Vincent Koen
Kazuyoshi Ohnuma
OECD Economic Surveys: Malaysia 2026
Abstract
Malaysia’s economy displayed resilience in 2025 amid heightened global uncertainty and major external shocks. Growth held up well, supported by the upswing in the global technology cycle, strong investment in data centres and a rebound in tourism. Trade flows were volatile as exporters adjusted to higher US tariffs, but exemptions mitigated their impact. Domestic demand remained robust, underpinned by strong labour market conditions and rising wages, while inflation eased to low levels. In early 2026, growth stalled temporarily in the first quarter, before regaining strong momentum in the second quarter, while inflation has remained broadly contained. Monetary policy has stayed broadly neutral, with exchange-rate flexibility continuing to act as a key shock absorber. Financial system soundness is supported by ample capital and liquidity buffers, although pockets of vulnerability warrant monitoring. Fiscal consolidation progressed gradually, but subsidies, notably for energy, continue to weigh on public finances and complicate medium-term planning. Looking ahead, growth is projected to remain solid, albeit slightly lower than in 2025, and inflation will see a small increase, while demographic ageing and climate objectives underscore the urgency of structural reforms to boost productivity and strengthen fiscal sustainability.
The Malaysian economy displayed remarkable resilience in the face of recent adversity, before eventually starting to show signs of weakening. GDP grew at 5.2% during 2025 despite a set of major tariff shocks, similar to the robust outcome recorded in 2024 (Figure 1.1). However, on a quarter-on-quarter basis, growth slowed in late 2025 and more sharply in the first quarter of 2026 before re-accelerating in the second quarter of 2026, despite the backdrop of surging global commodity prices and heightened geopolitical tensions.
As an economy deeply integrated in global value chains though with a fairly diversified export structure (Figure 1.2), many observers expected that Malaysia would be badly hit by the rise in US tariffs. This diversification has helped cushion the impact of external shocks by spreading risks across products and markets, reducing reliance on any single trading partner. However, deepening trade diversification, including through new export markets and more complex products, would further enhance resilience and mitigate risks.
Malaysian exporters faced a major set of tariff shocks in 2025 as the United States, one of Malaysia’s top export markets, raised import duties. An initial 24% ad valorem rate on Malaysian goods was announced in early April, but formal negotiations led to a tariff on Malaysian exports to 19% effective 1 August, a rate broadly aligned with that applying to regional peers. Exemptions were provisionally maintained for over 1700 lines accounting for around three quarters of Malaysia’s exports to the United States (including electrical and electronic products, which form the bulk of those exports). In late October 2025, a US-Malaysia agreement confirmed the 19% headline rate, expanded zero tariff/non-trade-barriers facilitation lists for US exports to Malaysia, and set out some cooperation tracks, notably on agricultural market access and critical minerals. The exemptions remain subject to potential revision, and the authorities have been focused on mitigation through leveraging Malaysia’s free trade agreements, accelerating the execution of the New Industrial Master Plan (Box 1.1) and National Semiconductor Strategy, and providing firm-level support to help exporters adapt to the new tariff baseline. In February 2026, the US Supreme Court invalidated the tariffs imposed under the International Emergency Economic Powers Act (IEEPA). In the wake of this decision, the US Administration introduced a temporary 10% tariff for five months under Section 122 of the US Trade Act. A review under Section 301 was also initiated, which might affect certain sectors. While tariffs are now lower, uncertainty remains significant.
Malaysia’s New Industrial Master Plan 2030, launched in 2023, sets an ambitious agenda to move manufacturing up the value chain, raise domestic linkages, and deepen participation in global value chains. It targets more high-value jobs, stronger clusters, and improved environmental, social and governance performance, supported by mission-based projects in areas such as smart factories and electric vehicles.
The strategy is aligned with the need to diversify industrial growth and strengthen resilience amid supply-chain disruptions and technological change. It recognises that industrial upgrading now depends less on low-cost labour and more on innovation, digitalisation, and firm-level capabilities. The main challenge lies in implementation. The plan spans multiple missions, strategies, and action plans, making effective coordination across agencies essential. A mid-term review is scheduled for end-2026 to assess progress and recalibrate the plan if needed. Predictable regulation, and sustained investment in human capital will be critical to ensure that the plan translates into productivity gains (see chapter 3).
Source: MITI (2023).
Note: In Panel B, the public sector includes government consumption and public investment.
Source: CEIC; Department of Statistics Malaysia; and OECD calculations.
Against this backdrop, Malaysia’s trade flows have been marked by volatility (Figure 1.1, Panel C), reflecting shifting global demand conditions and anticipatory behaviour ahead of trade policy changes. After frontloading of shipments to the United States in early 2025 ahead of the expected imposition of higher tariffs, they eased back as these effects unwound but picked up late in the year. Exports to the rest of Asia gained momentum through the year, with particularly strong growth to Chinese Taipei, supported by sustained demand for electrical and electronic products and intermediate inputs linked to regional semiconductor and data-centre investment (Panel E). Inbound tourism has also picked up substantially. Imports also fluctuated, with investment-related demand for capital goods and intermediate inputs a major driver. Imports from China were up by some 19% over the year as a whole, mostly on account of electrical and electronic products, machinery and equipment, and chemical products. As a result, the trade surplus narrowed somewhat compared with previous years, though it remained positive, helping to keep the current account balance in surplus (Panel F). Malaysia’s net international investment position stood at -3.3% of GDP at the end of the first quarter of 2026.
Source: World Development Indicators; ASEAN Stats; UN Comtrade database; and OECD calculations.
Trans-shipment activity has been an important driver of Malaysia’s headline export performance. Re-exports, which largely proxy goods trans-shipped through Malaysia’s ports with limited domestic transformation, surged and accounted for circa 20-25% of total exports during 2025, cushioning the impact of weak global demand, tariff uncertainty and supply-chain reconfiguration linked to geopolitical tensions. In the process, Malaysia’s major ports, notably Port Klang and Tanjung Pelepas, have benefited from China+1 strategies and trade rerouting, reinforcing the country’s role as a regional logistics hub. However, the domestic value added from trans-shipment remains limited, while heightened scrutiny of certificates of origin underscores the need to monitor compliance to avoid reputational risks.
Resilient growth owed much to the global tech cycle, with capital investment in Malaysia turbocharged by the rapid buildout of data centres (Figure 1.1, Panel D), an activity where Malaysia enjoys distinct comparative advantages (Box 1.2). This buildout supports the construction sector but creates only a limited number of jobs. It also strains the existing grid and water supply in certain areas (Loo, 2025). Furthermore, heavy reliance on fossil generation could make it more difficult to achieve 2050 net zero targets absent accelerated renewable integration (see Chapter 2).
Rapid digitalisation, cloud adoption and soaring AI compute demand have triggered a worldwide surge in data-centre investment. Malaysia has rapidly emerged as a major hub for such investment in Southeast Asia, with Johor as the epicentre. Between 2021 and 2024, the country attracted approximately USD 44 billion in data centre-related projects, with total digital investments reaching USD 65 billion during the same period. In 2025 alone, approved investments in the digital services industry reached USD 35 billion, driven by global hyperscalers. The latter’s investments in Malaysia reflect several factors. Singapore’s land and power constraints have pushed hyperscalers to look for alternative sites nearby: Johor, just across the border, offers low latency and direct fibre links to Singapore. Also, a number of major international cables land in Malaysia, ensuring high-speed global connectivity. Moreover, Malaysia offers cheaper land and competitive electricity tariffs compared to Singapore and Hong Kong, tax breaks, investment allowances, streamlined approvals under Malaysia Digital and special economic zones, as well as good intellectual property protection. In addition to these advantages, Malaysia’s substantial rare earth reserves (notably neodymium, dysprosium and praseodymium) provide a complementary strategic asset. These elements are critical inputs for high-performance magnets used in servers, data-centre equipment and renewable energy systems. The authorities are seeking to leverage these endowments through a dedicated rare earth strategy focused on downstream processing, value-chain development and reduced reliance on raw exports. If effectively implemented, this could enhance Malaysia’s position in critical mineral supply chains while supporting the domestic digital and energy transitions.
Malaysia attempts to harness the data-centre boom as part of a broader digitalisation effort to create high-skilled jobs in engineering, cybersecurity, and data management; stimulate demand in construction, energy, and telecommunications; and support the development of local supplier ecosystems, including equipment maintenance, software services, and facility management. Increased demand for reliable power is also accelerating investments in grid infrastructure and renewable energy, with potential positive spillovers for the wider economy.
The expansion of data-centre capacity also aligns with Malaysia’s broader AI strategy to position the country as a regional AI hub. Greater availability of domestic computing infrastructure lowers barriers to AI adoption by local firms, supports the growth of AI start-ups, and enables public-sector use cases in areas such as smart cities, healthcare, and digital governance (see chapter 3). By integrating data-centre development with its AI roadmap, national AI frameworks, and investments in digital skills, Malaysia aims to capture higher value-added activities across the AI value chain.
Source: Cox et al. (2025), DNA (2025), Market Research Malaysia (2025), MIDA (2024).
The labour market tightened continuously during 2025 and early 2026, amid robust job creation across services and manufacturing (Figure 1.3, Panel A). The employment rate continued to rise, with the share of those employed for less than 30 hours per weeks trending down. The unemployment rate fell to 2.9% by November 2025, its lowest level in a decade (Panel C). The recently unemployed (less than three months) account for close to two-thirds of the pool of unemployed, and long-term unemployment (over one year) for around 5%. The youth unemployment rate for the 15 to 24-year-olds edged down but still exceeded 10% in March 2026. The labour force participation rate rose further, to a historical high of close to 71% (Panel B), reflecting higher female participation and continued absorption of older workers. Nominal wage growth was reinforced by minimum wage adjustments and a two-step public sector wage catch-up in 2025-26, although wage gains varied across sectors amid lingering cost pressures (Panel D). Despite the tight market, the labour share of income remains below pre-pandemic levels in many industries and comparatively low relative to peers, reflecting long-standing skills mismatches, limited collective bargaining coverage and reliance on lower-skilled labour. The Thirteenth Malaysia Plan reiterates the objective of raising the labour share, albeit with a lower target than in the previous Plan, through a combination of minimum wage increases and upskilling initiatives (see Chapter 4), underscoring that cyclical strength in the labour market has yet to translate fully into broad-based productivity-linked wage gains.
Source: Department of Statistics Malaysia; CEIC; and OECD calculations.
Buoyed by the strong labour market, household consumption recorded a vigorous expansion in 2025, with 5.3% growth at constant prices, before temporarily slowing in the first quarter of 2026. The slowdown in household consumption in early 2026 was largely due to a sharp drop in motor vehicle sales associated with the expiration of electric vehicle import duty waivers, and therefore probably temporary. However, household consumption of non-durables continued to benefit from policy support measures, including cash transfers and public wage adjustments, as well as festive spending and resilient labour market conditions. Retail sales showed sustained momentum, including during the first five months of 2026.
The evolving conflict in the Middle East that erupted in February 2026 is leaving its mark on the economy, but Malaysia’s status as a net energy exporter has so far cushioned the conflict’s economic fallout more than in regional peers. In sequential terms, the economy stalled in the first quarter of 2026, even though real GDP was still up by 5.4% over a year earlier. On the supply side, the pace of expansion in manufacturing held up, sustained by the tech sector, but weakened in other sectors, including agriculture and construction. Domestic demand softened, with an outsized negative contribution from stockbuilding. The Middle East conflict has begun to affect selected input supplies, with tighter global availability and higher prices for fertilisers, petrochemical feedstocks and certain industrial gases (notably helium, used in semiconductor manufacturing) adding to cost pressures in agriculture and some manufacturing segments. In the second quarter of 2026, growth recovered strong and broad-based momentum, rising to 5.8% over a year earlier, notably sustained by the tech sector and petroleum, chemicals, rubber and plastics products.
Exports remained buoyant in the first five months of 2026, still pulled by sales of electrical and electronic products benefiting from the global tech cycle. Strong demand for artificial intelligence and automotive electronics lifted electrical and electronics shipments to an all-time high in May. Imports of intermediate goods weakened substantially in April before rebounding strongly in May, in part related to the disruptions caused by the ongoing blockade of the Strait of Hormuz. Net export values of LNG, crude oil and petroleum products together more than doubled between February and March 2026, then declined amid a temporary surge in imports of petroleum products in April and finally rebounded in May 2026, the latest reading, with exports exceeding imports by around a third in May. This mostly reflects Malaysia's strong exports of liquified natural gas, while for crude oil and refined petroleum products together, Malaysia's exports and imports were close to balanced, with net exports negative for crude oil and positive for refined petroleum products.
Headline consumer price inflation declined to low levels in 2025, fluctuating between 1.1% and 2.0% during the year and through the June 2026 reading of 1.9% (Figure 1.4), with some high-frequency volatility due inter alia to energy, telecommunications, and streaming prices. The surge in global energy prices following the onset of the conflict in the Middle East has pushed up headline consumer price inflation but far less than in most other countries as the price of petrol has been kept fixed (see below). The associated core measure (excluding fresh food items and administered prices set or regulated by the government) stood at 1.9% in June of 2026. This compares with a longer-run average rate of 2% since 2010 for headline inflation. Inflation is also lower than in regional peers such as Singapore, the Philippines, Viet Nam, and Indonesia. Service price inflation has been running somewhat faster, pulled up inter alia by dining, accommodation, personal care and financial services.
Note: In Panel B, headline inflation refers to the year-on-year percentage change in the consumer price index (CPI). Core inflation excludes the most volatile components of the CPI basket, notably food and energy prices, to better capture underlying price pressures. The long-term average corresponds to the simple average of headline inflation over the period 2010-25.
Source: CEIC; OECD calculations.
Despite the backdrop of soaring global energy and other commodity prices following the onset of the conflict in the Middle East and of enduring international trade frictions, real GDP growth is projected to remain solid at 4.9% in 2026 and 5.0% in 2027 (Table 1.1). The projected small slowdown in 2026 partly reflects the strong carryover from the stalling of GDP in the first quarter of the year, which was followed by strong growth in the second quarter. The economy’s underlying momentum is less dented by the latest energy price shock than in most neighbouring countries as Malaysia is a net energy exporter (Box 1.3). Even so, on balance growth is likely to be reduced and inflation to be higher than foreseen earlier on. As to the impact of higher US tariffs on Malaysia, IMF estimates suggested in early 2026 that, after exemptions and trade reallocation, they may reduce GDP by around 0.2%, though sectoral and firm‑level effects could be more pronounced (IMF, 2026). Tech‑related goods (notably semiconductors) should continue to underpin exports, keeping the current account in surplus. The Visit Malaysia 2026 campaign and incentives are expected to lift arrivals and tourism receipts, providing some offset to goods‑trade headwinds.
On the domestic side, private consumption is poised to recover after a temporary slowdown early in the year notwithstanding the squeeze imparted by the pick-up in inflation, supported by a tight labour market and wage growth. Budget 2026 measures, including higher allocations for Sumbangan Tunai Rahmah and Sumbangan Asas Rahmah cash assistance to households, as well as sectoral tourism initiatives, will bolster disposable incomes for lower‑ and middle‑income households and reinforce urban services activity. Private investment also slowed in early 2026 but is set to regain momentum in technology‑intensive sectors (semiconductors, data centres, green energy), while public investment is supported by multi‑year infrastructure pipelines and national master plans including the installation of extra gas‑related energy capacity. Together, these forces should sustain demand even as external conditions remain uncertain.
Per cent changes from previous year unless specified
Note: The underlying oil price assumption is that the quarterly average Brent price peaks at USD 102 in 2026Q2 and declines thereafter to USD 78 by 2027Q4, in line with the futures curve observed in late May. The price of natural gas is also assumed to evolve in line with the futures curve.
Source: OECD Economic Outlook 119 database and OECD projections.
Headline inflation is projected to move up further from its low 2025 readings, converging with core inflation, on the back of higher global energy and commodity prices, wage increases, and the mid-2025 sales tax and services tax expansion (see below), though a stronger ringgit should temper pass‑through via import prices. In the near term at least, higher global oil prices will only partly be reflected in consumer prices given that the authorities maintain a fixed price for RON-95 fuel for most buyers (see below). However, diesel and fertiliser prices have already started to rise substantially, and electricity bills have drifted upward even without a formal tariff hike. Estimates, including the central bank’s, suggest that aggregate demand was slightly exceeding potential output in 2025, and unemployment only slightly below its structural level. With growth having slowed since, cyclical inflationary pressure is limited.
Malaysia’s near-term outlook is clouded by uncertainties, with risks skewed to the downside (Table 1.2). As a highly open economy, Malaysia remains vulnerable to external shocks, including prolonged supply disruptions, commodity prices staying high for longer and a sharper slowdown in global demand due to the evolving conflict in the Middle East, the potential emergence of new chokepoints in addition to the Hormuz strait, or a re-escalation of trade tensions and trade barriers. Malaysia’s large electrical and electronics and semiconductor industries face heightened supply‑chain vulnerabilities from the conflict in the Middle East, reflecting their deep integration into global input markets. The disruption to LNG facilities in Qatar, one of the world’s main helium producers, constrains global helium supply, a critical input for wafer cooling, plasma etching and other precision processes in semiconductor manufacturing. While Malaysian chipmakers have so far avoided production interruptions thanks to inventory buffers and diversified sourcing, prolonged supply constraints could raise costs and delay production, underscoring the sector’s exposure to geopolitical shocks in upstream gas and industrial‑gas markets. Agriculture, which contributes over 8% to Malaysia’s GDP, with palm oil alone accounting for 4.4%, makes the economy sensitive to movements in global fertiliser and commodity prices. Malaysia imports around 61% of its annual fertiliser use and sectors that are vulnerable to potential supply shortages include palm oil, paddy or rice, fruits and vegetables and food production. Lower-than-projected prices, particularly for palm oil and other key exports, could weaken export performance and fiscal revenues. Financial market volatility and a potential correction in technology-related sectors, particularly if the current AI-driven investment cycle falters, could weigh on exports and investment. Renewed weakness in China would amplify these pressures. Since the subsidy bill has risen sharply in the face of higher global oil prices, fiscal sustainability risks have also risen, reinforcing the need for timely policy action to safeguard fiscal credibility and resilience. On the upside, a stronger-than-foreseen semiconductor upcycle, breakthroughs in trade negotiations, stronger-than-expected tourism flows under Visit Malaysia 2026, and faster progress on structural reforms could bolster confidence and external receipts.
Domestic risks are less stark but still present. Inflation could rise more than anticipated due to a larger-than-expected pass-through of the global energy and commodity price shock into domestic prices, which would erode purchasing power and complicate monetary policy. Slower-than-expected implementation of infrastructure projects or private investment plans could dampen growth momentum, while fiscal consolidation challenges may constrain policy space. Conversely, upside growth surprises could stem from accelerated execution of energy and industrial projects, stronger private investment in high-tech and green sectors, and sustained consumer spending supported by targeted cash transfers and a resilient labour market.
Malaysia’s macroeconomic exposure to the recent surge in global oil and gas prices is moderated by its role as an exporter of hydrocarbons. Higher international prices are expected to strengthen export receipts for crude oil and natural gas, partly offsetting adverse external spillovers from the conflict affecting energy markets. Moreover, the authorities’ decision to maintain a capped retail price for RON-95 petrol at MYR 1.99 per litre is likely to dampen the pass-through of higher fuel costs to consumer price inflation in the near term.
At the same time, Malaysia’s energy trade structure creates specific vulnerabilities. The country remains dependent on imported crude from the Persian Gulf and on petroleum products supplied through regional trading hubs. In 2025, exports of petroleum (crude plus petroleum products) reached MYR 123 billion while imports amounted to MYR 150 billion. Domestic production is skewed towards higher-quality sweet crude, which is largely shipped to advanced regional markets, whereas local refineries process a substantial share of imported Middle Eastern oil. A sustained disruption to shipping routes in the Gulf region would therefore require refineries in Malaysia and elsewhere in Asia to adjust sourcing strategies and secure alternative grades of crude.
Although domestic crude output falls short of total consumption, Malaysia remains a net energy exporter once natural gas and petroleum products are taken into account. In the final quarter of 2025, outbound shipments of energy products exceeded imports by nearly MYR 5.5 billion.
Elevated oil prices also carry fiscal implications. The government has committed to maintaining fuel subsidies for RON-95, but reduced the associated monthly quota from 300 to 200 litres (which still covers the needs of around 90% of households). If global prices were to stay around USD 100 for Brent crude, monthly subsidies for RON-95 and diesel (which remains subsidised separately in Sabah and Sarawak) could reach MYR 3 billion (1.8% of GDP), eroding fiscal space. Over a longer horizon, stronger hydrocarbon revenues are expected to boost dividend payments from the national oil company Petronas, helping offset the fiscal burden of higher subsidies, but such transfers typically materialise with a lag.
The largely independent central bank, Bank Negara Malaysia (BNM), has navigated post‑pandemic normalisation with a pragmatic, data‑dependent approach within a flexible exchange‑rate regime and without an explicit numerical inflation target, a framework that has nevertheless delivered comparatively low and stable inflation outcomes. After cutting the overnight policy rate from 3% to 1.75% in the first part of 2020, to cushion the COVID‑19 shock, BNM raised it in 2022-23 back to 3%. It made a 25 basis points cut to 2.75% in July 2025 to insure against prevailing uncertainties surrounding global trade and geopolitical developments that posed risks to Malaysia's growth outlook (Figure 1.5). BNM indicated that the move was a risk‑management adjustment rather than a shift to outright easing. The combination of a credible reaction function and continued exchange‑rate flexibility has helped keep inflation expectations stable. The current policy rate is probably close to neutrality insofar as it is slightly below its longer-term average, with inflation also slightly below but set to head higher.
Source: CEIC.
Alongside the overnight policy rate, the statutory reserve requirement (SRR) is used by BNM as a liquidity management instrument. The SRR was reduced from 3 to 2% in March 2020 (Figure 1.5), with temporary flexibility to recognise government securities for compliance, injecting roughly RM30 billion into the system but without signalling a change in the monetary policy stance. It was cut further to 1%, in May 2025 amid financial market volatility to ensure sufficient liquidity in the banking system and help banks better manage liquidity in a more uncertain environment. Current BNM guidance retains the SRR as a non‑signal tool to support smooth transmission of policy rates to retail lending and deposit rates. The framework is underpinned by well‑developed money market operations, including daily tenders via the FAST platform.
Besides, BNM has introduced a MYR 5 billion SME Stabilisation Relief Facility to support SMEs affected by disruptions stemming from the ongoing Middle East conflict. The facility aims to alleviate short-term liquidity constraints and sustain viable businesses facing operational and cash flow pressures, providing working capital financing of up to MYR 750 000 per firm for a tenure of up to five years at a concessional rate capped at 3.75% per annum. To enhance access, particularly for firms lacking collateral, financing will be backed by guarantees of up to 80% from Credit Guarantee Corporation Malaysia and Syarikat Jaminan Pembiayaan Perniagaan. The time-bound facility, available from mid-May to end-2026 or until full utilisation, is complemented by supervisory guidance encouraging early borrower–lender engagement and supported by advisory and debt resolution services provided by Agensi Kaunseling dan Pengurusan Kredit.
Since 2024 the ringgit has appreciated from what, as documented in the previous OECD Economic Survey of Malaysia (OECD, 2024), was widely seen as a weak level, aided by narrowing interest‑rate differentials with the United States and improving domestic fundamentals (Figure 1.6). On a bilateral basis, it lost only 2% against the US dollar during the two months to end-April, following an appreciation on the order of 20% over the previous two years. The authorities underline that the exchange rate will continue to act as a shock absorber, supported by ongoing efforts to encourage more balanced two-way flows and deepen the forex market (IMF, 2026). BNM’s Financial Markets Investor Portal reported daily forex turnover in the USD 20 billion range in the onshore market in 2025, stressing the central bank’s role in ensuring orderly market conditions rather than targeting a level. Retaining a flexible regime remains appropriate given Malaysia’s openness and diversified trade links.
Note: The real broad effective exchange rate is calculated as weighted average of bilateral exchange rates adjusted by relative consumer prices. An increase in the index denotes an appreciation of the currency in real terms, implying a decline in external price competitiveness. Index 2020 = 100. Monthly data, not seasonally adjusted.
Source: Bank for International Settlements.
The monetary stance has been appropriate so far, helping preserve growth while continuing to anchor expectations. However, with both headline and core inflation projected by the OECD to rise to 2.1% on an annual average basis in 2026, consideration may need to be given to reversing last year’s precautionary cut if signs emerge that the energy and commodity price shock is passing through into core inflation and implies an overshoot of the current 1.5-2.5% BNM inflation projection. The distortions that fuel subsidies impose on price-wage dynamics, for example, may be an additional indirect channel why core inflation could rise after some lag. In any event, policy should stay nimble amid heightened global uncertainty. If growth slows more than expected or if external shocks intensify, the established toolkit (including liquidity operations and, if needed, SRR flexibility) can complement the overnight policy rate, while continued exchange‑rate floating limits the need for large rate adjustments to counter imported shocks. The recent global energy price shock may be a challenging test.
The previous OECD Economic Survey of Malaysia (OECD, 2024) welcomed Malaysia’s progress on macro policy frameworks and recommended further enhancements to monetary policy communication (Table 1.3 further down). Publishing Monetary Policy Committee minutes, even if only in summary form, could strengthen accountability, clarify the distribution of views, and help anchor expectations, particularly in a setting without an explicit inflation target. Such a step would align Malaysia with practices in many inflation‑targeting and flexible‑exchange‑rate peers and would complement BNM’s already detailed Monetary Policy Statements.
The Malaysian financial system exhibits strong capitalisation, ample liquidity buffers and generally healthy private sector balance sheets. BNM and IMF assessments concur that systemic risks are contained, despite an uncertain global environment (BNM, 2026; IMF, 2026). Aggregate capital ratios stay comfortably above regulatory minima, with the total capital ratio of the banking system rising to close to 18% by late 2025, broadly comparable to Singapore and well above Basel III requirements, though lower than in some regional peers such as Indonesia. The system-wide liquidity coverage ratio stood at just over 160% at the end of 2024 and remained elevated in 2025, providing a substantial buffer against funding stress. BNM’s regular stress tests suggest that banks would remain resilient under severe macro-financial shocks, reflecting prudent underwriting standards and conservative provisioning. Furthermore, the authorities have recently finalised a Consumer Credit Bill that tightens supervision of previously unregulated non-bank lenders, notably buy-now-pay-later providers.
Overall, asset quality does not appear to be a source of concern (BNM, 2026; IMF 2026). Non-performing loan ratios remain low and stable (Figure 1.7), supported by steady employment and wage growth and broadly favourable corporate earnings. Household balance sheets are healthy overall, but vulnerabilities persist among a subset of highly leveraged borrowers. In particular, loans to households with debt-service ratios above 60% remain a focus of supervisory attention, as these borrowers are more sensitive to interest rate shocks and income volatility. While this segment mostly includes middle-to-high-income borrowers, and delinquency rates are contained, continued vigilance is warranted. Unlike in a number of OECD countries, housing price growth has not outstripped income growth in recent years, implying less of a risk of a generalised correction affecting mortgage portfolios.
Source: IMF, Financial Soundness Indicators.
Macroprudential tools can help fine-tune emerging risks in household loan portfolios. Malaysia already has a comprehensive toolkit, including loan-to-value caps for the third and subsequent housing loans to individuals and loan tenure caps for personal financing (10 years) and housing (35 years). Applying loan-to-value caps for first and second properties and introducing debt-service-to-income limits for new mortgage borrowers, like in Singapore, could mitigate pockets of vulnerability without unduly constraining credit to first-time buyers or productive investment. Such measures could complement existing supervisory guidance and borrower-based tools, particularly if household leverage were to rise or housing market conditions to become less balanced.
Exposures to commercial real estate and to firms facing sector-specific headwinds warrant close monitoring. Occupancy rates remain structurally weak for offices, at around 72%, and only middling for retail, at around 79% in early 2025 (NAPIC, 2025). Lending related to commercial real estate remains manageable, but stress could emerge if office vacancies worsen or if refinancing conditions were to tighten. Firms affected by external trade developments, including higher US tariffs, may face financial stress.
At the same time, linkages between banks and non-bank financial institutions have continued to deepen, reflecting the growing role of investment funds and insurers in credit intermediation. Non-bank finance provides useful diversification of funding sources and is subject to the supervision of the government (in the case of pension funds), the Securities Commission and sectoral regulators, as well as to BNM stress-testing for systemic non-banks (which suggests that they hold sufficient liquid assets to withstand shocks). Even so, strengthened BNM monitoring, including of emerging alternative credit providers, would help limit contagion risks and regulatory arbitrage.
Islamic finance continues to be a source of innovation and strength for the financial system (IFSB, 2025). Recent innovations include the launch of the world’s first CNY 200 million (USD 17 million) climate sukuk, digital tokenisation and carbon credit monetisation, as well as the announced introduction of a cash waqf (charitable endowment) sukuk to fund initiatives with significant social impact. Islamic banks remain well capitalised and liquid, benefiting from prudent balance sheet structures and a strong domestic deposit base. Asset quality in Islamic banking has broadly mirrored that of conventional banks, with low impairment ratios and limited exposure to higher-risk segments. The sector’s promotion of risk-sharing and asset-backed financing contributes to resilience, although concentration in certain segments, such as property-related financing, underscores the importance of consistent stress testing and prudential oversight. Moreover, as the world’s largest sukuk issuer, Malaysia has continued to strengthen its sukuk market through regular issuances of Malaysian Government Investment Issues that serve as benchmarks across major maturities, resulting in secondary market activity comparable to conventional bonds. These sukuk serve as long-term funding tools, including for green transition-related activities.
Finally, cyber risks have become more prominent as digitalisation deepens across finance (Box 1.4). While BNM has strengthened its technology and cyber risk management capabilities, continued investment in operational resilience and coordinated incident response will be essential to safeguard confidence in the financial system amid rising global cyber threats.
Malaysia’s fiscal position continued to improve in 2025, supported by steady economic growth and ongoing, albeit cautious, consolidation efforts. The federal government deficit narrowed to 3.7% of GDP, faster than foreseen in Budget 2025 and in line with previous OECD recommendations (Table 1.4), reflecting overall expenditure restraint and robust revenues (Figure 1.8). Government revenue performance in 2025 was underpinned by firm nominal growth, strong corporate profitability and improvements in tax administration, notably via e-invoicing. Public debt remained elevated but broadly stable as a share of GDP, staying above pre-pandemic levels and above the 60% medium-term target under the Public Finance and Fiscal Responsibility Act (FRA), though without triggering any adverse market reaction. Malaysia’s deficit and debt ratios remain significantly higher than in peer countries such as Indonesia, Thailand the Philippines or Viet Nam. Consolidation has proceeded gradually, without undermining growth, although buffers remain thinner than before the pandemic.
Malaysia’s rapid digitalisation of banking, payments, commerce and public services has brought substantial efficiency gains but has also increased exposure to cyber risks. The expansion of online and mobile banking, fintech platforms and internet-based services has enlarged the attack surface of the financial system, with fraud and ransomware emerging as prevalent threats. Reported ransomware incidents rose sharply in 2024, while financial institutions experienced a high incidence of attempted intrusions. Beyond finance, cyber incidents have affected a wide range of economic actors, with Malaysia ranking among the most affected economies in Southeast Asia in terms of compromised user accounts. Vulnerabilities linked to the rapid deployment of connected devices in manufacturing, healthcare and other critical services, as well as the growing use of artificial intelligence by attackers, heighten the risk of operational disruptions, data losses and erosion of trust. Large-scale cyber incidents could disrupt payment systems, undermine investor confidence and generate spillovers across supply chains and essential services.
Policy efforts to mitigate cyber risks have intensified. The Cyber Security Act 2024 establishes a comprehensive legal framework for critical information infrastructure sectors, including banking and finance, strengthening the mandate of the National Cyber Security Agency and introducing requirements for risk assessments, audits and incident reporting. The Malaysia Cyber Security Strategy provides a medium-term roadmap built around governance, ecosystem development, skills, research and international cooperation. In the financial sector, BNM is active through its risk management in technology and electronic banking guidelines, requiring stronger governance, real-time fraud monitoring and enhanced resilience of critical systems, complemented by the National Scam Response Centre. Budgetary allocations have been increased to support cybersecurity capabilities, while Bursa Malaysia has issued recommendations for brokers and trading systems to raise cyber resilience.
Further progress may call for a more proactive and system-wide approach to cyber resilience. Strengthening threat intelligence, digital forensics and cross-border information sharing would help address sophisticated and potentially state-linked attacks. Deeper public-private partnerships could improve early detection and coordinated responses, particularly in the financial system and other critical sectors. Addressing shortages of cyber security professionals through targeted training, certification and the use of automation and artificial intelligence would enhance defensive capacity. Expanding cyber hygiene and awareness programmes, especially for MSMEs, would reduce economy-wide vulnerabilities. Finally, regular stress testing and resilience audits of critical infrastructure, combined with closer cross-border cooperation, would help ensure that Malaysia’s digital transformation is supported by robust and credible cyber defences.
Source: Fintech News Malaysia (2024), Lee et al. (2024), Cheng et al. (2025), Malaysian Re Foresights (2025).
Going forward, the government in late 2025 reaffirmed its medium-term fiscal consolidation path, planning to bring the federal deficit down further to 3.5% of GDP in 2026 and 3% by 2028. Budget 2026, the fourth budget under the MADANI administration and the first aligned with the Thirteenth Malaysia Plan, sought to strike a balance between consolidation and social support through targeted cash assistance programmes. At the same time, development expenditure, conceptually similar to capital expenditure, was revised down reflecting the pace of project execution and reprioritisation. Budget 2026 also implemented the second and final phase of civil servant wage adjustments (+7% for employees after +8% in 2025, +3% for top management after +4% in 2025). This meant to address longstanding public sector pay compression but adds to recurrent spending pressure. More structural challenges include the need to improve spending efficiency (Chapter 3), especially by accelerating subsidy rationalisation, and to mobilise more stable and growth-friendly revenues. In this context, more systematic and regular spending reviews across major expenditure categories could help identify savings, reallocate resources towards higher-impact programmes and strengthen expenditure control. Embedding such reviews within the budget process would also support programme evaluation and prioritisation, thereby complementing broader fiscal consolidation efforts. Given the unexpected sharp increase in fuel subsidies in recent months (see below), achieving the consolidation targets for 2026 and 2027 enshrined in Budget 2026 will require significant new fiscal measures. Indeed, on current policies the deficit is projected by the OECD to widen to 4.0% of GDP in 2026 and to reach 3.8% of GDP in 2027.
A broader view of public finances that includes statutory bodies, extra-budgetary entities and government-linked companies suggests a larger public sector footprint than reflected in the federal accounts alone, as well as a larger deficit, with the consolidated public sector deficit estimated at 7.5% of GDP in 2025, compared with 6.4% in 2024. Government-linked investment companies continue to play a central role in the economy and create complex fiscal interlinkages (see Chapter 3). Government guarantees as defined in the FRA amounted to 22% of GDP at the end of 2025 and remain commonly used for infrastructure projects and public enterprises. While most guaranteed entities seem to be financially sound, the scale of contingent liabilities points to the importance of transparent reporting and prudent risk management across the consolidated public sector.
Looking ahead, population ageing and relatedly rising social protection needs will place increasing pressure on public finances (Figure 1.9). In particular, as recommended in this Survey, the social safety nets will need to be strengthened to adequately protect the population against old-age poverty, which will significantly increase pension spending (Table 1.5). At the same time, productivity-enhancing investments (Chapter 3) and climate adaptation (Chapter 2) will require additional fiscal resources. This underscores the need to firmly adhere to the Public Finance and Fiscal Responsibility Act 2023 through further efforts on both the expenditure and the revenue sides of government accounts, to ensure public debt sustainability (Figure 1.10). Failure to do so would intensify fiscal pressures over time and limit the capacity to respond to future shocks. The illustrative quantification presented in Table 1.5 suggests that the recommendations presented in this Survey – insofar as they fiscal impact can be gauged – can serve to plug the fiscal gap and ensure compliance with the Fiscal Responsibility Act.
Note: Consolidated public sector consists of general government and non-financial public corporations. In Panel B, 2025 data for Thailand and Viet Nam are IMF projections.
Source: Ministry of Finance, Fiscal Outlook and Federal Government Revenue Estimates 2026; IMF, World Economic Outlook database.
Note: The old-age dependency ratio is defined as the number of persons aged 65 and over relative to the population aged 15 to 64. For Malaysia, the data includes Sabah and Sarawak (states in East Malaysia).
Source: United Nations, Department of Economic and Social Affairs, Population Division (2024), World Population Prospects 2024.
Gross federal government debt scenarios, in per cent of GDP
Note: All three scenarios are based on OECD Economic Outlook projections for 2026-27 and assume that thereafter social and education spending will rise gradually by 2060 in line with Table 1.5. Defence spending is assumed to remain roughly constant as a share of GDP. The baseline scenario (red line) contains no compensating measures to maintain a constant fiscal deficit. The second scenario (blue line) assumes that the headline deficit remains constant at 3% of GDP, the Public Finance and Fiscal Responsibility Act (FRA) cap, as rising spending is compensated by the revenue measures, lower subsidies and other expenditures recommended in this Survey (Table 1.5). The first two scenarios assume that annual real GDP growth is 4.2% between 2028 and 2030 before declining gradually to a rate of 2.2% between 2030 and 2060. The third scenario (green line) rests on a stronger growth trajectory as from 2028 due to the implementation of growth-enhancing structural reforms, with growth 1 percentage point higher than in the baseline (and thus close to the mid-point of the 4.5-5.5% range contemplated in Malaysia’s Budget 2026 debt sustainability analysis for 2026-30). In all scenarios, the GDP deflator grows at a constant 2% per year from 2028 and the interest rate on public debt is maintained at 4% (as against 10-year government bond yields of around 3.6% in late March 2026).
Source: OECD estimates.
Estimated potential long-run impact on the fiscal balance
Note: The fiscal impact of other recommendations in this Survey is not readily quantifiable so not estimated here.
Source: OECD estimates.
Reform priorities on the expenditure side of federal government accounts include subsidies, which continued to absorb a sizeable share of federal spending in 2025, even before their recent surge, remaining high by regional standards (Figure 1.11) and above the levels prevailing during the late 2010s. Energy subsidies, in particular, accounted for one sixth of current expenditure in 2025, crowding out fiscal space for social and development spending. The government has made progress in rationalising certain subsidies, notably for electricity and selected food items, but the pace has been uneven. While these reforms have reduced fiscal leakages and improved targeting in some areas, overall subsidy spending remains sensitive to global commodity prices and policy reversals, as vividly illustrated by the sharp increase in the fuel subsidy bill following the onset of the conflict in the Middle East. Besides, the distribution of MYR100 cash vouchers to all Malaysians aged 18 and above in August 2025, to cope with rising living costs, could have been targeted to those in need.
Note: In Panel A, data for 2025 and 2026 are government estimates based on the Budget bills.
Source: Ministry of Finance, Fiscal Outlook and Budget 2026; IEA, Fossil Fuel Subsidies database.
Energy subsidy reform underwent a partial reversal in late 2025. While petrol prices were already low in Malaysia in international comparison (Figure 1.12), the government reduced the RON-95 petrol price for citizens from MYR 2.05 (around USD 0.50) to MYR 1.99 per litre as from end September, while maintaining market pricing (then at around MYR 2.60 per litre) for non-citizens through MyKaD (identity card) verification at fuel pumps. With a cap at 300 litres per month, the fuel purchases of the vast majority of households were fully covered by the subsidy. Budget 2026 maintained the RON-95 subsidy framework, postponing earlier plans featuring notably in Budget 2025 to exclude higher-income households, which could have been facilitated by a more active use of the PADU national socio-economic database (Box 1.5). However, in the face of a mounting subsidy bill, the monthly RON-95 quota was reduced to 200 litres starting in April 2026. Going forward, and bearing in mind the lessons from the 2022 energy price shock (Box 1.6), it will be important to gradually phase out this subsidy.
As highlighted in the 2024 OECD Economic Survey of Malaysia (OECD, 2024), Malaysia’s social protection system including old-age pensions remains in its infancy, and political demand for better social protection is likely to rise, not least as the population ages. Access to and coverage of Malaysia’s fragmented old-age retirement schemes remains low. Overall pension coverage is below 40% of the population aged 15 to 64. When comparing the coverage of those who are already in pension age, Malaysia stands out at the lower end of the spectrum (Figure 1.13).
Source: Global petrol prices dataset, data as of 18 May 2026, available at https://www.globalpetrolprices.com/.
People protected by social protection systems including floors - older persons
Source: ILO World Social Protection Data Dashboards, available at https://www.social-protection.org/gimi/WSPDB.action?id=16
Moreover, the current contributory pension system, to which only close to 40% of the working-age population contributes, faces significant sustainability challenges. Early withdrawals (allowed starting at age 55) from the Employees Provident Fund (EPF), the main scheme for those working in the private sector, for non-pensionable civil servants and for non-Malaysian employees, and a low statutory retirement age reduce the accumulation of retirement savings, leaving many individuals exposed to longevity risk and inadequate income in old age. These features shorten contribution periods and accelerate drawdowns, undermining the system’s ability to provide sufficient coverage as life expectancy rises. To ensure future retirement income adequacy, the retirement age should be gradually increased in line with demographic trends, which would bring it closer to that in regional peers. At the same time, rules allowing early lump-sum withdrawals should be tightened to preserve savings for retirement, as recommended in the 2024 OECD Economic Survey (Table 1.6). Complementary measures could include expanding voluntary top-ups and improving financial literacy to encourage longer working lives and higher contributions. Budget 2026 contains subsidies to incentivise the enrolment of gig workers in the EPF, but the take-up of such voluntary schemes has been low in the past (OECD, 2024).
For the majority of the current working-age population that are currently not covered by any pension scheme, including informal, self-employed or unemployed workers, expanding the coverage of non-contributory pension schemes could help address these gaps. Thailand and Viet Nam have made significant progress in rolling out basic non-contributory pensions, allowing them to move towards universal pension coverage of the current working-age population (OECD 2025a, OECD 2025b).
Expanding non-contributory pensions also holds strong potential to improve the incentives for formal job creation. Labour informality is a multi-faceted challenge that Malaysia shares with many regional and emerging-market peers. Formal workers are typically defined as those that have access to at least one social insurance scheme or employment benefit, which are directly tied to contributions and/or a declared employer-employee relationship (World Bank, 2024). Based on this definition 26.8% of total employment in Malaysia was informal in 2022, down from 38.2% in 2009 (World Bank, 2024). If the agriculture sector is excluded, the share drops to 23.3%. Informal employment is more frequent among older persons and those with less education and informal workers are more concentrated at the bottom of the income distribution.
High non-wage labour costs can be one factor making it more convenient for businesses to hire informally rather than creating formal jobs, especially in a context of limited enforcement. Non-wage labour costs include the mandatory 25% of wages in contributions to the social security fund EPF, which are paid jointly by businesses and workers. One reform to consider would be to exempt low salaries in the vicinity of the minimum wage from mandatory contributions to the EPF, which currently fails to provide adequate protection against old-age poverty for most low-income workers in any case (OECD, 2024). Instead, these workers could be covered by tax-financed non-contributory pension benefits, which would have to be expanded significantly.
Malaysia has a means-tested, tax-financed allowance for older individuals, known as Bantuan Warga Emas (BWE), but it covers only around 4% of the total population aged over 60 with a benefit of MYR 600 (USD 150) per month. Its current fiscal cost is approximately 0.05% of GDP (Khalid and Mansor, 2025). With this low coverage, BWE currently fails to provide consistent minimum protection for poor and vulnerable households, but the scheme could provide the basis for a gradual expansion towards universal coverage of all those aged 65 and above with no pension or income from other sources. Building on the BWE as a basic universal but means-tested first pillar of the pension system for low-income earners may be one way to fight old-age poverty while reducing non-wage labour costs and promoting formalisation. International evidence, including experience in Latin America (OECD, 2025c), suggests that a gradual expansion of non-contributory social pensions can help to improve social protection outcomes, but clear targeting is essential to contain long-term costs. Such targeting can build on further improvements in social registries (Box 1.5) although progress towards efficient targeting of social benefits remains work in progress (Table 1.6). Expanding social protection coverage would require identifying additional fiscal space from expenditure savings or revenue mobilisation, and careful design to balance fiscal sustainability with adequacy (O’Keefe and G. Rongen, 2025).
The national socio-economic database PADU (Pangkalan Data Utama) has the potential to become a cornerstone of Malaysia’s move from broad-based subsidies towards more targeted and fiscally sustainable social assistance. This is an important priority given that around one third of social assistance accrued to households with income above the 40th percentile in 2022 (World Bank, 2025).
Launched in early 2024, PADU consolidates socio-economic information on 30.7 million citizens and permanent residents aged 18 and above, drawing on data from over 200 government agencies and self-declared household profiles. The national identification number (MyKad) serves as the single unique identifier. In principle, this enables the consolidation of citizen records across agencies into a consistent, non-duplicated and interoperable data ecosystem. PADU’s stated objectives – improving targeting and reducing leakages – are well aligned with the government’s fiscal consolidation agenda and may at the same time facilitate an expansion of the current narrow social protection coverage. Since 2025, the authorities have deployed a Data‑as‑a‑Service model through PADU to support beneficiary targeting and inform policy design, including fuel subsidy reform, with 25 inter‑agency data‑sharing requests approved by April 2026. Building on this, the planned introduction of Analytics‑as‑a‑Service is intended to expand access to granular socio‑economic data.
Even so, progress has so far remained behind what has been achieved elsewhere, for example in Brazil which has built up a comprehensive social registry called cadastro único (OECD, 2025c, Chapter 5). PADU could play a greater role in the targeting of major spending items such as fuel subsidies and cash transfers, potentially yielding substantial fiscal savings while preserving support for vulnerable groups. Cash transfers to those in working age amount to around 1% of GDP and are fragmented across over 150 programmes at the federal level alone, which can lead to overlaps, leakages and benefit duplication. With 78% of Malaysians receiving some sort of social assistance benefit, their targeting has significant scope for improvement (OECD, 2024). For example, if PADU-enabled reforms reduced leakages and coverage of higher-income households by 15-20% for major subsidy programmes, annual savings could plausibly amount to around 0.5-1% of GDP, depending on energy prices and programme design. Realising these gains will require further automatic integration with authoritative administrative datasets (tax, social security, pensions, education and health), reducing incentives and scope for misreporting. Making PADU registration a prerequisite for access to key benefits would strengthen coverage, while targeted outreach, through mobile registration units, local governments and civil society, could improve inclusion of informal workers and rural households. Used effectively, PADU could become a powerful tool to support subsidy rationalisation, improve equity and deliver durable fiscal consolidation without undermining social protection objectives.
Source: Castle et al. (2023), Jalli (2024), Leng and Liew (2024), Leite et al. (2022).
Policy responses to the 2021-22 global energy shock were rapid but often weakly targeted, fiscally costly and, in many cases, curtailed incentives to reduce energy consumption. Across countries, a large share of support took the form of price caps, tax cuts and universal transfers, with only limited targeting to vulnerable households. This raised fiscal costs while slowing the reallocation away from fossil fuels.
Malaysia’s experience reflects these global patterns. In 2022, the government undertook one of the largest subsidy efforts in its history to shield households and firms from rising global energy prices. Blanket subsidies were used to freeze retail fuel and electricity prices, including keeping RON-95 petrol, diesel and LPG prices unchanged despite crude oil exceeding USD 100 per barrel. The government also maintained electricity rebates for households and businesses and provided an additional RM4 billion electricity subsidy for the second half of the year to avoid tariff increases. Altogether, consumption subsidies on fuel, cooking oil, electricity and other essentials reached RM67.4 billion (3.8% of GDP) in 2022. This broad support, including to higher-income groups, placed substantial pressure on public finances.
Three main lessons can be drawn from this cross-country experience. First, support should be temporary and targeted on vulnerable groups. Second, preserving price signals is crucial to incentivise energy savings and efficiency. Third, administrative capacity (especially digital tools) matters for delivering timely and well targeted transfers. Complementary investment in energy diversification and the green transition reduces exposure to future shocks. These lessons are directly relevant in 2026 amid renewed energy price pressures linked to the conflict in the Middle East. Governments should prioritise income support for vulnerable households and viable firms, avoid generalised price caps, and embed automatic sunset clauses. Measures should be designed to maintain incentives to curb energy demand and accelerate clean energy investment, while safeguarding fiscal sustainability.
Source: Ministry of Finance (2022); Hemmerlé et al. (2023); OECD (2026).
Government tax revenue is low at only 12.6% of GDP, which is not sufficient to cover medium-term spending needs and enhance social safety nets. The tax mix is characterised by a very large share of corporate income tax receipts, reflecting Malaysia’s narrow personal income tax base and the absence of a broad-based value-added tax (Figure 1.14). This tax structure heightens revenue volatility and exposes fiscal outcomes to global and domestic business‑cycle fluctuations, particularly in an economy where profits in key sectors such as commodities, electronics, and logistics, are highly sensitive to external demand conditions.
In the realm of consumption taxes, an increase in the sales tax and the service tax (SST) rate from 6% to 8% except for telecommunication, food and beverages as of March 2024, and the broadening of its coverage to rental, construction, financial, healthcare and education services from July 2025, contributed substantially to higher revenue. As a result, SST revenue increased to 2.8% of GDP in 2025. Even so, the SST remains structurally limited: its single‑stage nature distorts production chains, and its numerous exemptions leave significant gaps. As a result, it is less effective, less neutral, and less predictable than a modern value‑added tax. By contrast, a broad‑based VAT, similar to the Goods and Services Tax (GST) introduced in 2015 but abandoned in 2018, would rest on a more resilient and diversified revenue base, reducing reliance on volatile profit‑based taxes and distributing the tax burden more evenly across the economy, while also creating less distortions in the productive sector and being more growth-friendly. The ongoing rollout of generalised e‑invoicing strengthens the case for re‑introducing such a tax, as it will significantly reduce evasion and fraud, lower administrative costs for government and compliance costs for businesses and help address the implementation challenges that contributed to the GST’s earlier withdrawal. Reinstating a broad-based consumption tax with appropriate compensatory measures to reduce the burden on low-income families would significantly strengthen revenue capacity and reduce the volatility of overall tax receipts and support a more sustainable fiscal position over the medium term. Evidence from regional and international experience suggests that well-designed consumption taxes can support development objectives while preserving equity (Myoda et al., 2024).
Source: OECD Global Revenue Statistics Database 2025.
Other potential revenue measures to help address fiscal pressures include widening the personal income tax base by recalibrating existing reliefs and allowances, which are currently extensive and tend to favour individuals with higher earnings. Taxpayers may claim a large number of deductions (covering medical bills, parental support, childcare, education, retirement contributions and more), which narrows the effective base and limits revenue collection. Streamlining these provisions and focusing them on clearly defined policy goals would improve both efficiency and equity. Additional revenue could be mobilised by bringing more forms of personal income into the tax net. At present, various types of returns, including interest from deposits, gains from financial investments, private pensions, distributions from shares, and other capital‑related earnings, are exempt at the individual level. Malaysia could consider taxing capital income separately from wages under a dual‑income structure or alternatively integrating all forms of earnings within a unified personal tax schedule. Over the longer term, the introduction of a well‑designed capital gains tax could also be explored. Coupled with continued enhancements in tax administration and compliance, these measures would reinforce the fairness of the system, reduce distortions between different forms of income, and create a more resilient revenue base capable of supporting Malaysia’s long‑term fiscal needs.
Though it has a motor vehicle tax, Malaysia has no carbon tax, no fuel tax and no mandatory emissions trading system, and subsidies have tended to push up energy consumption and emissions. Budget 2026 proposed to introduce a carbon tax, starting with the iron, steel and energy sectors, but implementation is likely to take some time, especially in the context of much higher global energy prices. A gradual introduction of carbon pricing could be complemented by more stringent regulations, while targeted transfers could cushion the social impact and facilitate political support (see Chapter 2 for a more detailed discussion).
Malaysia’s fiscal governance framework has been strengthened in recent years, most significantly with the adoption of the Public Finance and Fiscal Responsibility Act in 2023 and of the Government Procurement Act in 2025. The 2023 law enshrines a medium-term deficit target of 3% of GDP or less; a medium-term overall government debt limit of 60% of GDP; a 25% of GDP limit for government guarantees; a 3% of GDP floor for development expenditure; and reporting requirements including a mandatory annual fiscal outlook, a mid-year performance report, and a fiscal risk statement. It does allow for temporary deviations under certain conditions, subject to corrective plans. The flexibility to invoke temporary deviations increases the risk that these limits become non‑binding. Experience across OECD countries shows that escape clauses should be tightly circumscribed, time‑bound and independently monitored to ensure credibility. Strengthening these elements, rather than eliminating flexibility altogether, would help Malaysia reinforce fiscal discipline while preserving the ability to respond to shocks. Notwithstanding the transformation in late 2023 of the Special Select Committee on Budget into a Parliamentary Select Committee on Finance and Economy with a broader mandate, the absence of a fully independent fiscal council, in contrast with most OECD countries and with most regional peers (OECD/ADB, 2025), limits external scrutiny of fiscal assumptions, compliance and long-term sustainability. An independent institution could strengthen credibility, especially as fiscal consolidation becomes more politically challenging. Further improvements in reporting on contingent liabilities and the broader public sector would also enhance fiscal risk management. The 2025 law codifies procurement rules into law, replacing the previous reliance on Treasury circulars and enhancing legal certainty and governance. It mandates open and competitive tendering, the creation of a Procurement Appeal Tribunal and review panel, and strict conflict-of-interest and disclosure rules. Enforcement is being strengthened with punitive measures (fines, imprisonment, delisting of firms in graft cases) and enhanced multi-agency oversight.
Looking further out, Malaysia’s potential growth rate is set to decline amid population ageing (Figure 1.9). Compensating these demographic headwinds would require boosting productivity growth, for which Malaysia has significant potential (Chapter 3). Reforms recommended in this Survey, many of which overlap with those spelled out in the Thirteenth Malaysia Plan, will need to be legislated and implemented. As the illustrative calculations presented in Table 1.7 show, these reforms hold significant potential to boost growth and living standards.
Source: Égert and Gal (2016); Égert (2017); Égert, de la Maisonneuve and Turner (2022) ; OECD (2025d); OECD calculations.
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