KUALA LUMPUR: The World Bank raised Malaysia’s economic growth forecast for 2026 to 4.4% from 4.1%, citing resilient domestic demand despite escalating geopolitical tensions in the Middle East.
“Malaysia enters this crisis period from a position of strength. We expect domestic demand to be strong this year because of favourable labour market dynamics, as well as continued government support where required,” World Bank lead economist for Malaysia Apurva Sanghi said at a briefing for the Malaysia Economic Monitor (MEM) April 2026.
He also noted the situation in the Middle East remains very fluid and can change from one moment to the next and as such, this cannot be fully accounted for in any projection.
“In 2025, especially the last two quarters, all the metrics point towards Malaysia doing well. This year, we expect some spillover momentum. Look at bond yields for example, the country is quite robust here. And as of now Malaysia is doing quite well,” he said.
The latest gross domestic product outlook by the World Bank is broadly in line and close to projections from Bank Negara Malaysia and the government.
Malaysia’s economy had outperformed expectations in 2025, expanding by 5.2%.
On inflation, Apurva said this remains contained at near 1.6% although this would also be predicted upon how the global geopolitical situation moves along.
Meanwhile, the World Bank said there is a need for Malaysia to focus on enhancing its economic complexity as its ranking in the region has declined in the last four years.
According to the Harvard Atlas Economic Complexity, Malaysia’s Economic Com-plexity Index ranking has fallen from its 2021 peak of 23rd placing to 32nd, which is a level similar to 2016.
This reflects limited diversification of export products over the period, the findings showed.
By contrast, the World Bank highlighted the same index showed Vietnam, with more scope to diversify from a lower starting point, has climbed 20 places over the past decade by actively entering new and more complex product markets.
This shift is evident when comparing the 2024 export structures with those from 10 years ago: whereby Vietnam’s has shifted markedly, with significant increases in electrical and machinery products, while Malaysia’s structure remained largely similar, the World Bank said in the MEM April 2026 bulletin.
“Nonetheless, at current income levels, Malaysia’s economic complexity is associated with projected annual growth of around 4.5% through 2034, broadly aligned with the lower-bound target under the 13th Malaysia Plan.
“Against this backdrop, renewed progress in export diversification and upgrading will be critical to rebuilding economic complexity and supporting growth beyond baseline projections,” it said.
“Over the past decade, Vietnam’s export structure has evolved more rapidly than Malaysia’s,” it noted.
Apurva said economic complexity is an important gauge of being able to drive long term growth.
“The more complex an economy is, the better is it for growth and per capita outcomes here. If a hypothetical country Q only exports the most basic products, it will be subject to the ups and downs of raw material prices.
“So the more complex set of goods and services an economy uses, the better off the country’s citizens are in terms of its developmental outcomes,” Apurva said.
Apurva said some of the areas the country could improve on this front include complex machinery such as lenses and optical elements and complex chemical products.
“These are more complex, feasible and closest to the country’s set of capabilities for Malaysia to consider improving on in their supply chain,” he said.
The World Bank report elaborated further on these sectors and products: machines for working materials by laser and similar means; chemical preparations for photographic uses; lenses and other optical elements; and parts of radios, telephones and televisions.
“Our findings also show Malaysia has done remarkably well in moving from basic commodity oil producer and exporter decades ago into more higher value added and more complex refined goods – this is something to be lauded.
“But Malaysia can learn from its own experiences where it moved up in economic complexity within the commodity sector,” he said.
“How was this done? - by importing technology, learning from the best, building capabilities and these can be applied to the other sectors as well,” Apurva added.
The objective is not merely to export more complex goods, but to ensure that the associated capabilities are built domestically, enabling greater value capture and long-term upgrading, it said.
Having the know-how to produce sophisticated products enables Malaysia to capture higher value, generate quality jobs, and create broader economic impact, the World Bank noted.
“For example, while the manufacture of computer, electronic, and optical products dominates Malaysia’s gross exports, only around 54% of the value is captured domestically (in contrast to manufacture of chemicals which captures 61% of the domestic value added or DVA).
“Developing domestic capabilities in high-value stages ensures that participation in these global value chains translates into deeper productive know-how, higher economic complexity, and sustained growth,” it said.
However, it also noted that moving to high value-added activities does not imply that Malaysia should artificially raise DVA through import substitution, which could be inefficient.
Malaysia has the highest gross exports in computer, electronics, and optical products, but a relatively low share of domestic value added in their exports, it said.
Meanwhile, commenting on the country’s fiscal deficits, Apurva said part of the reason why this had come down last year and beaten expectations is the bigger than expected revenues from the Sales and Service Tax (SST).
“This may continue, but we don’t know for how long. But relying on SST and commodity related revenues are not a sustainable long term strategy to bring down the fiscal deficit. Malaysia needs to pivot away from expenditure only fiscal deficit reduction measures to better revenue mobilisation,” he said.
