OECD Economic Surveys: Malaysia 2026

Executive summary

Key messages

Strong growth and resilience to shocks have helped Malaysia achieve sizeable improvements in material living standards. Further progress will now hinge on new policy approaches to boost productivity and provide better opportunities for wider parts of the population, including through reforms in the education system. Against this background, the key messages of this Survey are as follows:

• Fiscal consolidation should be stepped up to reduce Malaysia’s vulnerability to economic shocks, including soaring energy prices due to the conflict in the Middle East, and anticipate rising spending pressures. This will require reducing fossil fuel subsidies and re-introducing a broad value-added tax while protecting low-income households with targeted transfers.

• The effects of climate change are becoming increasingly visible, calling for more coordinated adaptation efforts and further emission reductions.

• Boosting productivity will require stronger human-capital investment and regulations that are simpler and more conducive to dynamic firm entry and growth.

• Deteriorating education outcomes and skill mismatches require fundamental reforms of the education system, including more and better spending on pre-school, primary and secondary education, stronger incentives and more autonomy and accountability for educational institutions.

Malaysia is approaching high-income status

Strong growth and resilience to shocks have helped Malaysia achieve sizeable improvements in material living standards. Further progress will now hinge on new policy approaches to boost productivity and provide better public services and opportunities for wider parts of the population.

Since gaining independence in 1957, Malaysia’s economy has undergone a profound structural transformation. Initially dependent on commodities such as rubber and tin, the country diversified into manufacturing from the 1970s onward, supported by rapid export expansion and strong inflows of foreign direct investment. Major reforms launched in the 1970s aimed to reduce poverty and address economic disparities, helping lift living standards and enabling the rise of a sizeable middle class.

By the 1980s and 1990s, Malaysia had become an important hub in global value chains, particularly in the electrical and electronics sectors. The economy demonstrated resilience during shocks such as the 1997–98 Asian Financial Crisis and the Global Financial Crisis, and growth has held up well since (Figure 1). Amid external headwinds from the conflict in the Middle East and persistent structural challenges, including weakening productivity momentum and mismatches between skills and labour market needs, growth is set to moderate.

Malaysia is now at a critical juncture. After years of aspiring to high-income status, the country is on track to cross this threshold around 2028–2030. Yet fewer than half of Malaysians will earn above the high-income threshold at that point, and average household incomes would need to roughly double for most Malaysians to reach that level. Social protection systems remain underdeveloped, covering only a small share of the population and leaving many retirees without adequate old-age pensions. Education outcomes lag regional peers, constraining further gains in productivity and income.

Policies that have served Malaysia well in the past may not be the ones that the country needs going forward. Long-standing policy weaknesses will now need to be addressed more decisively to accelerate the shift from labour-intensive, low-cost manufacturing to innovation-driven growth. This will put improvements in education at the forefront of future policy reforms, while boosting productivity through greater competition, including in services sectors where state-owned enterprises have often played a dominant role in the past. A combination of more efficient spending and higher revenues will allow the public sector to provide better social safety nets and public services.

Figure 1. Malaysia has outperformed peers

GDP per capita relative to the OECD average, at PPP

Source: World Bank, World Development Indicators database.

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Growth will moderate but remain solid

Strong headwinds have tested the resilience of the Malaysian economy, including soaring global energy prices, disruptions in global energy and commodity supply and higher tariffs. Malaysia remains vulnerable to these external shocks, which could intensify and affect several key sectors of the economy. Stepping up fiscal consolidation should include raising spending efficiency but also mobilising additional revenue sources to finance improvements in social protection and education. Monetary policy should remain vigilant to rising price pressures.

The economy has remained resilient amid external shocks, but growth slowed temporarily in early 2026. Robust global demand for data centres and artificial intelligence has buoyed exports and led to a strong increase in foreign direct investment inflows into information and communications.

Growth is expected to remain solid at 4.9% in 2026 and 5.0% in 2027 (Table 1), amid downside risks from trade tensions, higher commodity prices and weaker global demand. The financial sector remains sound, though pockets of risks call for enhanced macroprudential tools and close supervisory monitoring. Cyber risks are increasing as digitalisation deepens.

Inflation has fallen to low levels and underlying pressures are limited, suggesting monetary policy can remain broadly neutral. Higher global commodity prices call for careful monitoring. Greater transparency, including publishing Monetary Policy Committee minutes, would strengthen central bank credibility and help anchor expectations.

Labour market conditions are tight and consumption is buoyant, but structural challenges such as skills mismatches and relatively low labour income shares underscore the need for productivity-enhancing reforms and continued human-capital investment.

Table 1. Real GDP growth will remain solid

	2023	2024	2025	2026	2027
Real GDP	3.6	5.2	5.2	4.9	5.0
Private consumption	4.6	4.8	5.3	4.5	4.6
Public consumption	3.4	4.6	5.3	4.2	5.1
Investment	5.4	12.1	9.6	5.7	5.8
Exports	-7.9	8.6	4.9	4.4	3.8
Imports	-6.8	8.7	6.3	3.5	4.2
Unemployment rate (% of labour force)	3.4	3.2	3.0	2.9	2.8
Inflation (CPI)	2.5	1.8	1.4	2.1	2.3
Government budget balance (% of GDP)	-5.0	-4.1	-3.7	-4.0	-3.8
Government debt (% of GDP)	64.3	64.5	65.2	65.0	64.3

Note: Annual growth rates in percent unless specified. Government figures refer to the federal government.

Source: OECD Economic Outlook 119 database and OECD Projections.

Fiscal consolidation has progressed but remains gradual. As subsidy spending has risen amid soaring energy prices since the onset of the conflict in the Middle East, concrete action will be needed to ensure compliance with the fiscal targets through to 2028. Large and weakly targeted energy subsidies should be phased out. A newly established social registry could support the move towards more targeted support. Boosting revenue will require a broad tax reform to bolster targeted social support, education and investment. Tax revenues below 13% of GDP make increasing government revenue a priority. Re-introducing a broad-based consumption tax would align Malaysia’s tax policies with international best practice and provide a stable revenue base, while targeted transfers could help protect the purchasing power of vulnerable groups. This could go along with broadening the personal income tax base and further strengthening tax administration.

Long-term fiscal pressures from ageing and fragmented social protection require early action. Social safety nets are patchy, and less than 20% of older persons receive any kind of social benefit, calling for a wider coverage of means-tested social pensions. Strengthening fiscal governance through independent fiscal oversight and a broader coverage of the fiscal accounts could make it easier to tackle future fiscal challenges. Public debt is already higher than in regional peers and is projected to stay above 60% of GDP (Table 1).

Climate change calls for better preparedness and accelerated emission reductions

Climate change will continue to increase the frequency and intensity of floods and heatwaves and accelerate sea-level rise. The resulting serious economic damage can be mitigated by stepping up climate adaptation investments. With annual greenhouse gas emissions having doubled since 2000 amid rising energy demand, more renewable energy sources can help achieve net zero emissions by 2050 and enhance energy security.

Adaptation policies are fragmented across various sectoral policies and ministries. Publishing and implementing a coherent economy-wide climate change adaptation strategy, currently under preparation, can address this fragmentation and allow better coordination.

Better climate risk data collection and dissemination are essential for private and public actors. Anticipating climate risks hinges on high-resolution flood risk maps and climate projections.

Insurance coverage against natural hazards is highly incomplete. Improving risk awareness and offering financial assistance to the most vulnerable groups for acquiring insurance against natural hazards would strengthen households’ and businesses’ financial resilience to climate risks.

Fossil fuels dominate the energy mix. Removing high fossil fuel subsidies (Figure 2) will be a precondition to introducing positive carbon pricing and aligning private and public incentives with climate objectives. Accelerating investments in renewable energy and electricity infrastructure could strengthen energy security and reduce emissions.

Figure 2. High fossil fuel subsidies run counter to carbon pricing effort

Source: IEA, Fossil fuel subsidies database

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Productivity growth has slowed

Productivity growth has slowed (Figure 3) and, in recent years, has fallen short of Malaysia’s own targets. Regulatory complexity and skills shortages continue to constrain firm performance and innovation, particularly for smaller firms. Stepping up efforts to streamline business regulation and reduce compliance costs would help to support technology adoption and scaling up of small firms to foster stronger productivity growth and a solid pace of living-standard gains amid ageing pressures.

Figure 3. Productivity growth has trended down

Note: Annual average growth rates of GDP per worker.

Source: Asian Productivity Organisation, APO Productivity database 2025.

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Foreign investment and digital integration remain hindered by restrictive entry rules. These include foreign equity caps and burdensome requirements for cross-border digital services. Easing these barriers, while maintaining appropriate safeguards for genuinely strategic sectors, and simplifying data-transfer compliance would strengthen Malaysia’s role in global value chains and boost competition and knowledge spillovers.

Competition in product markets is held back by weak policy settings, with OECD Product Market Regulation indicators suggesting a sizeable gap to best practice. A gradual phasing-out of blanket price controls in favour of targeted support, further easing of logistics regulation and more business-friendly insolvency procedures would improve resource reallocation.

Government-linked companies continue to dominate key sectors. State-owned enterprises often benefit from preferential treatment. Enforcing competitive neutrality, strengthening antitrust enforcement and improving governance standards, including merit-based board appointments and greater transparency, would foster a more level playing field for private firms.

Public support for micro, small and medium enterprises remains fragmented across numerous programmes and agencies. Consolidating schemes, strengthening performance evaluation and focusing assistance on innovation, digitalisation and export readiness would contribute to stronger productivity growth among small firms.

Digital transformation offers major scope to raise public-sector efficiency. Progress remains uneven and often siloed, requiring stronger central coordination, mandatory interoperability standards, outcome-based performance metrics and systematic independent evaluation of major digital investments, particularly in large sectors such as health.

Productivity and investor confidence could also benefit from addressing fragmented governance structures and integrity challenges. Rationalising ministries and agencies, strengthening project appraisal and procurement controls, enhancing asset-disclosure rules and ensuring the independence and effectiveness of anti-corruption and anti-money-laundering institutions would allow Malaysia to make further progress.

Building on progress in education reform will improve living standards and opportunities

The education system has helped Malaysia reach the threshold of high-income status. But education outcomes have deteriorated, and the labour market shows mismatches between workforce skills and those demanded by employers. Growing information and electronics sectors are likely to require a wider range of skills.

Learning outcomes in primary and secondary education have fallen behind. In the 2022 OECD PISA study, Malaysia’s 15-year-olds ranked in the bottom third of approximately 75 participating countries in mathematics, reading and science. Between 2018 and 2022, Malaysia was among in the top six countries recording the largest declines across all three subjects. The share of low-performing students in Malaysia in the 2022 PISA was about double the OECD average in all three subjects (Figure 4). Only 58% of fifth-grade students had achieved proficiency in reading, compared to 82% in Viet Nam.

Early childhood education often lays the grounds for success later in life and reduces inequalities of opportunities. But the capacity of public and registered private childcare amounts to only 3.5% of children aged below 5. Preschool education has now been made compulsory for 5-year-olds, with almost full coverage targeted by 2030. Achieving this will hinge on making compulsory preschool free for families and should be complemented by later extending it to 3- and 4-year-olds, as in many OECD countries. This will require additional resources, as outlays per preschool student are around a quarter of spending on primary and secondary students. Reducing fragmentation of early childhood education and centralising the responsibility for childcare and preschool education in one ministry would facilitate coordination and quality improvements.

Better learning outcomes in primary and secondary education will require improving teachers' performance incentives by actively implementing the teacher assessment framework and reducing the amount of time they spend on administrative tasks. Granting schools more autonomy while holding them accountable for their performance could lead to better outcomes, especially when principals are selected according to capability rather than seniority.

Plans to place technical and vocational education and training (TVET) on par with academic pathways can help to equip students with relevant skills for the labour markets, especially when the private sector is consulted in curriculum design. A fragmented TVET system makes it hard for students to make the best choices. Policies to effectively rate the more than 1000 TVET institutions would lead to better options for students and employers. 

More than one-third of tertiary graduates face skill-related underemployment. Tertiary enrolment has fallen in response to the difficulties encountered by recent graduates on the labour market. Reinforcing linkages between the business sector and higher education, including in curriculum design, is important to reduce skill mismatches. Public universities would benefit from greater autonomy and accountability, including with respect to choosing their own management.

Figure 4. Malaysia has a high share of low-performing students and few high-performing ones

Source: OECD, PISA 2022 database.

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MAIN FINDINGS	KEY RECOMMENDATIONS
Enhancing macroeconomic policies
Headline inflation has undershot its long-term 2% average in 2025 but is projected to reach 2.1% in 2026 following the energy and commodity price shock associated with the conflict in the Middle East.	Maintain a data-dependent monetary policy stance and consider reversing last year’s precautionary policy rate cut if signs emerge that core inflation is set to overshoot its long-term average.
Fiscal consolidation has been and is planned to remain very gradual, despite a high public debt ratio. It is now at risk amidst soaring global energy and commodity prices.	Take a set of spending and tax measures to ensure that the 3% of GDP 2028 deficit target is met, prioritising subsidy containment.
Fossil fuel subsidies weigh on public finances and reduce incentives for emission reductions. Despite some progress in subsidy rationalisation, the RON-95 petrol subsidy was raised in September 2025.	Limit and gradually phase out energy subsidies and use part of the savings for targeted cash transfers to low-income households.
Mounting spending needs in social protection and education call for strengthening the fiscal revenue base. The scope of the sales tax and the services tax has been expanded but it is not the most efficient way to collect taxes on goods and services. There is room to reduce tax expenditures and to tax more forms of personal income.	Mobilise additional tax revenues by: Re-introducing the Goods and Services Tax while compensating low-income households with targeted transfers. Broadening the personal income tax base by streamlining deductions, limiting exemptions and taxing a wider range of capital income. Further enhancing tax administration.
Non-contributory pension coverage for the vulnerable remains narrow.	Expand the coverage of means-tested non-contributory pensions towards all those with no old-age pension from other sources, taking into account the need for fiscal sustainability.
Coping with climate change
Climate adaptation policies remain fragmented across different sectoral strategies and institutions.		Finalise and publish the National Adaptation Plan (MyNAP), which will consolidate the governance of climate adaptation policies.
Climate risk information, hazard mapping and data availability remain uneven across regions and sectors, limiting the ability of businesses to anticipate climate risks.		Improve the availability and accessibility of climate risk data, including high-resolution flood risk maps and climate projections.
Natural disasters can generate large fiscal costs, while insurance coverage against climate risks remains limited among households and businesses.		Expand natural hazard insurance coverage by improving risk awareness and offering financial assistance to most vulnerable groups and sectors. Consider mandating property insurance policies to include natural hazard coverage.
Petrol prices continue to be subsidised, while the absence of a carbon pricing framework weakens incentives to reduce emissions.		Move from subsidising fossil fuels towards a carbon pricing strategy, while protecting vulnerable households through targeted transfers.
Boosting productivity
Restrictions on foreign equity holdings are comparatively tight.	Relax foreign equity caps while maintaining appropriate safeguards for genuinely strategic sectors.
Price controls remain for a number of key goods, though they have been lifted for a few in 2025.	Continue to phase out price controls gradually, replacing them by targeted subsidies for vulnerable households.
State support for micro, small and medium-sized firms is delivered through a large number of ministries, agencies and programmes.	Streamline and consolidate public support for smaller firms.
Policymaking and administration remain highly fragmented.	Consolidate ministries and agencies, with a clear allocation of mandates and stronger centre-of-government steering capacity.
Further progress can be made to harness competition among different private and state-owned enterprise bidders in public procurement.	Introduce new mechanisms to detect bid-rigging and cartel behaviour in procurement.
There is no comprehensive, mandatory asset disclosure regime for ministers and Members of Parliament.	Legislate mandatory and regular asset disclosures for all high-level members of the executive and for legislators.
Improving skills, education and training
The government has made preschool compulsory for 5-year-olds and aims to raise the enrolment rate to 98% by 2030.	Make compulsory preschool education free for families and consider extending it to 3- and 4-year-olds.
Students’ scores in PISA and other international tests have fallen significantly and lag behind other countries with similar income levels.	Establish a professional framework to specify what is expected of teachers and define a path for career progression.
Malaysia’s fragmented TVET sector comprises 683 federal public, 28 state public and 697 private institutions, but in the absence of evaluations of TVET institutions, funding allocations are not systematically related to performance.	Use the new TVET rating system to evaluate institutions based on graduate employability, wage levels and coordination with the private sector.
Skills mismatches have become increasingly evident on the labour market. Skill-related underemployment among tertiary graduates was 35.6% in 2025. Tertiary enrolment fell from 45% of youth in 2016 to 39% in 2024.	Reinforce linkages between the business sector and higher education, including in curriculum design.