap fuel for the broader subsidies picture.
Ghana, Jordan, and Egypt have all undergone painful reforms in the 2010s–2020s, typically under IMF programme conditionality. The pattern is consistent: fiscal necessity drives reform; the political cost is managed through compensation programmes.
Questions
Why do Malaysia and Indonesia subsidise fuel?
Both countries established fuel subsidies decades ago as a social protection measure, keeping transport costs low for households and businesses, and helping manage food price inflation (since agricultural products are transported by road). As oil exporters, they also had the fiscal headroom to absorb the cost when crude prices were moderate. The World Bank's study on fuel subsidies in developing countries provides historical context on how these programmes expanded.
What happens to inflation when fuel subsidies are removed?
Subsidy removal causes a direct one-time price level increase — not ongoing inflation, unless second-round effects (wage demands, transport cost pass-through) kick in. Indonesia's 2022 reform triggered a 1.5–2 percentage point CPI spike; Malaysia's phased 2024 changes are expected to have a more modest effect. The Bank Indonesia CPI data shows how the 2022 spike played out month by month.
Are fuel subsidies always bad policy?
Not universally. In low-income countries without well-functioning social safety nets, fuel subsidies can be an effective (if blunt) tool for protecting household purchasing power. The problem is targeting: universal subsidies disproportionately benefit higher-income households that drive more and have larger vehicles. The IMF recommends replacing them with targeted cash transfers, but building those systems takes time and institutional capacity.