(Bloomberg) -- Malaysia will start limiting subsidies on the most commonly used variety of gasoline to only the most needy from the second-half of 2024, as the government seeks to narrow a budget gap that’s among the widest in Southeast Asia.

The country’s richest 20% households, known as the T20, are now receiving 53% of fuel subsidies, Economy Minister Rafizi Ramli said on Monday in Kuala Lumpur. Such a model is neither sustainable nor equitable, he added.

All Malaysians enjoy subsidies on retail prices of RON-95 grade fuel, as well as diesel and cooking oil. The government also cushions electricity prices, with lower tariffs for most domestic users. 

That’s left Malaysia grappling with a hefty subsidy bill, which is anticipated to exceed 81 billion ringgit ($17.3 billion) this year. The nation is expected to post a budget shortfall equivalent to 5% of economic output this year, the second widest in the region after the 6.2% gap forecast for the Philippines.

“Given our public finances ran a fiscal deficit of more than 5% for 3 consecutive years, we must find new avenues to mobilize our resources and reduce wastages within the system,” Rafizi said in a speech in the nation’s capital. The government is addressing its revenue inadequacy by increasing tax collection, he added.

Restoring fiscal health is key for Malaysia to retain emerging Southeast Asia’s highest credit score, and keep investors’ faith at a time when higher US rates have pushed them to ditch emerging-market assets. Prime Minister Anwar Ibrahim has revealed that Malaysia’s debt and liabilities stood at 1.5 trillion ringgit, or 82% of gross domestic product. 

Rafizi added Monday that the current high interest rate environment is set to peak in 2024, offering Malaysia’s central bank a path to gradually being reducing the overnight policy rate. Economists expect Bank Negara Malaysia to maintain the benchmark interest rate at 3% for the rest of the coming year, extending a rate pause that started in July 2023.

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