AN economic shock, whether its external-driven or domestic-inflicted often necessitates a reset of economic policies to address underlying persistent structural issues and impediments, stabilise the economy and market, and build stronger resilience for future shocks.
The conflict in the Middle East has inflicted a major impact on global supply chains by disrupting energy markets (higher oil and gas prices), triggering inflationary pressures, delaying shipping routes, increasing transportation costs, and restricting access to key raw materials.
It is also impacting production amid increasing cost of production, triggering wholesale inflation and transmitting inflation feedback loop affecting consumers.
As the saying goes, “sometimes the world needs a shock or a crisis” as it pushes governments and policymakers to move beyond incremental change and pursue comprehensive, necessary reforms.
While the economic shock offers a “window of opportunity” for reforms, the reset is not always a total overhaul; it is a combination of immediate economic and businesses stabilisation measures as well as long-term structural adjustments.
Since the Covid-19 pandemic, the Malaysian government has accelerated structural economic reforms aimed at recovery, resilience, and long-term sustainability.
From 2024 to 2025, Malaysia has aggressively executed a suite of strategic and catalytic economic transformations aimed at shifting the nation from a middle-income to a high-income nation, with a strong focus on high-technology, digitalisation, artificial intelligence (AI), green transition, and strengthening social safety nets in the context of demographic shifts and ageing.
Economic transformation
Anchored by the Madani Economy Framework, these strategies include the New Industrial Master Plan 2030, National Energy Transition Roadmap (NETR), National Semiconductor Strategy, the Thirteenth Malaysia Plan (2026-2030) and National AI Roadmap.
Fiscal consolidation and strong fiscal governance are widely regarded as top priorities, focusing on targeted subsidies rationalisation, reforming tax systems, ensuring responsible spending and managing public debt through the Public Finance and Fiscal Responsibility Act 2023 and Government Procurement Act 2025.
Another commendable bold move is reforming the public pension system to address long-term fiscal sustainability, moving new hires from the traditional defined-benefit scheme to a contribution-based system.
These bold and unpopular actions are essential for rebuilding fiscal space to address potential future shocks and long-term development needs.
Several measures implemented to plug financial leakages have resulted in the recovery of approximately RM15.5bil over the past two years.
Malaysia’s sovereign credit ratings have maintained a steady, “stable” outlook, supported by strong economic fundamentals, structural reforms, and consistent growth.
The investment landscape is experiencing a historic surge, with approved investments reaching a compound average growth rate of 8.4% per annum from RM309.4bil in 2021 to RM426.7bil in 2025, driven by strong foreign and domestic interests.
Private investment had expanded by 8.7% per annum in 2023 to 2025. Key growth areas include data centres, semiconductors, and digital economy projects, solidifying the nation’s position as a premier regional technology hub.
Despite these achievements, several persistent structural challenges remain and must be addressed to avoid the middle-income trap and to move towards a high-income, sustainable economy.
These include slow productivity growth, gaps in public delivery services, insufficient innovation and technology investment, regional development disparities, and limited fiscal space.
Fiscal burden
First, the convergence of global oil shocks and heavy fuel subsidies have created an unsustainable fiscal burden, exposing an urgent need to refine the targeted fuel subsidies mechanisms, making it fiscal resilient future-proof.
Preparing for the next oil shock involves building structural resilience rather than relying solely on short-term reactive measures.
Amid political sensitivity, leaning off fuel subsidies is a critical, albeit difficult, economic re-engineering aimed at reducing fiscal deficits and promoting sustainable energy use.
We need sustainable and future-proof policies that reduce fossil fuel dependence and expand renewable-centred energy systems, making our economy more stable, our businesses and communities more resilient and strengthening cushioning against the risks of future oil shocks.
Businesses must invest in green technologies and fuel efficiency. Consumer behavioural changes are crucial to shift from high consumption on fuel to efficiency and alternatives, leveraging price signals, promoting eco-driving vehicles, and enhancing infrastructure for alternatives.
Second, accelerate the implementation of NETR and prioritise investments in clean and renewable energy industrial strategy.
Accelerate grid reforms and investment to enable diversification, modernisation, and electrification of key sectors, pursued aggressively alongside manufacturing, plantation, and technology priorities.
With clean power it is a main lever to diversify away from fossil fuels.
We have to push for higher domestic production of clean molecules such as hydrogen and ammonia, methanol, and sustainable aviation fuel as they represent another part of the solution for the fertiliser, chemicals, shipping, and aviation sectors.
Third, forming comprehensive strategic partnerships between the government and businesses and also with their counterparts to secure supply chain security.
It requires a multi-layered approach that prioritises trust, data sharing, and shared investment in critical infrastructure.
There’s an urgent need to rapidly scale domestic production where it’s feasible.
In parallel, it is important to build trusted trade and business partnerships with allies and friends to ensure multiple sources of supply to reduce the risk of further disruptions, as well as decreasing vulnerabilities related to sabotage, cyber threats, and geopolitical instability.
The government and agencies have to actively re-evaluate and strengthen the adequacy of stockpiles of strategic resources due to rising geoeconomic fragmentation and instability as well as the unreliability of traditional transit routes in a changing security environment.
This strategic pivot marks a shift from “just-in-time” to “just-in-case” logistics, focusing on ensuring security of supply for critical materials, energy, and commodities.
Fourth, strengthening public sector delivery services to support private sector efficiency through accelerating digital services transformation, re-engineering bureaucratic processes, and fostering a facilitative regulatory environment.
In times of managing economic shocks, public service leaders can take the opportunity to reform the public sector, making it more agile and context-specific responses, rather than waiting for centralised approvals.
Investing in skill development and handling of new technologies is crucial as it prepares the public workforce for a future-oriented, responsive public sector.
The Bureaucratic Red Tape Reform is enforced to address bureaucratic hurdles, including abolishing outdated rules and work practices across all government agencies aimed at enhancing delivery system efficiency and productivity.
The Ombudsman Bill, which is scheduled to be tabled in Parliament in 2026, aims to create an independent body, Ombudsman Malaysia, to improve public accountability, address public complaints regarding mismanagement, misconduct, and inefficient public service delivery.
Fifth, our approach to manpower development and re-skilling must focus on strengthening education, training and talent system readiness for AI, green transition and geo-economic fragmentation.
Improving learning-training, and learning-to-employment pathways through employer-education collaboration is a critical strategy for addressing skills gaps, enhancing employability, and supporting economic growth and businesses. The new education and Technical and Vocational Education and Training ecosystem focus on skill accelerators, where verifiable, portable, and stackable credentials are the cornerstone of the modern digital, skills-based economy.
The choice is not degrees, rather than scaling future-critical skills through a shift toward shared, industry-led frameworks and stackable, digital micro credentials.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer's own.
