Tackling the Root Of Inflation Through Subsidy Rationalisation, Rent Controls

By: Jason Loh

The recent subsidy rationalisation of diesel in Peninsular Malaysia, effective June 10, is a necessary step, but it must not justify unwarranted price hikes. This targeted approach, aimed primarily at the B40 and M40 groups, ensures that the diesel price remains capped at RM2.15 per litre in Sabah, Sarawak, and Labuan, shielding these regions from immediate impacts.

The Madani government’s decisive move aligns with Malaysia’s status as a net importer of refined petroleum. As noted by the Observatory of Economic Complexity (OEC), Malaysia faced an RM54.7 million deficit in refined petroleum in April 2024. In 2022, the country imported USD27.1 billion worth of refined petroleum, making it the 9th largest importer globally. This rationalisation continues the subsidy reforms initiated under the Najib administration in 2013, which aimed to curb the smuggling of subsidised diesel into neighbouring countries like Thailand.

Finance Minister II Amir Hamzah Azizan highlighted a significant increase in diesel subsidies, from RM1.4 billion in 2019 to RM14.3 billion in 2023. This surge in consumption can only be attributed to illicit sales, given that diesel represents less than 12% of total vehicle sales in Malaysia. The subsidy rationalisation has already shown effectiveness, with diesel sales at borders declining by 40%.

The government’s targeted cash assistance of RM200 per month for B40 and M40 households with diesel vehicles underscores that this policy is not meant to penalise honest users but to address the misuse of blanket subsidies. This measure is expected to cover the additional cost of travelling 75 km daily for typical diesel vehicles, benefiting over 80% of private diesel vehicle users.

The Subsidised Diesel Control System (SKDS 1.0 & 2.0) ensures that commercial vehicles continue to receive subsidised diesel, supporting public transportation and logistics sectors. This controlled approach limits the scope of subsidy rationalisation, aiming to reduce smuggling and leakage.

On a broader scale, continuing to subsidise the domestic market while being a net importer strains Petronas’s profit margins, impacting dividends paid to the government and undermining the national balance of payments. The rationalisation aligns with Petronas’s Energy Transition Strategy and the National Energy Transition Roadmap, aiming for net zero emissions by 2050.

Despite the rationalisation, price stability remains a priority, with the Automatic Pricing Mechanism (APM) ensuring controlled profit margins for wholesalers and retailers. This mechanism, in place since 1983, balances the interplay between global market prices and domestic retail prices.

However, the real challenge lies in addressing the inflationary pressures from other sectors, particularly rents. EMIR Research has pointed out the issue of “sellers’ inflation,” where dominant market players exploit their position to raise prices. This includes landlords who increase rents irrespective of the business cycle, significantly contributing to cost of living pressures.

To combat this, the government should establish a “Business Rent Council” to monitor and regulate business rents, ensuring that price hikes are justified and aligned with economic conditions. Reintroducing a modified Rent Control Act and enacting a Residential Tenancy Act could provide additional protection against inflation for both business and residential tenants.

Addressing rent inflation is crucial for mitigating the overall cost of living increases. By controlling real estate prices, the government can help stabilise the cost of doing business and improve purchasing power for consumers, in line with the principles of the Madani Economy Framework.

For Malaysia to achieve sustainable economic stability, both subsidy rationalisation and rent control measures must be implemented effectively. This dual approach will not only curb immediate inflationary pressures but also set a foundation for long-term economic resilience.

The author is the Head of Social, Law & Human Rights at EMIR Research, an independent think tank focusing on strategic policy recommendations based on rigorous research

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