OECD Economic Development Reviews: Malaysia, 2021

In 2021, the country adopted 4 additional stimulus packages equivalent to 15.9% of GDP to combat persistently high infection rates.

Over the past decades, Malaysia has significantly improved the sphere of economy and social problems. The development process continues, as evidenced by the upcoming 12th Malaysia Plan for 2021-2025, which represents an intensified turn in the direction of further reforms.

In order to avoid significant economic damage due to the COVID-19 pandemic, fiscal stimulus packages were introduced and monetary policy was relaxed.

The crisis has hit the most vulnerable in the labor market, especially women, youth and unskilled workers. Due to disruptions and a decrease in external demand, GDP declined sharply in 2020 (-5.6%). Provided that the health crisis is brought under control, most sectors, including the hotel business, will be able to restore their activities by the end of 2021.

Assuming the vaccination campaign progresses as planned, Malaysia's economy is projected to recover in 2021 (+4.3%) and then continue to recover in 2022 (+6.1%). The unemployment rate will return to its previous level in 2022.

Malaysia has advanced its regulatory reforms in recent years to ease the administrative burden on businesses and simplify the procedure for setting up new businesses.

Digitalization accelerated during the pandemic.

Digitalization of business was not ubiquitous before the pandemic. A number of SMEs do not use basic digital tools such as computers and the Internet, and remote work is less common than in other countries.

Seeking to achieve high-income status in the next decade, the government plans to present its 12th Five-Year Plan. The announcement of the plan, originally slated for 2020, has been delayed to accommodate new emerging challenges posed by the pandemic.

A strong economic position and a solid political foundation have enabled Malaysia to respond quickly and boldly to the downturn caused by the pandemic. In 2020, the government rolled out five stimulus packages of 21.5% of GDP, including non-fiscal measures. Budget for 2021 strengthens containment and support measures, increasing federal government spending by 2.7% from 2020.

In 2021, the Government adopted four additional stimulus packages equivalent to 15.9% of GDP to combat the persistently high infection rate.

The largest components are financial easing measures, including a six-month moratorium on all bank loans, excluding credit card loans (RM100 billion in PRIHATIN[2]), government loan guarantees (RM50 billion in PRIHATIN) and liquidity the central bank by reducing the required reserve requirements (30 billion Malaysian ringgit in the PRIHATIN package). In addition to economic assistance, the Government has also strengthened its public health capacity to overcome the crisis.

Priority should be given to vaccination, which needs to be accelerated through an expanded partnership with the private health sector, even after the end of the emergency decree.

It is also necessary to focus on reducing income inequality. While Malaysia's social protection is rather weak, the household savings rate is low (1.4% in gross terms in 2015).

An improved social protection system will improve household income prospects and, consequently, the sustainability of private consumption.

Since the outbreak of the pandemic, the Government has taken a number of measures to ease the financial situation of households and businesses.

This included a program of a massive moratorium on loans (7.1% of GDP) for six months starting in April 2020, a scheme of state guarantees on loans and special lending mechanisms for SMEs.

The liquidity coverage ratio has been stable in the range of 140-153% since the beginning of 2020, and the total capital ratio was 18.1% in March 2021.

A high level of household debt can be a problem. Although some of the gross debt reflects the high level of home ownership in Malaysia (77% in 2019), more vulnerable low-income households need additional support, especially if the labor market recovery drags on.

The Malaysian ringgit, which has remained stable for years, fell by 6% against the US dollar between January and April 2020. As in some other emerging market countries, the central bank of Malaysia conducted direct purchases of government bonds in the amount of 0.5% of GDP in April 2020 to curb capital outflows (only 0.7% from March to December 2020).

Since then, the central bank has taken a number of measures to improve the functioning of the foreign exchange market. Resident exporters were exempted from the requirement to convert export earnings into local currency below 200,000 Malaysian ringgit per transaction. Then, in April 2021, the conversion requirement was lifted, which led to further liberalization of the foreign exchange market.

The ratio of external debt to GDP increased slightly to 68% at the end of 2020 (from 63% in 2019) due to the lower value of GDP, but private debt was 51%, of which the non-financial sector was low — at 27%.

With regard to personal income tax, in 2020 the progressiveness was increased, a new scale was introduced in the amount of more than 2 million Malaysian ringgit per year with a 30% tax rate (previously 28%). In the medium term, it is necessary to further improve the progressiveness, while increasing the efficiency of tax collection. The general structure of personal income tax can also be improved by revising its tax base, which has been narrowed due to various tax benefits and exemptions.

Among the federal taxes of Malaysia, the main sources of income are corporate income tax, personal income tax and sales tax, as well as service tax.

Corporate income tax. Companies with paid-up capital of no more than 2.5 million ringgit are taxed at a rate of 17% before taxable profit of 600,000 ringgit and 24% for income exceeding this amount. The tax rate for companies with paid-up capital of more than 2.5 million ringgit is 24%.

Income tax. Individuals are required to pay tax on all types of income, including interest and dividends. Tax rates are gradually increasing in accordance with the increase in taxable income. The lowest rate is zero (paid income 0-5 000 ringgit), and the highest is 30% (paid income over 2 million ringgit).

Countering corruption remains a priority.

Malaysia has been gradually strengthening the integrity of the public sector over the years. The Special Committee of the Cabinet of Ministers on Combating Corruption (JKKMAR) headed by the Prime Minister and its secretariat, the National Center for Governance, Integrity and Anti-Corruption (GIACC), were established to monitor anti-corruption measures enshrined in the National Anti-Corruption Directorate.

In 2019, the Parliament adopted a law on the establishment of the National Center for Combating Financial Crimes (NFCC), which will strengthen the coordination of state bodies in the fight against financial crimes and the integration of law enforcement.

The pandemic-stricken labor market requires greater social protection.

Prior to the pandemic, there had been notable progress in the Malaysian labor market in terms of its inclusiveness. The participation of women in the workforce aged 15-64 increased to 56% in 2019 from 47% in 2010. The appearance of more women in the workforce increased the overall labor force participation rate (aged 15-64) from 64% in 2010 to 69% in 2019, which helped the economy achieve high growth rates.

Another long-awaited development was that in the late 2010, low-income households acquired additional purchasing power. The minimum wage was standardized in 2018 across the country to 1100 MYR per month (273 USD), an increase of 1,000 ringgit (241 USD) in peninsular Malaysia and 920 MYR (222 USD) in East Malaysia in 2016 and increased to 1200 MYR (286 USD) in 56 districts of the city and municipal councils in 2020.

Nevertheless, the pandemic is a serious problem. The unemployment rate reached a high of 5.3% in May 2020.

Consequently, strengthening the social protection of the self-employed is crucial in order not to miss out on the benefits of past progress achieved as a result of the integration of women into the economy.

In addition to universal medical services, Malaysia has a three-tier social protection system:

The first level is an income support scheme aimed at the most vulnerable households.

The second is employment insurance, which includes an occupational injury insurance scheme provided by a Social Security Organization (SOCSO) and unemployment benefits for employees.

The third level is an established pension system, mainly for employees.

While entrepreneurship is encouraged in Malaysia, the self-employed are less covered by social protection, especially at the second and third levels of the social protection system.

As the pandemic shows, the self-employed are more affected by economic downturns. Therefore, it is extremely important to help them prepare for future retirement, since the level of relative poverty among the elderly is higher than among the youth and the working generation.

Some countries have expanded pension provision for the self-employed. For example, in Austria, some categories of contract workers, such as lecturers, artists, scientists, journalists, writers and others have been covered by social protection, including pensions, since the 1990s.

In other countries, there are special schemes for the self-employed. For example, artists' insurance in Germany is a mandatory scheme for artists and writers that provides health insurance, pensions and long-term care. The state subsidy covers 20% of contributions and 30% of service users, for example, publishers.

In Malaysia, the Government encourages voluntary contributions to the Provident Fund (EPF).[3]In 2018, the EPF established the i-saraan program, under which self-employed persons under the age of 55 who do not receive regular income can make voluntary contributions to their retirement savings in the amount of up to 60,000 Malaysian ringgit per year. Under this program, the Government provides an appropriate contribution of 15% of the total contribution or a maximum of 250 Malaysian ringgit per year until 2022. Although the fee has increased from 98,874 in 2018 to 120,738 in 2019 (Annual Report, EPF), it is still small (4% of the total number of self-employed).

In Malaysia, there are pension schemes that cover mainly employees, but are available to the self-employed and unemployed. The self-employed can voluntarily contribute up to 60,000 ringgit per year to the EPF.

A public sector pension is a defined benefit scheme funded from the general revenue of the Government. State officials are covered by this scheme, and they are paid a one-time tip and a monthly allowance (maximum 30 years).

The mandatory retirement age was gradually raised from the original 55 years in 1951 to 60 years in 2012.

Malaysia needs to reduce its carbon emissions.

A more ambitious goal is appropriate and achievable. 

Malaysia's greenhouse gas (GHG) emissions have increased, but the country's share in global emissions is small. In 2015, after the adoption of the Paris Agreement, Malaysia set a goal to reduce the intensity of greenhouse gas emissions in the equivalent of CO2 per GDP: namely, a reduction of 35% by 2030 or 45%, subject to international support.

However, Malaysia urgently needs to further strengthen its political efforts, as its absolute greenhouse gas emissions have increased and will continue to grow in line with high economic growth rates.

Recently, a number of countries have announced the goal of achieving carbon neutrality by the middle of this century, although this is a difficult task for any country. In particular, achieving net zero emissions by 2050 will require a complete transformation of energy production and use.

In Malaysia, the state oil company Petronas has committed in 2020 to achieve zero net emissions by 2050.

In addition to the constant pursuit of energy efficiency, the transformation of the energy sector into a lower-emission sector is crucial. Electricity generation is one of the main sources of carbon emissions (electricity and heat production accounted for 39% of CO2 emissions in 2016).

In order to balance its energy balance, the government aims to increase the share of renewable energy sources to an ambitious 31% by 2025 and 40% in 2035.

In addition to bioenergy derived from oil palms, Malaysia is also engaged in the further development of renewable energy sources, such as energy generation from solid household waste and small hydroelectric power plants (with a capacity of up to 30 MW). In order to promote "green" investments, including the production of electricity from various renewable energy sources, a soft loan, a green technology financing scheme was introduced in 2010, and its second distribution ended in 2020.

The benefits of forests are not limited to their economic value. In the case of Malaysia, the government's priority now is to promote green tourism

Improving solid waste management is extremely necessary.

In order to improve and standardize the quality of services regardless of the income level of local authorities, the 2007 Solid Waste Management and Public Cleaning Act was adopted for Peninsular Malaysia and the federal Territories of Putrajaya and Labuan.

According to the Law, persons who do not share their waste will be fined. However, the six states and two federal territories that pass Law 672 make up only 36% of the country's population.

In the OECD countries, the level of solid waste disposal in 2015 was 55%, of which 35% accounted for recycling and composting, and 20% for incineration with energy production.

Although waste-to-energy (WTE) technologies are receiving more attention in Malaysia, all four existing incinerators do not have energy recovery. Thus, the government has shifted the focus of its policy, considering the installation of six new energy utilization plants by 2025. In this regard, it would be possible to actively promote biogas, highly efficient combustion and collection of landfill gas with energy recovery.

The introduction of an Extended Producer Responsibility (EPR) scheme could also be a useful policy tool to reduce the total amount of solid waste by recycling recyclable materials. Malaysia is exploring the possibility of using the ROP scheme.

Conclusion.

The crisis has highlighted the need for further reforms that Malaysia needs to pursue in order to achieve more inclusive and high growth after the pandemic.

Further easing of government regulation is crucial to stimulate business dynamism and restore vigorous growth. Accelerating digitalization will be a key factor in improving the productivity of Malaysian firms in the post-pandemic era.

[1] https://www.oecd.org/publications/oecd-economic-survey-malaysia-2021-cc9499dd-en.htm

[2]The package is aimed at protecting the welfare of people, supporting businesses, including small and medium-sized enterprises.

[3]government defined contribution program