A SURGE in global crude oil prices amid the ongoing conflict in West Asia is placing mounting pressure on Malaysia’s fiscal position, raising concerns over the country’s creditworthiness should its dependence on subsidies persist.
Governments worldwide have been compelled to intervene to shield households from rising inflation, often through subsidies and price controls.
However, a report by Bank Islam Economic Research cautions that such measures are only effective in the short term and are ill-suited as a sustainable long-term policy approach.
"Although subsidies may help ease short-term inflationary pressures, they cannot serve as a sustainable long-term policy solution," analysts stated in the report.
Malaysia previously demonstrated resilience during the 2022 Russia-Ukraine crisis, maintaining relatively moderate inflation at 3.4 per cent, significantly lower than many other economies.
This was largely achieved through extensive government intervention, which absorbed much of the inflationary impact stemming from global supply chain disruptions and rising energy prices.
However, this approach carried substantial fiscal consequences. Subsidy expenditure surged to RM62.1 billion that year, nearly five times higher than in 2021.
Economists warn that prolonged large-scale subsidy spending is fiscally unsustainable and poses significant risks to government finances.
Beyond widening the fiscal deficit, it also constrains the government’s capacity to invest in infrastructure and deliver essential public services that yield long-term benefits.
More critically, continued reliance on subsidies to contain inflation may erode Malaysia’s fiscal resilience and weaken its sovereign credit rating in the eyes of international investors.
These pressures are further compounded by Malaysia’s position as a net food importer, with the food trade deficit reaching RM39.3 billion in 2024.
This dependence necessitates higher subsidy outlays for imported commodities.
At the same time, export restrictions imposed by several countries and rising global logistics costs have added to the strain.
Shipping route diversions, which have extended delivery times by between 10 and 20 days, have driven up operational costs that are ultimately borne by the government.
In light of these challenges, economists argue that reliance solely on fiscal strength is no longer viable. Instead, they stress the urgency of improving energy efficiency within the agricultural sector and reducing dependence on fossil fuels to safeguard Malaysia’s long-term financial stability. - March 27, 2026
