Has Malaysia turned the corner economically?

Malaysia’s economy has been on a rollercoaster over the last decade, with political transitions, policy shifts, and external shocks all contributing to periods of instability. However, there is growing optimism that Malaysia is finally turning the corner. But has it really? To answer this question, it is crucial to reflect on the past, examine the present reforms under Prime Minister Datuk Seri Anwar Ibrahim’s leadership, and analyse what more needs to be done to secure Malaysia’s economic future.

Datuk Seri Najib Razak’s tenure as prime minister, spanning from 2009 to 2018, was marked by significant economic growth, but also by a recognition that Malaysia’s traditional economic model—one heavily reliant on oil and gas revenues—was unsustainable. Malaysia’s GDP during Najib's tenure grew from RM673bil in 2010 to RM1.36 trillion in 2018, doubling in size. GDP per capita increased from approximately US$8,400 in 2010 to over US$11,000 by 2018. Despite the broader economic progress, Najib faced critical fiscal challenges—primarily, the over-reliance on PETRONAS, Malaysia’s oil giant.

PETRONAS contributed as much as 30-40% of government revenue at its peak. Najib recognised that Malaysia was overly dependent on oil and gas, especially as global oil prices fluctuated and domestic production declined. His solution? Najib initiated a gradual decoupling of government finances from PETRONAS’ revenues, allowing the company to retain more profits for reinvestment. This strategy, while painful in the short term, was seen as necessary to protect Malaysia from the volatility of global oil markets.

Equally bold was Najib’s introduction of the Goods and Services Tax (GST) in 2015. The GST, set at 6%, was designed to broaden Malaysia’s tax base. At the time, Malaysia’s tax-to-GDP ratio was only around 12-14%, far below its regional peers like Thailand (17%) and South Korea (26%). The GST helped bring in RM44bil in its first full year of implementation in 2016. While unpopular politically, it was an important step in creating a more sustainable revenue stream for the government and reducing Malaysia’s dependence on income from oil and gas.

The 2018 General Election saw a dramatic political shift, with the opposition coalition Pakatan Harapan coming to power. One of the first orders of business was to repeal the GST, replacing it with the Sales and Services Tax (SST). This move, while politically expedient, proved to be economically damaging. The SST, reintroduced at a 10% rate on goods and 6% on services, is a much narrower tax, with revenues falling short of GST collections by a significant margin. In 2019, government revenue from SST was around RM27bil — RM17bil less than what the GST had generated.

This revenue shortfall created fiscal pressure, limiting the government’s ability to invest in infrastructure, education, and healthcare and pushing up the national debt. Furthermore, the government lacked a cohesive plan to replace the lost GST revenue, leading to greater borrowing.

Then came the Covid-19 pandemic, and with it, an unprecedented economic crisis. During Tan Sri Muhyiddin Yassin’s and Datuk Seri Ismail Sabri Yaakob’s premierships, the government was forced to embark on large-scale stimulus spending to mitigate the fallout. Economic stimulus packages like Prihatin and Pemulih injected over RM530bil into the economy between 2020 and 2022. While these packages were crucial in preventing economic collapse and providing relief to struggling Malaysians, they came at a heavy cost.

Malaysia’s government debt ballooned from RM793bil in 2019 to RM1.2 trillion by the end of 2022. The debt-to-GDP ratio surged from 52% to over 65%, pushing Malaysia’s finances into a precarious position. In addition, the fiscal deficit expanded to 6.5% of GDP, far above the 3% considered sustainable.

Under Anwar’s leadership, Malaysia has embarked on a new course of economic reform under the “Madani Economy” framework. The premier has focused on addressing the structural weaknesses in Malaysia’s economy, particularly the overreliance on subsidies and the narrow tax base.

One of the critical reforms under Anwar’s government has been the removal of diesel subsidies, a long-standing burden on public finances. Diesel subsidies, which cost the government billions annually, have disproportionately benefited wealthier Malaysians and businesses while offering little targeted help to those needing it. By phasing out these subsidies, Anwar’s government hopes to redirect funds towards more productive areas, such as infrastructure development and social programs.

Another key success has been the boost in Foreign Direct Investment (FDI) and Domestic Direct Investment (DDI). In 2023, Malaysia attracted RM163.3bil in FDI, marking a 16% increase compared to the previous year. Major investors included tech giants like Intel and Tesla, which saw Malaysia as a strategic hub in South-East Asia for manufacturing and technology development. Domestic investment also saw a resurgence, with over RM100bil flowing into sectors like manufacturing, construction, and services.

Anwar’s administration has also focused on strengthening the ringgit, which had weakened substantially during the pandemic years. By mid-2024, the ringgit had appreciated by nearly 5% against the US dollar, helped by improved investor sentiment and stronger economic fundamentals.

What’s still missing? Further reforms are needed.

While Malaysia has undoubtedly made strides, several areas still need urgent reform. Firstly, a reintroduction of GST is essential. While politically controversial, the GST is a far more efficient and equitable tax compared to SST. Widening the tax base is critical for Malaysia’s fiscal sustainability, and the government needs to design a mechanism that ensures lower-income Malaysians are protected while wealthier individuals and businesses contribute their fair share. Reintroducing GST could add an additional RM40-45bil annually to government coffers.

Subsidy rationalisation also needs to go beyond diesel. The removal of blanket fuel subsidies, electricity subsidies, and even cooking oil subsidies would be the logical next step. In a country where subsidies consume close to 20% of the budget, continuing on this path is unsustainable. Reforms should target subsidies toward the most vulnerable, ensuring they receive direct financial aid.

Furthermore, Malaysia must address its educational system to escape the middle-income trap. Reports from the World Bank have highlighted that Malaysia’s workforce is under-skilled relative to its competitors, with the quality of education often lagging behind regional peers like Singapore and Vietnam. For instance, Singapore’s Wage Credit Scheme has provided wage top-ups to incentivise businesses to raise wages for low-income workers while simultaneously investing in skills development. Malaysia’s progressive wage policy could be modelled similarly, linking wage increases with productivity gains.

Can the Madani government stay the course?

The question remains: can Malaysia stay on track and avoid the pitfalls of the past? The answer will depend on the government’s ability to resist political pressures and focus on long-term economic goals rather than short-term populism.

Anwar's administration has made bold moves, and the markets have responded positively. But turning the corner economically requires more than market confidence — sustained commitment to reform, fiscal discipline, and a government willing to take politically unpopular but necessary steps.

Suppose Malaysia can stay the course, reform its education system, broaden its tax base, and continue to attract high-quality investments. In that case, this administration may very well be the one to secure Malaysia’s economic future. With the right policies, Malaysia can overcome the middle-income trap and position itself as a high-income, competitive economy in the heart of South-East Asia.

Let us hope.

> The views expressed here are entirely the writer’s own