Heavy burden of protection

“Subsidies should not be viewed as a permanent solution. If geopolitical tensions and elevated energy prices persist, the growing subsidy burden could place considerable pressure on public finances.”

Growing subsidy costs could complicate Malaysia’s fiscal discipline ambitions

KUCHING: Prolonged increases in global energy prices could put Malaysia’s fiscal consolidation efforts under pressure despite the continued need for fuel subsidies to protect households and businesses.

Universiti Malaysia Sarawak (UNIMAS) Faculty of Economics and Business senior lecturer Dr Dzul Hadzwan Husaini said subsidies remained necessary in the short to medium term to contain transport, production and distribution costs.

However, he warned that sustained geopolitical tensions and elevated fuel prices could increase government expenditure and complicate efforts to reduce the fiscal deficit.

Malaysia is targeting a narrower deficit of 3.3 per cent of gross domestic product (GDP) in 2027, compared with 3.6 per cent in 2026.

“Subsidies should not be viewed as a permanent solution. If geopolitical tensions and elevated energy prices persist, the growing subsidy burden could place considerable pressure on public finances,” he told Sarawak Tribune.

Dzul said maintaining fiscal sustainability could require better subsidy targeting, tighter expenditure priorities and stronger revenue collection.

He said fuel subsidies also helped contain inflation by limiting increases in business operating costs, although their effectiveness depended partly on market competition and pricing behaviour.

The proposed RM2,000 minimum wage could add to operating costs for certain businesses, with firms possessing greater market power potentially passing the increases on to consumers.

“Otherwise, some of the benefits of subsidies and wage increases could be offset by higher consumer prices,” he said.

Dzul said Malaysia should also strengthen electricity grid infrastructure and regional energy connectivity to improve supply reliability and reduce exposure to international fuel price fluctuations.

Reliable and competitively priced electricity, he added, was important for attracting investment in manufacturing, semiconductors and data centres.

However, renewable energy expansion alone would not guarantee lower fossil fuel consumption if overall electricity demand continued to grow.

He said grid modernisation should be accompanied by effective energy efficiency policies and a clear strategy to reduce dependence on conventional fuels.