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Malaysia Cautiously Treads The Path To Fiscal Recovery – Analysis

By Shankaran Nambiar Having assumed office in November 2022, it was time in 2024 for Malaysian Prime Minister Anwar Ibrahim to get the building blocks in place to restart his country’s economy. On Anwar’s plate were serious problems, chiefly the uncomfortably narrow fiscal space that had been created by operational expenditures rising close to the level of government revenues. Other important issues were reducing Malaysia’s reliance on migrant workers and increasing productivity. There was little that could be done to bring operational expenditures down given the legally-mandated salary and pension payments for Malaysia’s large civil service. The solution was to either increase government revenue or cut expenditure. In the end, the government did both. Anwar was firm in his resolve not to bring back the goods and services tax (GST) that was introduced by former prime minister Najib Razak in 2015. Though Anwar conceded that the GST is the most efficient taxation system, he complained that it is regressive and vowed not to bring it back until the income threshold reached a minimum of RM3,000–4,000 (US$670–894) per month — a target that is unlikely to be achieved in the near future. The difficult journey of expanding fiscal space began with subsidy rationalisation. In October 2024, the government passed the Public Finance and Fiscal Responsibility Act, which aimed to improve fiscal policy management and the sustainability of public finances. In June 2024, the government removed diesel subsidies, which increased the price of diesel from RM2.15 (US$0.48) to RM3.35 (US$0.75) and reduced the subsidy bill which had ballooned to RM14.3 billion (US$3.2 billion) in 2023 from RM1.4 billion (US$312.8 million) in 2019. The removal of subsidies also effectively put a stop to diesel smuggling. Realising that the act of removing subsidies is also a political exercise, the government decided to delay the removal of the petrol subsidy to mid-2025. Together, these removals are expected to save the government close to RM8 billion (US$1.8 billion). But with inflationary pressures throughout the year, the government was caught between acceding to market forces and capitulating to cost-of-living pressures. For example, seeing a rise in the price of chicken, the government decided to ban chicken exports in June until outcries from the farming lobby led to a reversal in October. The fact that the Malaysian ringgit was relatively weak against the US dollar — hovering mostly between RM4.79 to RM4.71 — made imports more expensive in the first half of 2024, adding to inflationary pressures. It is uncertain if the strengthening of the ringgit in mid-July can be attributed to any structural changes in the economy but three factors point to the decision’s effectiveness. First, the country’s export figures picked up from May. Second, the central bank persuaded government-linked companies to repatriate their foreign earnings, increasing purchases of the ringgit. Third, the reduction in the US Federal Reserve’s interest rates made the ringgit relatively more attractive. By the end of September 2024, the ringgit had reached a peak of RM4.10 to the dollar, before declining moderately. Some of the uncertainties that existed in 2024 are likely to persist in 2025. The subsidy rationalisation program will continue, with the petrol subsidy to be amended so that it becomes a targeted subsidy for disadvantaged groups. But it is not yet clear how the subsidy will be designed or executed. February 2025 will also see the raising of the minimum wage to RM1,700 per month (US$380) from the prevailing RM1,500 (US$335). This will add to costs for small- and medium-sized enterprises and sectors dependent on unskilled workers. The increase may nudge these sectors into capital investments and a reduced reliance on unskilled workers, particularly migrant labour. In his budget 2025 speech, Prime Minister Anwar said that a mandatory contribution to the Employees’ Provident Fund (EPF) will need to be made for foreign workers. Along with a higher minimum wage, requiring EPF contributions for foreign workers may spark inflationary pressures. Combined with the withdrawal of subsidies, Malaysians may be forced to cope with a higher cost of living. The Prime Minister travelled extensively in 2024, signing MOUs to draw in investment. Anwar believes developing countries like Malaysia must maintain their economic independence and has deepened links with established partners and others such as Russia and China. But there are uncertainties in the global environment, particularly how the Trump administration will affect Malaysia. It is yet to be seen whether Trump’s threat of tariffs will have any direct consequence for Malaysia in 2025. The future of US–China tensions could benefit Malaysia as a third party, but the Trump administration could also choose to fix loopholes that would otherwise allow Chinese companies to seek refuge in Malaysia. While the government could have been bolder in its attempts to raise government revenue to consolidate the country’s fiscal situation in 2024, it did initiate a much-needed subsidy rationalisation program which will continue through 2025. But the increase in minimum wage, the mandatory contribution to the EPF for foreign workers and the withdrawal of fuel subsidies will add to inflationary pressures in 2025. The global outlook, particularly a less than spectacular performance from China coupled with trade uncertainties, looks set to produce a growth figure that falls within the lower end of the government’s forecast of 4.5–5.5 per cent for 2025. About the author: Shankaran Nambiar is Visiting Fellow at the Crawford School of Public Policy. Source: This article is published by East Asia Forum and part of an EAF special feature series on 2024 and the year ahead.