Randall Jones
Ken Nibayashi
OECD Economic Surveys: Malaysia 2024
Abstract
Growth is projected to strengthen during 2024 and 2025, primarily driven by domestic demand although exports are also projected to pick up. Inflation has come down, but in light of a necessary withdrawal of energy subsidies, it is expected to rise again, subject to considerable uncertainty. Monetary policy should remain vigilant to the potential inflation pressures resulting from these policy changes. Fiscal policy will need to continue the ongoing budget consolidation, supported by an improved fiscal framework. The new budget targets can be achieved by a combination of reducing some spending items such as subsidies and making spending more efficient, but also by mobilising additional sources of revenue. Upcoming spending pressures related to population ageing will only exacerbate this need to raise additional revenues. Economic governance has improved, but space for further improvement remains in the area of tax administration, the governance of state-owned enterprises, whistleblower protection and systematic asset disclosures by high-level officials and parliamentarians.
Amid weaker global trade in 2023, growth has lost momentum
Malaysia’s economy has weathered recent shocks relatively well, including the pandemic, supply chain bottlenecks and the economic implications of the Russian invasion of Ukraine. After plummeting by 5.5% in 2020, growth turned positive at 3.3% in 2021, followed by 8.9% in 2022. A robust fiscal response supported the strong rebound from the pandemic downturn. The government launched five stimulus packages in 2020, amounting to 3.9% of GDP, and four packages in 2021 provided another 1.8% of GDP of support (OECD, 2021[1]).
Growth moderated to a more sustainable 3.6% in 2023 (Figure 1.1, Panel A), driven by domestic demand in the face of a significant drop in exports in 2023. Improving labour market conditions supported private consumption during the year’s first three quarters. Indeed, the unemployment rate fell from a peak of 5.1% during the pandemic to 3.4% in 2023, matching its pre-pandemic level (Figure 1.1, Panel B). Gross fixed investment increased 5.5%, led by a pick-up in the public sector.
Malaysia is exposed to external shocks, given that it is a highly open economy with exports amounting to around three-quarters of GDP (Figure 1.2), though this is lower than the 120% in 2000. Exports of goods and services surged at double-digit rates in 2021 and 2022 amid strong world trade growth before declining by 8.1% in 2023 as global trade growth stalled. This pattern was in line with the experience of several peers in the region (Figure 1.1, Panel D). In 2023, exports of goods in value terms fell by 8.0% (in Malaysian ringgits), mainly reflecting lower external demand for key products and global declines in oil and food prices. Indeed, palm oil and LNG exports dropped by double-digit rates, while electrical and electronic products decreased by around 3%. Exports to China fell by 8.7%, whereas shipments to the United States declined by only 3.6%, reflecting their larger share of final goods rather than parts. In stark contrast to goods, service exports rebounded in 2023, reflecting a revival of tourism. Although imports also declined, net exports made a significantly negative contribution (0.6 percentage points) to GDP growth and the current account surplus narrowed from 3.2% of GDP in 2022 to 1.5% in 2023 (Figure 1.1, Panel E).
Note: In panel C, the public sector consists of government consumption and public investment.
Source: CEIC; DOSM; and Bank Negara Malaysia.
Source: OECD, Economic Outlook database; World Bank, World Development Indicators database; CEIC.
Other Asian economies (Singapore, China, Hong Kong, China, Japan, Thailand, Korea, Viet Nam, Indonesia and Taipei, China) accounted for 59.4% of Malaysia’s exports in 2023 (Figure 1.3, Panel A). The United States and the European Union accounted for another one-fifth. By product category, electrical and electronic products had the largest share at 40.4%, followed by petroleum products and LNG at (14.2%) (Figure 1.3, Panel B). Exports of agro-food products, such as palm oil and energy, account for about a quarter of Malaysia’s exports.
Share of total exports, 2023
Source: Department of Statistics Malaysia; and OECD calculations.
Inflation has slowed
Inflation took off in early 2021, driven by global supply chain bottlenecks, soaring global energy and commodity prices, and the depreciation of Malaysia’s currency. Headline inflation peaked at 4.7% in April 2021, driven by rising transport costs, and again in August 2022, led by food and beverage prices. However, inflation remained below that in regional peers, such as Thailand (7.9%) and Singapore (7.5%) (Figure 1.4), reflecting Malaysia’s subsidies to reduce consumer prices. In particular, fuel subsidies contained the pass-through of surging global energy prices. In addition, price controls limit hikes in fuels and staple foods. By some estimates, Malaysia’s headline inflation in 2022 would have been almost 5 percentage points higher without fuel subsidies (8.1% instead of 3.3%) (AMRO, 2023[2]). However, this has come at a significant fiscal cost and has created distortions, defying efforts to reduce carbon emissions. With falling inflationary pressures from the food and beverage sector and transport (Figure 1.5), headline inflation fell to 2.5% in 2023, while core inflation (excluding fresh food, energy and administered prices) fell to 3.0%.
Source: CEIC.
Source: CEIC; and OECD calculations.
Output increased steadily in the first two quarters of 2024, with year-on-year growth accelerating to 5.9% in the second quarter, thanks to double-digit growth in gross fixed investment and steady increases in private consumption and exports of goods and services. Output is projected to increase by 4.9% in 2024 (Table 1.1). Domestic demand will be the primary driver of growth, although the fiscal policy stance will be mildly restrictive as the government seeks to achieve its deficit reduction targets. Monetary policy remains neutral (see below). Private consumption is likely to remain robust, with inflation declining to low levels and favourable labour market conditions. The labour force participation rate has risen to an all-time high and wage growth is stable at around 4¼ per cent in the manufacturing sector (Figure 1.1, Panel B), supporting household income growth. The unemployment rate is expected to continue declining to close to 3%.
Per cent changes from previous year unless specified
Source: OECD Economic Outlook 115 database and OECD projections.
Announced government policies aim to raise wages on the lower end of the distribution, with a stated policy objective of boosting the median wage by 3.8% between 2023 and 2025 through financial incentives for employers to pay higher wages. Such direct interventions in wage-setting may not be the most effective way to improve wages and could affect future export competitiveness if the resulting wage increases are not in line with productivity growth.
Gross fixed investment growth is projected to be robust in 2024. New opportunities in technology-intensive sectors and the expected rebound in exports will encourage private investment despite the impact of higher interest rates on financing costs. Infrastructure projects and investment by public corporations will support public investment.
Recent changes in the configuration of global value chains in the context of trade and geopolitical tensions may turn out beneficial for inward investment flows and exports. As multinational companies are seeking to create more resilient value chains and diversify the location of their production, Malaysia is emerging as one of the destinations for such relocations. This is particularly the case in the electronics and semiconductor industries, where Malaysia’s 50-year experience is helping to attract further foreign direct investment inflows and expand production capacity and exports. This process that is likely to continue.
Stronger external demand is expected to boost Malaysia’s export growth to between 8.7% in 2024 and 5.5% in 2025 and a similar rebound is likely for imports, in line with strong domestic demand. The contribution of net exports to GDP will be around zero, while the current account surplus is expected to rise to 4.4% of GDP in 2024 and 5.6% in 2025.
Easing global supply constraints and lower commodity prices will put downward pressure on headline consumer price inflation in 2024-25. By some estimates, oil prices are projected to fall 2.3% in 2024 and non-fuel commodity prices by 0.9% (IMF, 2024[3]). Inflation trends in Malaysia also depend on the progress in reducing and retargeting the subsidies intended to mitigate increases in the prices of energy and food items. In 2022, government subsidies nearly tripled to 2.9% of GDP, before reaching 3.5% in 2023. Subsidies are set to be reduced and better targeted in 2024. This will put upward pressure on inflation in the short run but is an important first step towards strengthening the efficiency of public spending and making better use of scarce fiscal resources.
The OECD inflation projection of around 2.75% in 2024 and 2025 in Table 1.1 rests on the assumption that progress in reducing subsidies will put upward pressure on inflation. This also assumes that price ceilings on petrol and diesel are adjusted. Other price ceilings are assumed to remain in place until the end of 2025, limiting inflation while continuing to create distortions and shortages. The yet uncertain pace of the subsidy withdrawal casts considerable uncertainty on inflation for 2024, reflected in the fact that even official projections by the central bank cover a fairly wide range of 1.5 percentage points.
The risks to the outlook appear skewed to the downside
With a trade-to-GDP ratio of 147% (Figure 1.2), Malaysia is vulnerable to changes in the global economic environment. Geopolitical risks related to ongoing conflicts are a concern, in part because they could add to shipping costs or even spark commodity price shocks. Malaysia would be affected, as commodities still play an important role in its exports (Figure 1.3). This could also lead to spikes in global risk premia, resulting in capital outflows from emerging markets. In addition, the pace of disinflation in major economies remains uncertain. Faster inflation declines would accelerate the anticipated easing of monetary policy, boosting world output growth, while stubborn core inflation could lead to additional monetary tightening. Economic developments in China, Malaysia’s second-largest trading partner, are another source of uncertainty. Effective reforms in the Chinese property sector could lead to faster growth, while failure to address these issues could result in a further slowing in China’s growth.
A key domestic downside risk relates to the uncertainty around inflation. Persistent inflation above the 2% norm, resulting from weakness in the Malaysian ringgit and subsidy reform, could restrain private consumption, particularly by low-income households, which have been disproportionately affected by recent price increases. In addition, it could prompt additional monetary policy tightening. The slow pace of planned fiscal consolidation to meet the medium-term targets leaves public finances vulnerable to economic shocks and spending pressures. Accelerated digitalisation and productivity gains in micro, small and medium-sized enterprises (MSMEs), which account for nearly half of employment, is an important upside risk (Chapter 4). Besides these risks, there are also low-probability events that could lead to changes in the economic outlook (Table 1.2).
Monetary policy has tightened
The objective of the Bank Negara Malaysia (BNM) is to maintain price stability “while remaining supportive of growth”. As the central bank, it is also responsible for financial system stability. The BNM, which is legally independent, uses an overnight interest rate as “the sole indicator used to signal the stance of monetary policy”. Unlike many central banks, the BNM does not set a specific inflation target. Inflation has averaged 1.8% over the past ten years, indicating that the BNM has successfully maintained price stability.
When prices and output plunged following the outbreak of the COVID-19 crisis (Figure 1.6, Panel A), the BNM reacted promptly, cutting its policy rate by 125 basis points in 2020 to a historic low of 1.75% (Figure 1.6, Panel B) and providing cashflow relief to individuals and businesses. As the economy rebounded and headline inflation approached 5%, the BNM started a tightening cycle in May 2022 that increased the overnight rate to the broadly neutral pre-pandemic level of 3.0% by May 2023, where it remains. However, the statutory reserve requirement (SRR), which was cut during the pandemic to ease lending conditions, remains well below pre-pandemic levels.
With headline inflation at 1.5% and core at 1.8% in January 2024, the March 2024 Monetary Policy Statement assessed the current policy stance to be consistent with the BNM’s evaluation of inflation and growth prospects (Bank Negara Malaysia, 2024[4]). The inflation broadness index, which measures the diffusion of inflation by counting the percentage of items in the CPI index rising more than a certain threshold, has declined continuously during the past year, and inflation expectations remain well anchored. The output gap is positive but less than 1% and the monetary policy stance is broadly neutral based on the real policy rate (IMF, 2024[3]).
Although inflation is currently below its long-run average, there are significant risks around its future trajectory that warrants caution. In particular, the inflation effects of the planned subsidy withdrawal are highly uncertain. In the best case, the reform will increase inflation temporarily as energy prices move to a higher level, but there could also be more enduring second-round effects and more widespread upward pressures on inflation. Against this background, it is important to avoid a premature easing of the monetary stance and to respond quickly to any inflationary pressures that could result from the planned reform of subsidies. While temporary inflationary pressures would typically not require a monetary policy reaction, the BNM should be prepared to counter the effects of the subsidy withdrawal and adjust rates as appropriate.
Source: CEIC.
Effective communication by the central bank is essential, particularly during this period of high uncertainty. The introduction of the “Monetary Policy Statement (MPS) Snapshot” by the BNM in 2022, constitutes important progress in communication and transparency around monetary policy decisions. Publishing the minutes of monetary policy committee meetings, in line with the current practice of most major central banks, may also be helpful.
Coping with exchange rate fluctuations
As monetary policy has tightened in major advanced economies since 2022, emerging market economies, including Malaysia, experienced capital outflows and downward pressure on their currencies (Figure 1.7). In addition, the weakness in the renminbi had a negative impact on the ringgit, given that the deepening economic links between China and Malaysia have led to a correlation between their currencies. The Malaysian ringgit depreciated more than any other currency in the region over 2021-23, falling 15% against the US dollar. At the beginning of 2024, the currency fell to its lowest level since 1998 in the context of the Asian Financial Crisis. The government and the central bank viewed the level of ringgit as undervalued, particularly as Malaysia’s economic fundamentals continued to be strong and its economic prospects are positive, while some estimates suggest that the real effective exchange rate was undervalued by 27% to 30% (IMF, 2024[3]). The BNM intervened in the foreign exchange market in the past in line with its policy of using intervention to curb excessive short-term exchange rate volatility (Bank Negara Malaysia, 2023[5]). Since July 2024, however, the ringgit has recovered all the losses incurred during the previous 12 months (Figure 1.7).
Although inflation is low, renewed depreciation of the ringgit could stoke inflationary pressure, and past inflation could push up prices with a lag. Still, foreign exchange interventions are not a substitute for needed policy adjustments and should not be an instrument to lean against exchange rate pressures that are driven by fundamentals, although they may have a temporary role in addressing disorderly market conditions. Malaysia’s flexible exchange rate regime has been and should continue to be the first line of defence against external shocks.
Source: CEIC; and Bank Negara Malaysia.
The expected monetary policy easing in the United States and Europe during 2024 should continue to ease downward pressure on the ringgit. The Ministry of Finance plans to encourage more capital flows to Malaysia. One of its strategies is stepping up coordination with state-owned companies (SOEs), including government-linked investment companies (GLICs), to encourage them to repatriate foreign investment income and convert that income into ringgit more consistently to support the ringgit (Bank Negara Malaysia, 2024[4]). However, this may run counter to the commercial strategies of SOEs. Over the medium term, structural reforms to increase potential growth and address the fiscal imbalance would provide the most enduring support to the ringgit. In addition, policies to further liberalise and deepen the foreign exchange market, notably by gradually phasing out capital flow management measures, would help limit exchange rate volatility. While average daily turnover in the foreign exchange market increased to USD 15.5 billion in 2023, compared to USD 12.1 billion over the preceding five years, further easing of controls on capital flows would help in this regard.
The banking sector has maintained adequate capital buffers, even during the severe downturn caused by the pandemic in 2020. At the end of January 2024, the Total Capital Ratio (18.6%), the Tier 1 Capital Ratio (15.5%), and the Common Equity Tier 1 Capital (CET1) ratio (15.0%) stood well above Basel III minimum regulatory levels (8.0%, 6.0%, 4.5%, respectively) (Figure 1.8, Panel A). Banks also have strong liquidity positions that create significant buffers against potential liquidity stress. Bank balance sheets contain large amounts of liquid assets that can be easily and immediately converted into cash at little or no loss of value (IMF, 2024[3]). The liquidity coverage ratio (LCR), which compares high-quality liquid assets to the expected net cash outflows of the banking system over the next 30 calendar days, has been stable at around 150% (Panel B), although banks’ liquid reserves in 2022 were only 8.9% of their assets, compared to Thailand (17.4%), the United States (19.0%), East Asia and Pacific countries (20.7%) and Indonesia (26.3%) (World Bank, 2024[6]).
Note : Panel A – capital levels are shown as a percentage of risk-weighted assets. The minimum requirements under Basel III are 8.0% for total capital, 6.0% for tier 1 capital and 4.5% for common equity, Panel B – the liquidity coverage shows high-quality liquid assets as a percentage of expected total net cash outflows over the next 30 calendar days.
Source: Bank Negara Malaysia.
The robustness of the financial system is also confirmed by the stress tests conducted by the central bank, which covered a three-year horizon up to the end of 2025 (Bank Negara Malaysia, 2023[7]). One scenario of these stress tests assumes a temporary but severe disruption in the operating environment, including a sharp contraction in the Malaysian economy, significant job losses, and tighter credit conditions. The second assumes a less severe but more prolonged economic contraction. The stress test affirmed that banks could withstand significant macroeconomic and financial shocks and sustain lending to businesses and households. Over 80% of banks in Malaysia would be able to maintain capital ratios above their internal targets. However, 24 out of 54 banks (with a cumulative share of 25% of total banking system assets) would report losses in at least one year during the stress test horizon.
The growth in commercial bank loans to the private, non-financial sector has decelerated during the past decade (Figure 1.9, Panel A). In particular, it failed to keep pace with nominal GDP over 2020-22 before rebounding in 2023 as growth slowed (Figure 1.9, Panel B). Loans to households from the banking sector fell from 76.8% of GDP in March 2021 to 69.5% at the end of 2023 and have mainly financed purchases of residential properties and vehicles, in addition to credit card spending.
Source: CEIC; and OECD calculations.
Malaysia's banking sector is relatively deep compared to many other emerging markets, including Indonesia, although less so than Thailand and China (Figure 1.10, Panel A). The size of capital market is double Malaysia’s GDP. Non-performing loans, which reached 9.4% of total loans in 2005, have remained below 2.0% since late 2013, including during the pandemic and post-pandemic periods. In the third quarter of 2023, non-performing loans were 1.7% of total loans, only 0.1 percentage point higher than the pre-pandemic period of 2015-2019. Malaysia’s non-performing loan ratio has remained lower than in its regional peers (Figure 1.10, Panel B).
Nonetheless, part of the household loan portfolio will require particular vigilance by financial supervisors. At the end of 2023, a quarter of household borrowers had a debt-service ratio (DSR) above 60%. More than two-thirds of high-DSR debt is held by middle and high-income borrowers, who typically have larger financial buffers to sustain loan repayments in the event of financial shocks, according to Central Bank data. Consequently, even though interest rates have risen since 2022 and 78.3% of outstanding of household debt was at floating rates at the end of 2023, the impairment ratio among high-DSR borrowers has remained low and stable at 1.2%. Against this background, a wider use of macroprudential tools, such as loan-to-value regulations, may help to fine-tune risks affecting household loan portfolios of the banking sector. House prices have been broadly stable since early 2023.
Parallel to the conventional financial system, Malaysia as developed a competitive, liberal and globally recognised Islamic finance ecosystem that operates alongside the conventional financial system, and Islamic banking assets currently amount to around one third of total banking assets. From a global perspective, Malaysia host approximately one sixth of global Islamic finance activities and accounted for 40% of the total Islamic bonds (sukuk) outstanding globally, as the country has become a global multi-currency sukuk hub (Fitch Ratings, 2023[8]). Islamic finance operates according to the principles of Islamic law, which prohibits usury and promotes risk-sharing and participatory asset-backed financing. Malaysia has extensive experience in financing major infrastructure projects through sukuk, which can lower the cost of financing compared to conventional lending, as the structure of sukuk products is well suited to long-term investments. The emphasis on risk-sharing of Islamic finance reduces the overall debt exposure of the financial system and provides a potentially valuable example for other economies. Innovative sukuk structures have also been introduced, to finance sustainable and responsible investments, for example into green technology.
Note: EME in Panel A is comprised of Argentina, Brazil, Chile, China, Colombia, Czechia, Hong Kong SAR, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Poland, Russia, Saudi Arabia, Singapore, South Africa, Thailand and Turkey. EME in Panel B adds the Philippines and Viet Nam. Household debt and non-financial corporation debt are those from banking institutions.
Source: BIS; and IMF.
Deficits and debt have risen above the pre-pandemic period
As in many countries, Malaysia’s fiscal deficit increased significantly in 2020 and 2021 as the government took measures to limit the economic fallout from the pandemic in many sectors. The federal government balance, including the COVID-19 fund, deteriorated by 3.0 percentage points of GDP between 2019 and 2021, reaching 6.2% of GDP (Figure 1.11, Panel A). The fiscal deficit narrowed somewhat in 2022, reflecting robust growth of 8.7% and the decline in social expenditures, especially in the health sector, as a share of GDP. Progress continued in 2023 when after two years of fiscal consolidation, the federal government deficit was 5.0% of GDP. The primary deficit, which does not contain interest payments, fell to 2.5% of GDP in 2023, but this is still more than double the pre-pandemic level.
Note: Consolidated public sector consists of general government and non-financial public corporations.
Source: Ministry of Finance, Fiscal Outlook and Federal Government Revenue Estimates 2024; IMF, World Economic Outlook database.
One obstacle to a more decisive fiscal consolidation has been a rise in government expenditures since 2021, reaching 22.4% of GDP in 2023. This was preceded by almost a decade of decline since 2012, including during the COVID-19 pandemic years (Figure 1.12, Panel A).
The spending increase over 2022-2023 is related to rising subsidies, which expanded by a factor of 2.5 over that biennium, boosting their share of total spending to over 20% (Figure 1.12, Panel A). The most significant component was the fuel subsidy, which accounted for three-quarters of the total. While many countries initially increased fuel subsidies to reduce the impact of the recent sharp increase in global crude oil prices on consumers, Malaysia’s fuel subsidy was larger than that of regional peers, reaching USD 478 per person (Figure 1.12, Panel B). The subsidies impose a high fiscal cost and encourages fuel consumption, making it inconsistent with the country’s decarbonisation strategy (Chapter 3). Prolonged energy price caps run counter to climate change mitigation objectives by distorting market signals. This reduces incentives to shift to renewables and lower energy demand. Subsidies have been ineffective as a social policy tool due to its poor targeting. Estimates suggest that while the poorest decile received only 6% of the amount spent on these subsidies, the richest 10% of households in Malaysia received about 15% of the total amount spent on subsidies (World Bank, 2023[9]).
Spending on the budget category that comprises subsidies and social assistance is set to be cut in the 2024 budget, decreasing their share of total spending from 23.1% in 2023 to 17.4%. This reflects a recognition that energy subsidies have not been effective in achieving policy objectives and is a step in the right direction, but there is scope to go much further. Further reducing subsidies and relying on cash transfers targeted at low-income households most affected by rising prices would be a key ingredient for achieving the consolidation needed for compliance with the new fiscal framework and promoting social inclusion and sustainability at the same time.
Higher deficits since the pandemic have left their mark on government debt. The rise in federal government debt from 52.4% of GDP in 2019 to 63.3% in 2021 forced the government to lift its statutory debt limit from 55% to 65%. On a general government basis, Malaysia’s government debt rose by more than 10% of GDP over that period to 69.7% in 2023(Figure 1.11, Panel B). This is about half of the debt increase experienced by the Philippines and Thailand. Relative to GDP, however, Malaysia’s general government debt level exceeds that of regional peers.
The fiscal positions of entities outside the federal government need to be monitored closely, as extra-budgetary entities and state-owned enterprises, which contribute around 35% of GDP, have been mobilised to provide various support measures in the pandemic stimulus packages. These outlays are included in the consolidated public sector, defined as the general government and non-financial public corporations. Large non-financial public corporations include major entities such as Malaysia Airlines, Petronas and Telekom Malaysia. In 2019, the public sector deficit was on par with the federal government at 3.4% of GDP (Figure 1.11, Panel A). By 2021, however, the public sector deficit had risen to 8.3%, while the federal government deficit had a smaller increase to 6.4%. Both state and local governments and non-financial public corporations contributed around two thirds to the rise in the public sector deficit over 2019-21, a development that should be watched closely in the future.
Note: The data for 2023 is a government estimate and 2024 is based on the 2024 budget and the OECD projection of GDP in 2024.
Source: Ministry of Finance; and IEA, Fossil Fuel Subsidies database.
Furthermore, the consolidated public sector does not include public financial corporations, which the government uses to provide guarantees to businesses. The total assets under the control of the seven government-linked investment companies (GLICs) are almost the size of Malaysia’s GDP. Government guarantees, a quasi-fiscal tool administered under the Loans Guarantee Act, reached 20.8% of GDP in 2020, dropping to 17.2% in the third quarter of 2023. Adopting an integrated fiscal framework covering the entire public sector, including contingent liabilities, would strengthen fiscal monitoring and promote sustainability.
A new fiscal framework law is expected to strengthen fiscal sustainability
The Public Finance and Fiscal Responsibility Act (FRA), approved by Parliament in October 2023, is a major step towards a stronger fiscal framework. It is based on the principles of ensuring macroeconomic stability, maintaining a prudent debt level and establishing effective fiscal risk management. The FRA requires the Minister of Finance to provide a Medium-Term Fiscal Plan over a three-to-five-year period that includes numerical targets for the federal government. These targets must include a headline budget deficit not to exceed 3% of GDP, federal government gross debt below 60% of GDP in the medium term, government guarantees below 25% of GDP and a minimum development expenditure of 3% of GDP. The latter is focused on infrastructure investment and reducing poverty. However, these multiple targets, and potential conflicts between them, may make monitoring of compliance with the framework more complex, while simple fiscal rules are often more effective in ensuring fiscal sustainability (Debrun et al., 2018[10]). The FRA also incorporates transparency provisions, including several mandatory reports, such as a mid-year budget performance report and a tax expenditure statement. It also requires a comprehensive fiscal risk statement and a rigorous process for granting and monitoring of government guarantees, which aims to decrease the government’s exposure.
Temporary deviations from the fiscal objectives are allowed in the case of sudden shocks, provided the Cabinet approves the minister’s fiscal adjustment plan in response to the shock. The 2024 budget aims to reduce the federal government deficit from 5.0% of GDP in 2023 to 4.3% in 2024, a step toward the Medium-Term Fiscal Framework’s objective of cutting it to 3.0% by 2028. Moreover, the Framework targets an average deficit of 3.5% over 2024-26. The OECD projects that the deficit will fall to 4.6% of GDP in 2024 and remain at that level in 2025 (Table 1.1).
A strong institutional framework will be needed to underpin the successful implementation of the FRA and fiscal consolidation in the long run. To ensure this success, Malaysia could consider establishing an independent fiscal institution (IFI) to monitor compliance with the FRA and provide independent analysis of fiscal policy and performance, thus promoting fiscal transparency, sound fiscal policy and sustainable public finances.
IFIs typically have a mandate to critically assess, and in some cases provide non-partisan advice on, fiscal policy and performance, supporting greater transparency and accountability. There has been a surge in the number of IFIs over the years, with IFIs now in place in 29 OECD countries (OECD, 2023[11]). While fiscal decision-making is ultimately the responsibility of democratically elected officials, IFIs can, often in complement with credible fiscal rules, help countries to address bias towards spending and deficits and more generally enhance fiscal discipline and trust in fiscal prudence while promoting greater fiscal transparency and accountability (OECD, 2017[12]; OECD, 2023[11]; OECD, 2014[13]). Recent positive experiences with IFIs in Brasil, Chile or Portugal have demonstrated the potentially valuable role that IFIs can play to raise the quality of the fiscal policy debate (Box 1.1).
Chile has been gradually strengthening its fiscal framework over the last decades, which has contributed to sustain economic growth and keep public debt relatively low. A fiscal rule helped to shield public spending from the copper boom, generating savings that proved crucial when the country faced negative shocks, such as the global financial crisis. A key additional step forward was the creation of an autonomous fiscal council in 2019 (OECD, 2021[14]). The council is composed of five members nominated by the President and approved by the Senate. It has own resources and the mandate of the members do not coincide with the government term to foster independence. It is tasked, among other things, with evaluating the calculation of the structural revenues, monitoring the compliance with the structural balance targets, proposing mitigating measures, and evaluating and proposing changes to the fiscal rule. The institutional framework of the council is in line with OECD good practices.
The new fiscal framework established by the Public Finance and Fiscal Responsibility Act will also be instrumental for facing the significant fiscal challenges related to population aging. In 2020, only 7% of Malaysia’s population was aged 65 and above. The share is projected to rise to 14% by 2044 and to 20% by 2056. This will have significant implications for pension and health expenditures, as the old-age dependency ratio, which measures the number of persons aged 65 and over relative to those in working age, will more than double by 2050 (Figure 1.13). While this increase is less than what some other Asian societies like Viet Nam, Thailand and China will experience, it will nonetheless imply challenges for long-run fiscal sustainability.
Note: The old-age dependency ratio is defined as the number of persons aged 65 and over relative to the 15-64 years old population.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2022). World Population Prospects 2022, Online Edition; World Bank, World Development Indicators database.
Public debt will rise without new fiscal measures
The costs of population ageing will have significant effects on the trajectory of public debt. Assessing the additional fiscal burden from population ageing is subject to significant uncertainties, including related to the political demand for better social protection, which is generally weak at present and will leave many future retirees without any or without adequate pensions (Chapter 2).
By some estimates, it is likely that public social spending would rise from its 2019 level of 5.5% of GDP to approximately 10% of GDP by 2050, including due to the underfunded contributory pension system that would require funding from the government budget once its assets are depleted, which is estimated to occur around 2035 (IMF, 2024[3]). Some of this effect may be mitigated by parametric adjustments to the pension system and by raising activity rates among older workers, as currently only 45% of the population aged 55 to 64 population is in employment. Nonetheless, ageing alone would require sizeable additional government revenues in order to comply with the current deficit target of 3%. Assuming that social spending rises to 10% of GDP and that there would be no additional fiscal measures to compensate for this increase in ageing-related spending, government debt would approach 145% of GDP by 2050 in the baseline scenario (Figure 1.14, red line). In other words, current revenue levels are clearly not compatible with fiscal sustainability considering population ageing.
Raising spending without compensatory measures, however, would not be in line with the new fiscal framework. The Public Finance and Fiscal Responsibility Act and its resulting medium-term fiscal plans call for the headline budget deficit to be reduced to 3% of GDP by 2028, the target in the new fiscal framework, and kept there through 2050. In the face of future ageing costs, achieving these targets would imply significant additional fiscal measures, both on the spending but probably more so on the revenue side of public accounts. While Malaysia has room to mobilise additional revenues and raise spending efficiency to face these future challenges, the implementation of these additional fiscal measures requires establishing the necessary political consensus for their approval, which cannot be taken for granted and is subject to risks. If these additional measures can be implemented and the fiscal targets will be met, the government debt-to-GDP ratio would decline from its current level of 61.5% to around 55% by 2050 (Figure 1.14, blue line).
Federal government debt scenarios
Note: All three scenarios assume that social assistance spending will reach 10% of GDP by 2060. In the baseline scenario (the red line), there are no compensating measures to maintain a constant fiscal deficit. The second scenario (blue line) assumes that the headline deficit remains constant at the 3% mandated by the FRA, as ageing costs are compensated by higher revenue measures and potential reductions of other expenditures. The first two scenarios (the red and blue lines) assume that real GDP grows as in Table 1.1 until 2025, then at current potential growth of 3.9% between 2026 and 2030 before declining gradually to 2.5% between 2030 and 2050. The third scenario (green line) differs from these scenarios by assuming a stronger growth trajectory as of 2026 due to the implementation of all growth-enhancing structural reforms as outlined in the long-term scenario of Box 1.2, in which growth is on average 1 percentage point higher than in the baseline. In all scenarios, the GDP deflator grows at a constant 2.4% per year and the interest rate is maintained at 4.2%.
Source: OECD calculations.
Another important factor for the future trajectory of public debt relative to GDP is economic growth, which can be strengthened through structural reforms in several areas. An illustration of the potential growth impact of structural reforms advocated in this Survey is presented in Box 1.2. A third debt scenario represented by the green line in Figure 1.14 assumes that all growth-enhancing structural reforms presented in that box raise the economy’s potential growth trajectory, and that the fiscal targets of the new fiscal framework can be met. Under this scenario, the debt-to-GDP ratio would decline to 43% by 2050.
Some of the structural reform measures proposed in this Survey are expected to have significant positive effects on future growth and incomes, and this box provides tentative quantifications of these effects. The exercise draws on the OECD reform quantification framework (Égert and Gal, 2016[15]; Égert, 2017[16]), which relies on a production function approach. The influence of policies on GDP is typically assessed through their impact on supply-side components: labour productivity and employment. Each in turn can be further decomposed, the former into capital intensity and multi-factor productivity, and the latter into labour force participation and unemployment. Within the framework, the impact of structural reforms is quantified from a range of cross-country reduced-form panel regressions on three channels: i) multifactor productivity, ii) capital deepening, and iii) employment. The overall impact on GDP per capita is obtained by aggregating the policy effects of the various channels through a production function.
The estimated effects derived in this framework are used to simulate the impact of reforming policies in Malaysia towards OECD average values (Table 1.3). The effects of the policy variables are in principle additive, since in the quantification framework, the effects of each policy variable are estimated by controlling for those from other policies. However, this does not hold for some policy variables, in particular, institutional indicators from the World Bank Worldwide Governance Indicators, which display significant correlation among each other. Empirical work indicates that the quality of institutions matters to a large extent both over time and across countries (Égert, 2017[16]).
Source: OECD calculations.
This table only shows the results for the policy measures discussed in this survey whose impacts can be estimated using the above-mentioned framework, while other reforms fall outside of the model. The quantification exercise is meant to serve as an illustration of the potential impact of reforms and the results should not be considered as OECD projections.
Malaysia’s government is small in international comparison, both with respect to expenditures and revenues. Spending was 22% of GDP in 2022 on a general government basis, about half of the OECD average (Figure 1.15). This is small even in comparison with regional peers such as Thailand (25%), Cambodia (25%) or the Philippines (26%), although higher than in Indonesia (18%).
Note: Data for 2022.
Source: OECD Economic Outlook database; IMF World Economic Outlook database.
The current size of Malaysia’s public sector may not be well-suited to face upcoming spending pressures related to social protection, education, health and long-term care and pensions (Chapter 2), and also the costs of climate change adaptation and mitigation (Chapter 3). Facing these challenges will first of all call for reviewing spending patterns, with a view towards identifying those areas where spending could be reduced in line with changing priorities. The top priority is to continue reducing subsidies and replacing them with better-targeted transfers to vulnerable populations. Social spending at 5.5% of GDP is only about a quarter of the OECD average at noted above. The low level reflects the low share of elderly at 7% of the population in 2020. However, that share is projected to reach 14% by 2044 and 20% by 2056. Limiting the growth of ageing-related spending is thus one part of the strategy to ensure Malaysia’s fiscal sustainability. Measures to promote healthy ageing and increase the co-payment charges for high-income persons would limit the growth in public healthcare spending. Raising the withdrawal age from individual accounts in the private-sector pension fund EPF to 65 years would boost income for older persons (Chapter 2). Even after measures to reduce wasteful spending and limit the growth of social spending, however, there will still be a need for more public revenues to finance growing needs while promoting economic growth, social inclusion and the environment.
Government revenues have been on a declining trend, falling from 21.4% of GDP in 2012 to 17.5% in 2019 and further to 15.1% in 2021 (Figure 1.16, Panel A). While Malaysia collects about 3.9% of GDP from non-tax revenues, mainly consisting of petroleum-related revenues, the area where it stands out particularly is the low tax revenue relative to GDP, which dropped to 11.2% in 2021, only one-third of the OECD average (Figure 1.16, Panel B). While Malaysia shares the feature of low tax revenues with other countries in the region, only Indonesia has an even lower tax intake than Malaysia. Moreover, the recent trajectory suggests that Malaysia is not following the general upward trend experienced by regional peers as the 16.4% rise in its total tax revenue between 2011 and 2021 was far below that in Indonesia (71.5%), the Philippines (110.0%) and Viet Nam (111.6%).
In 2023, total government revenues grew 7.0% in nominal terms, exceeding the average increase of 5.4% since 2010. In 2024, the government introduced new tax measures, but these will only result in additional tax revenues of around 0.2% of GDP. These include a luxury goods tax at a rate of 5% to 10% on items such as jewellery and watches, a 10% capital gains tax and a hike in the service tax rate from 6% to 8%, while excluding sectors like food and beverages. The government also plans to implement the global minimum tax (OECD, 2024[17]) and enforce e-invoicing for large companies to improve tax collection. The growth of government revenues declined to 2.3% in the 2024 budget, reflecting a smaller contribution from oil-related earnings, which account for about one-fifth of government revenue. The latter reflects a diminishing reliance on petroleum-driven income streams, which is in line with the ongoing global shift away from fossil fuels.
Note: Value-added tax and sales tax are classified in general taxes on goods and services.
Source: Ministry of Finance; DOSM; OECD, Tax Revenue Statistics database.
Looking ahead, Malaysia will need to mobilise additional tax revenues, not only to meet its 3% deficit target in the short run, but also to finance future spending needs. This will require changes to the tax system so that it can provide more revenue to finance growing needs while promoting economic growth, social inclusion and the environment. While the degree to which the public sector should expand to meet future needs is ultimately a political decision, estimates suggest that Malaysia can collect up to 3 percentage points of GDP in additional tax revenues in the short term (IMF, 2024[3]), and up to 16 percentage points of GDP in the long term (OECD, 2022[18]; Gupta and Jalles, 2023[19]).
Taxes on goods and services can play a central role in this endeavour. The revenue share of taxes on goods and services fell after the end of the goods and services tax in 2018 (Box 1.3). In 2021, they accounted for 25.1% of tax revenue or 2.8% of GDP, compared to the OECD average of 31.3% of revenues or 10% of GDP (Figure 1.16, Panel B). Consumption taxes are a relatively stable revenue source and are often less harmful to economic growth, as they impose fewer distortions on employment and investment (Johansson et al., 2008[20]). In principle, general taxes on goods and services, notably value-added taxes (VAT), are relatively simple to enforce and difficult to avoid, and compared to advanced economies, many emerging market economies are raising more revenues from them than from personal income taxes.
A well-designed VAT is a tax on consumption whose main benefits are its neutral effects on the decisions of households and firms. The reason for this is that a VAT is levied on all sales of goods and services at every stage of production. Firms using intermediate inputs receive a credit for taxes paid by the producers of these inputs, which can be deducted from the taxes due on their own sales. This avoids distortions towards vertical integration of production. These distortions do arise in the case of a tax levied on turnover or sales, which taxes market transactions higher than value-added generated in-house. A VAT also generates positive dynamics from the perspective of tax administration, as producers at different stages of the production process have incentives for their upstream suppliers to comply with the VAT, to ensure that the input tax can be deducted. From a dynamic perspective, a VAT is neutral with respect to savings decisions, provided that the VAT rate does not change over time, so that the VAT applies the same tax rate on current and future consumption.
Increasing taxes on goods and services could be accomplished by re-introducing the GST, which was removed in 2018 (Box 1.3). The rate should initially be kept low to avoid the problems that marred its initial introduction in 2015. The potential regressive distributional effects of higher value-added taxes could be offset through well-targeted social transfers to vulnerable households, whose real purchasing power could be affected by the tax. Such a policy would be much more effective than exemptions and reduced rates, including those for food and other basic necessities, as the bulk of the monetary benefits from these exemptions tend to accrue to high-income households, reflecting their higher spending levels (OECD/KIPF, 2014[21]). In addition, exemptions and reduced rates raise administrative and compliance costs, especially for SMEs, provide opportunities for fraud through the misclassification of items and reduce tax neutrality.
Malaysia has undergone significant changes in its consumption tax system, shifting from a single-stage tax system (i.e., imposed only at one stage in the supply chain) to a valued-added tax system:
Sales tax and service tax (SST)
The single-stage tax system consisted of two independent taxes: the 1972 sales tax (imposed on goods) and the 1975 service tax. The sales tax is generally an ad valorem tax with a standard rate of 10%, with certain goods taxed at 5%. Other goods are taxed at specific rates or are exempted. The ad valorem tax rate on services is 6% for all taxable services, including digital services, except for charge card or credit card services, which are taxed at a specific rate of MYR 25 (USD 5.20) annually.
Goods and Services Tax (GST)
In April 2015, Malaysia introduced the GST, a broad-based multi-stage consumption tax, to replace the existing SST. This value-added tax was aimed at streamlining the tax structure to make it more efficient, effective, transparent and business-friendly while reducing government deficits and debt. The GST, which had a 6% standard rate, enhanced revenue collection and reduced tax evasion. However, implementation issues undermined public support for the GST, notably high compliance costs borne by smaller firms and delays in providing tax refunds to businesses. In addition, the burden of higher inflation, particularly on low-income households, increased public discontent (Narayanan and Latiff, 2024[22]). In preparation for the GST, the government had introduced the Price Control and Anti-Profiteering Act to protect consumers from excessive price hikes. It also made the GST less regressive by exempting certain essential items and services. Nevertheless, the unpopular GST was abolished in June 2018, partly because of its burden on low-income households.
Sales Tax and Service Tax (SST)
Following the abolishment of the GST, the government reinstated the SST in September 2018, but on a substantially smaller tax base. In services, the number of registered tax persons and establishments fell 79% from 476 023 under the GST to 100 405 under the SST. Moreover, the list of exempted items was ten times larger than in the GST. The share of the SST in total tax revenue was 15.3% in 2019, down from GST’s 24.9% in 2017 (OECD, 2019[23]). However, the government remains reluctant to re-introduce the GST. Instead, it raised the service tax rate in the 2024 budget to 8%. The Price Control and Anti-Profiteering Act aimed at protecting consumers from price hikes following the GST introduction has not been phased out despite its negative impact on competition and business dynamism (Chapter 4). Preserving competition in product markets is crucial, and international surveys show that price controls are considered to be an important risk for investing in Malaysia (World Bank, 2021[24]).
Taxes on goods and services also include environmentally-related taxes and health-related taxes such as those on tobacco, alcohol and sugar-sweetened beverages. These also present scope for further expansion, although often their focus is just as much on improving incentives as on collecting revenues. By imposing a direct cost on the polluter, taxes provide incentives for pollution abatement and also encourage innovation to seek out new products and processes that can reduce the polluters’ tax burden. Environmentally-related tax revenues can be used to finance targeted transfers to low-income households to compensate them for the resulting loss in purchasing power. As of 2021, none of Malaysia’s greenhouse gas emissions were subject to a carbon tax (Chapter 3). Improving the incentives provided by the tax system to reduce pollution and emissions will of course also depend on reductions in fossil fuel subsidies, which act as a negative tax on emissions and effectively reduced the price of 21.7% of emissions in 2021 (OECD, 2022[25]).
Personal income taxes are paid by only 15% of Malaysia’s labour force. In 2021, they accounted for 15.6% of tax revenues, far below the OECD average of 24.4%, largely due to a high basic allowance below which no personal income taxes are due. Personal income tax revenues amount to 1.75% of GDP, compared to an OECD average of 8.3%. Malaysia’s personal income tax system has 12 rates, ranging from 1% to 30%, while OECD countries have less than 5 brackets on average, and the top marginal rate is relatively low compared to the OECD average of 43%.
Narrow tax bases are one prominent explanation for Malaysia’s low tax revenues. In 2019, around 63% of personal income taxes, social contributions and indirect taxes, came from the 10% highest income earners, and another 15% from the population decile with the second-highest incomes (World Bank, 2023[9]). Personal income taxes concern mostly the top income decile. Despite its progressive distributional effect, this narrow tax base could be expanded without placing more of a burden on poor and vulnerable households.
At the same time, even those in the top decile of the income distribution effectively only contribute 14% of their market income in taxes, after accounting for the transfers, benefits and subsidies they receive. The net contribution of the second top-earning decile is approximately 7% (World Bank, 2023[9]). The top rate of 30% applies only from almost 60 times the average wage, much higher than in Thailand and Viet Nam where top rates are applied from 25 and 15 times the average wage, respectively. This suggests scope for reducing the taxable income thresholds at which top personal income tax rates are levied.
Moreover, there is also scope to reduce the number and extent of tax expenditures in personal income taxes, which often bring greater benefits to those with higher incomes. Individuals can claim a maximum of 17 deductions from their personal income, including for medical expenses, support for parents, private childcare, education and retirement schemes. Finally, incomes such as investment income from bank deposits or securities, pensions, capital gains and dividends are currently not taxed at the personal level. Malaysia could introduce a dual income tax at which capital income is taxed separately from labour income or it could tax labour and capital income jointly under the personal income tax. Over time, Malaysia could introduce a capital gains tax (OECD, 2006[26]). All of these measures would help to raise revenues and to tax personal incomes in ways that are more fair and less distortive.
Raising social security contributions, currently at 2.9% of tax revenue compared to the OECD average of 26.4%, would strengthen the sustainability of the pension fund, but at the same time, it is essential to keep the tax wedge low to encourage labour force participation and the formalisation of employment (Chapter 2). This applies particularly to low-income earners, among whom informal work is typically more prominent than among those with higher incomes.
Corporate income tax accounted for around 40% of Malaysia’s tax revenue, substantially above the OECD average of less than 10% (Figure 1.16, Panel B). A stronger reliance on corporate income taxes is not unusual among emerging market economies, given the relatively moderate administrative challenges in collecting corporate taxes compared to other taxes. Malaysia’s 24% statutory corporate income tax rate is close to the OECD average, but above neighbouring economies, such as Hong Kong, China (16.5%), Singapore (17%) and Taipei, China, Thailand and Viet Nam (20%). At the same time, tax expenditures like investment incentives reduce revenues from corporate taxes. Relative to GDP, Malaysia raises almost 6% of GDP from corporate income taxes, compared to 2.75% in the OECD area. There may be scope for streamlining tax incentives after subjecting them to a thorough evaluation.
The recommendations in this Survey are expected to affect both the expenditure and the revenue side of public accounts, although not all of them can be quantified with sufficient certainly. The fiscal impact of selected recommendations made in this survey, including in the following chapters, is presented in Table 1.4. The effect is estimated over the next 3-5 years, while longer-term spending needs in the context of population ageing and the green transition are likely to be larger.
Source: OECD estimates.
Raising additional revenues to finance future spending needs and spending these additional funds in the most effective way to achieve policy objectives will also require improvements in institutions and economic governance. While Malaysia has made progress in this regard, strengthening institutions is a gradual process. As incomes rise, citizens and businesses generally become more demanding with respect to the quality of economic governance, and cross-country comparisons typically point to a positive correlation between incomes and the quality of institutions and governance. Malaysia’s march towards high-income status provides an opportunity for further progress in this important domain, which will in turn feed into stronger economic performance.
The quality of the tax administration will be an important determinant of Malaysia’s future success with raising additional tax revenues. Besides changes in the tax code, a stronger enforcement of existing rules and better tax administration could lead to further revenue improvements now and in the future. Enforcement also has a role to play in reducing informal employment, particularly when coupled with better incentives for compliance through better policy design (Chapter 2).
One way to strengthen tax compliance would be to harness digital technologies, which could reduce the cost of enforcement for the authorities and lower the compliance burden for taxpayers. Malaysia is well-prepared to make further inroads on tax enforcement through digital means. The government plans to enforce e-invoicing for large companies to improve tax collection. Greater adoption of digital technologies in the government sector would allow strong synergies across different areas, notably, tax collection and social protection. Digital tools and digitally integrated administrative data including tax registries can improve the targeting of various benefits and facilitate formalisation. Digitalisation of government services would also be useful for regulatory reforms, such as streamlining administrative procedures.
Integrity is a cornerstone of a system of sound public governance. Public sector integrity is essential to establish trust in government, which in turn helps promote higher compliance of citizens with laws, including the payment of taxes. Corrupt practices and weak governance can waste public resources, increase the perception of political and litigation risk, deteriorate the investment climate of a country and exacerbate income inequalities by allowing relatively prosperous public officials and businesspeople to divert taxpayer resources. Malaysia’s Auditor General's Report 2022 on the activities of federal government ministries and agencies, published in November 2023, quantified the amount of waste of public funds at 0.2% of total expenditure in 2022. A recent study points to challenges in the implementation of anti-corruption measures, a culture of cronyism between political figures and business elites, and political interference into enforcement action against corruption offenders (Jones, 2022[27]).
Comparative indicators of corruption perceptions point to further room for improvement in economic governance. Malaysia’s corruption perceptions and control of corruption performance were better than most ASEAN countries but inferior to major OECD countries in 2023, following a slight improvement from 2022 (Figure 1.17, Panel A, Panel B). According to the Global Corruption Barometer, 71% of respondents in Malaysia consider government corruption a big problem (Transparency International, 2020[28]). Malaysia’s performance in control of corruption has fallen short of the OECD average, albeit exceeding the ASEAN average, with a minor uptick in recent years (Figure 1.17, Panels C and D). On the other hand, in terms of tax transparency and anti-money laundering, Malaysia’s performance is comparable to neighbouring countries and OECD countries (Figure 1.18).
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12.
Malaysia has made significant efforts to combat corruption and foster integrity in society. The National Anti-Corruption Plan (NACP) 2019-2023 contains 115 initiatives categorised in areas such as political governance, public sector administration, public procurement, corporate governance, law enforcement and legal and judicial reforms. 62 initiatives had been completed by the end of 2022 and 39 were expected to be completed by the end of 2023. Nonetheless, some initiatives in the NACP seem to have lost momentum or lack visible progress.
One way to enhance transparency and prevent illicit enrichment of member of government is a systematic and mandatory asset disclosure. While all civil servants are obliged to declare their assets once every five years, there are no such rules for high-ranking member of the executive branch or Members of Parliament. Relevant initiatives in the NACP have not been followed up. In practice, only a small share of high-level members of the executive and members of parliament have disclosed their assets.
Note: Panel A summarises the overall assessment on the exchange of information in practice from peer reviews by the Global Forum on Transparency and Exchange of Information for Tax Purposes. Peer reviews assess member jurisdictions' ability to ensure the transparency of their legal entities and arrangements and to co-operate with other tax administrations in accordance with the internationally agreed standard. The figure shows results from the ongoing second round when available, otherwise first round results are displayed. Panel B shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD calculations based on Global Forum on Transparency and Exchange of Information for Tax Purposes; and OECD, Financial Action Task Force (FATF).
Around the world, governance challenges are often particularly pronounced in state-owned enterprises (SOEs), in part due to their vulnerability to political influence. Political appointments for board and chairman positions in SOEs, i.e. appointments that are not based on merit or qualification, remain common in Malaysia, while a previous OECD recommendation had suggested to avoid this practice. Such appointments are inconsistent with the aspirations stated in the Twelfth Malaysia Plan 2021-2025, which calls for a more stringent process for the appointment of board members of SOEs. Minimum qualification requirements, such as a relevant degree or work experience, and mandatory cooling-off periods may reduce the scope for political appointments. OECD work has encouraged countries to develop frameworks that clarify and ensure boards have the necessary authority, diversity, competencies, and objectivity to autonomously carry out their function with integrity (OECD, 2023[29]). Malaysia may wish to consider the experience of Brazil where the 2016 SOE Statute has helped reduce political interference in the management of SOEs and advance the professionalisation of its boards by establishing clear rules for the appointment of directors, including minimum experience, academic background, and morality requirements, as well as a minimum “cooling off” period if coming from political office (Vitale et al., 2022[30]). Malaysia could also consider regulating the financing of political campaigns and parties to fend off the possibility of SOEs being used as a conduit for financing political activities (Noor Mohamed, 2022[31]).
Protecting whistle-blowers and officials involved in anti-corruption investigations against the criminalisation of and retaliation for their activities is crucial and often plays a key role for the disclosure of high-profile corruption cases. Most OECD countries have dedicated whistle blower protection laws, like the one implemented by Australia in 2019 (OECD, 2016[32]). Malaysia's 2010 Whistleblower Protection Act could be amended to enhance whistleblower protection and open up new avenues for disclosing information about offences.
Public procurement is usually one of the government activities most at risk to waste, mismanagement, collusion and corruption (OECD, 2016[33]). Reducing collusion will reduce the prices paid by public authorities and opportunities to corrupt the collusion process (OECD, 2012[34]). Efforts to combat corruption should include a thorough assessment of how public procurement laws could be improved further and implemented thoroughly. The mandatory use of centralised purchasing bodies, which are less prone to corruption, could be expanded, together with systematic training of procurement officials on effective tender design and effective detection of collusive practices (OECD, 2016[33]; OECD, 2012[34]). A November 2023 report by the Auditor General's on federal government ministries and agencies activities reported that losses and waste of public funds reached 0.2% of total government expenditure in 2022 due to a lack of compliance with procurement rules, as well as a lack of planning and monitoring. The annual report by Auditor General has regularly uncovered similar challenges, but an effective remedy for the problem is still outstanding. The planned enactment of a new Government Procurement Act in 2024 will be an opportunity to make further progress on fighting corruption and bid-rigging in public procurement.
Strong watchdogs and enforcement institutions are also an important element of an anti-corruption strategy. Malaysia’s Anti-Corruption Commission (MACC) was established in 2009 with an intent to empower the previous anti-corruption body with greater independence and autonomy to investigate cases. Since 2023, the MACC not only oversees enforcement, but also serves advisory functions related to governance and integrity. The MACC’s strong mandate was further strengthened in 2020 when a change in the underlying law facilitated legal action by commercial organisations or associated persons if charged for committing corruption offences for the benefit of their organisations. The governance of the MACC, however, could be strengthened further by securing its budget and isolating it against political interference, but also by improving the appointment procedure for the MACC Chief Commissioner. At present, the incumbent is appointed by the King upon the advice of the Prime Minister, but the process could be made more transparent if a parliamentary committee could recommend the nomination, and the tenure were established for a fixed period of time (OECD, 2021[1]).
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