Spotlight - Malaysia: October 26, 2023

The Malaysian government’s Budget 2024 was adopted this month. At a size of 393.8 billion ringgit (or approximately $83.3 billion), the budget is the largest to be tabled in the country’s history. This includes a record high RM303.8 billion for operating expenditures and RM90 billion for development expenditures. The government aims to control the fiscal deficit down to 4.3 percent of gross domestic product (GDP) next year while facilitating economic growth to rise up slightly to between 4 and 5 percent in 2024.

Malaysia is one of the lowest tax revenue collectors in Southeast Asia at around 11.8 percent of gross domestic product (GDP), compared to Singapore’s 12.6 percent and Thailand’s 16.4 percent. The government’s challenge resides in increasing fiscal revenues by controlling the  informal economy, corruption, and also subsidies. Prime Minister Anwar Ibrahim has stressed the fact that good governance should take precedence over taxation. In a recent address, Anwar stated “taxation is something that is essential only if it is deemed to be so critical. Do not ever forget that this country has two major problems, governance and then corruption which is systemic.”

Malaysia’s shadow economy is estimated to be as large as 30.2 percent of the country’s gross domestic product. According to Transparency International, Malaysia ranks 61st out of 180 countries on the 2022 corruption perception index (CPI). The CPI uses a score from 0 to 100: 100 is defined as very clean and 0 highly corrupt. Malaysia scores a low 47 out of 100. As a reference, the organization notes that the global average has remained unchanged for over a decade, at just 43 out of 100, and that more than two-thirds of countries score below 50. The same source shows that in 2020, 71 percent of Malaysians believed that government corruption is a big problem, while 13 percent of public service users reported paying a bribe in the previous 12 months.

Anwar’s government is in a difficult position as the coalition continues to seek Malay and/or Bumiputera support. The latter is a politically constructed category, meaning son of the soil, that accounts for both Malays and indigenous populations, represents over 60 percent of Malaysia’s population, and is the largest bulk of voters in the country. Anwar’s Parti Keadilan Rakyat (Keadilan, or PKR) has historically struggled to secure Malay conservative and/or rural votes. Yet, the Malaysian government’s position is difficult to hold without a solid Malay rural base. For this reason, the ruling coalition’s legitimacy to rule the country is being contested by the Malay-majority base in opposition. Keadilan’s alliance with the traditional Malay-based party, the United Malays National Organisation (UMNO), has failed to deliver on its promise to gather support from the rural base. On the contrary, the corruption-stained party may look like a liability; and at the same time, alignment with UMNO is a necessary evil for Anwar to retain power. 

Economic outlet The Edge and Malaysia’s Department of Statistics report that 71.6 percent of the 1.3 million households that earn less than RM3,000 a month were bumiputeras, compared to the 245,100 Chinese households earning below that amount (18.8 percent), 97,000 Indian households (7.4 percent) and 18,200 households of other ethnicities (1.4 percent).  In fact, all indicators point toward the same ethnic and geographical directions: Malay communities in states located along the eastern and northern coast, as well as communities living in East Malaysia (specifically Sabah), remain economically more vulnerable than those in urban peninsular Malaysia. Unfortunately for Anwar, these states, excluding Sabah, are ruled by the opposition Perikatan Nasional (PN). According to a research article published in the Journal of Economic Inequality (2023), “addressing chronic poverty is likely to require additional attention to less developed geographic areas, as a complement to the largely ethnicity-based policies that have historically played a dominant role.” However, reforming ethnic privileges would be perceived as jeopardizing “Malay interests.” This poses an almost impossible task for Anwar, as reform could spark dissatisfaction from the Malay majority and only further galvanize the Malay opposition front under PN.

For the same reasons, the government has not provided significant detail on its efforts to revise petrol subsidies. The subject is highly sensitive, as subsidy revisions would negatively impact the poorest sections of Malaysian society. Currently, subsidies on diesel petrol cost about RM1.5 billion in total for current consumption, and it is assumed that volumes are smuggled outside of Malaysia.

Another populist move can be found in the announcement of a future increase in civil servants’ salaries. While the measure is still under review, exceptional cash bonus will be distributed. Members of the large Malaysian civil service are predominantly ethnically Malay, because of the combination of both affirmative action and demographics, and are also traditionally supporters of Malay parties. While many supported UMNO prior to its dismal electoral showing in 2018, many have now switched to PN.

It should be noted that the cost of the 1MDB financial scandal still has severe repercussions on the country’s expenditures. Malaysia’s Ministry of Finance, in its fiscal outlook report, stated that 1MDB’s outstanding financial obligations were estimated at RM31.6 billion as of June 2022, comprising of a debt principal of RM25.9 billion and projected interests or profits of RM5.7 billion.

Finally, the budget’s research and development (R&D) allocation seems too narrow for Malaysia to step into the innovation race, a stagnation reinforced by the gigantic tech leap taken by Singapore over the past decade as a result of offering up to a 400 percent R&D tax incentive. This lack of strategy only perpetuates Malaysia’s struggles to retain talent and counter brain drain. In 2011, the World Bank estimated that social injustice is among the primary reasons for massive brain drain from Malaysia toward Singapore, Australia, New Zealand, and the United Kingdom, while emigrants consist mostly of ethnically Chinese Malaysians. More than a decade later, Malaysia’s Department of Statistics identified Singapore as the destination for 54 percent of overseas Malaysians, followed by Australia (15 percent), the United Kingdom (5 percent) and the United States (10 percent). The issue and the reasons behind emigration remain the same—inadequate education and economic policies (specifically those related to labor and innovation), social injustice, an absence of meritocracy and accountability in the working environment, and the weakening of the Malaysian currency and the inflexibility of immigration laws.

Sophie Lemière is an adjunct fellow (non-resident) with the Southeast Asia Program at the Center for Strategic and International Studies in Washington, D.C.