PETALING JAYA: An abrupt implementation of Sabah’s right to 40% of net revenue derived from the state could likely be detrimental for Malaysia – a country that has already been navigating budget deficits for 28 straight years.
Economists also warned that the federal government would potentially be forced to recalibrate its spending and revenue plans, under such circumstances.
As such, they are calling for a gradual, negotiated approach that phases the entitlement over several years.
Economist Geoffrey Williams said the entitlement “has potentially very serious consequences for the government’s fiscal position,” citing that Petroliam Nasional Bhd collected RM205bil from Sabah between 2018 and 2024 as an example of the sums involved.
“Forty per cent of that is about RM82bil – equivalent to 24.2% of the government’s operational expenditure.
“If it is backdated to 1974, it would be such a huge amount that it would be very difficult to pay,” he said, adding that negotiations are likely to determine a feasible settlement.
Another economist, who declined to be named, said the federal government needs to work out a compromise plan to gradually increase Sabah’s share of revenue to avoid a fiscal shock.
“A sudden increase to 40% would be very damaging to the economy and the country’s fiscal soundness. The uncertainty could unsettle investors and destabilise financial markets,” the economist said.
He suggested a medium-term fiscal framework – spanning about five years – to phase in the increase, allowing both the federal and state governments to adjust spending plans without derailing Malaysia’s deficit targets.
“It’s in the interest of both sides to adopt a win-win approach that protects the federal government’s fiscal position while ensuring Sabah and Sarawak get a fairer share of funds. A gradual approach would be less disruptive and more sustainable,” he added.
He noted that a phased plan would also give state governments time to strengthen their capacity to utilise the additional funds effectively.
“A sudden influx of revenue could risk wasteful spending if implementation capacity isn’t ready,” he said.
Data from the Statistics Department showed that Sabah has had the highest poverty rate in Malaysia since 1997.
Last year, the national poverty rate stood at 5.1%, with urban poverty at 4.5% and rural poverty at 12%.
Sabah, however, recorded the highest poverty rate at 17.7%, while Putrajaya had the lowest at 0.2%.
Additionally, most states have reduced hardcore poverty to near zero, but Sabah remains an exception at 0.7%.
On Oct 17, the Kota Kinabalu High Court ruled in favour of the Sabah Law Society (SLS), ordering the federal and Sabah governments to review the state’s 40% revenue entitlement for the “lost years” between 1974 and 2021.
Judge Datuk Celestina Stuel Galid found that Putrajaya had failed to provide evidence of any review during this period, relying only on an affidavit claim.
Under Article 112D of the Federal Constitution, Sabah and Sarawak are entitled to periodic reviews of special revenue grants.
However, the use of the original formula was suspended in 1974, with the federal government instead providing increased fixed grants.
In its 2022 judicial review, the SLS argued that this breached the Malaysia Agreement 1963 and deprived Sabah of its constitutional 40% revenue share, which could have significantly aided the state’s development.
The SLS highlighted that in 2022, eight districts – Kota Marudu, Kudat, Pitas, Beluran, Telupid, Nabawan, Tongod and Kota Belud – were among Malaysia’s 10 poorest, still lacking essential amenities such as clean water, electricity, roads, healthcare and schools.
The court also issued a mandamus order directing the federal government to conduct a revenue review with the Sabah government under Article 112D to reinstate Sabah’s right to 40% of revenue for each financial year from 1974 to 2021.
Following the Oct 17 ruling, the review must be completed within 90 days, and an agreement reached within 180 days.
The federal government has since decided not to appeal the decision affirming Sabah’s right to the 40% entitlement, saying it respects the constitutional provision.
However, the Attorney General Chambers or AGC, in a statement earlier this week, said it would appeal against certain “defects” in the judgment, including the finding that the post-2021 review was unlawful, but confirmed that the federal government will proceed with negotiations with the Sabah government on implementing the 40% revenue entitlement.
