Amidst an environment of rising debt and economic challenges, the government has introduced several initiatives to give the Malaysian economy a much-needed boost.
Some, like fuel subsidy rationalisation, will save the government billions of ringgit while others, like ensuring fiscal responsibility and stamping out corruption, will put Malaysia on a firmer financial footing.
However, even as these measures have won plaudits from global institutions such as the International Monetary Fund (IMF) and the World Bank, challenges remain, according to Bank Negara Malaysia (BNM).
As BNM governor Abdul Rasheed Ghaffour stated, external factors such as rising global interest rates could influence the government’s borrowing cost.
“This may make debt refinancing relatively costly. Higher debt servicing costs can have a negative impact on fiscal sustainability,” he pointed out.
The way to go
Nonetheless, the country seems to be moving in the right direction.
For instance, newly introduced policies such as the move for wider disclosures on the country’s debt burden have led to a notable improvement in key macroeconomic indicators.
Prior to 2018, such disclosures were limited to direct government borrowings, such as Malaysian government securities (MGS) and other direct papers.
When the Pakatan Harapan (PH) government took over that year, it expanded the definition of disclosure to include off-balance sheet financing, such as government-guaranteed borrowings, offering a more transparent picture of the country’s total financial commitments.
As a result, there was better scrutiny and more informed policy decisions.
The decision to set up a special task force to address financial irregularities and strengthen fiscal management, announced by Prime Minister Anwar Ibrahim on June 3, is yet another fiscal reform that has received positive feedback.
Strategic moves
Malaysia’s current financial policies focus on rebuilding fiscal buffers in a two-step strategy.
The first is to “raise the ceiling” through economic growth and investment, followed by the second step which is to “raise the floor” by ensuring social protection and improved quality of life while preserving macroeconomic and financial stability.
This strategic approach is clear in several key policies. For instance, the enactment of the Public Finance and Fiscal Responsibility Act (PFFRA) in 2023 was a landmark legislative measure to strengthen fiscal management and instill greater accountability and transparency in public finances.
As a result, the nation’s debt level has seen a significant drop.
The overall fiscal deficit declined from 5.5% of GDP in 2022 to 5.0% in 2023, further improving to 4.1% in 2024, exceeding the finance ministry’s initial target of 4.3%.
This progress is a direct result of ongoing efforts to optimise public spending and broaden revenue sources, demonstrating a strong commitment to prudent financial management.
A crucial aspect of this fiscal recalibration is the targeted rationalisation of subsidies. Most notable is the diesel subsidy rationalisation that was implemented in Peninsular Malaysia on June 10, 2024. Billions of ringgit saved under this approach is expected to be redirected to welfare programmes.
Programmes like Budi Madani provide targeted financial assistance to mitigate any adverse economic impact on vulnerable groups.
Lower borrowings
These moves have also led to a reduction in new government borrowings. For instance, the government took new loans of only RM75 billion in 2024, down from RM93 billion in 2023 and RM100 billion in 2022.
The recent increase in debt level can be attributed to “debt inertia”, a legacy of rollovers and restructuring of existing obligations rather than new borrowings.
The government hopes to reduce the budget deficit to GDP ratio to 3% or lower within the next decade, a gradual medium-term reduction designed to ensure sufficient investment in infrastructure and to support economic growth.
The economy on the mend
Apart from reduced debts, there already are other signs of economic recovery in Malaysia. For instance, the country’s GDP growth rose from 3.6% in 2023 to 5.1% in 2024, exceeding earlier official projections.
Meanwhile inflation has moderated, from 2.5% in 2023 to 1.8% in 2024. The IMF has noted that inflation has been around 2% since November 2023.
In 2024, net foreign direct investment (FDI) received amounted to RM47.4 billion, up from RM40.4 billion the year before. This, together with a RM25 billion investment pledge from government-linked investment companies (GLICs), is a reflection of investor confidence in the country’s economic outlook.
Overall, labour market conditions have been consistently strong, with the unemployment rate hovering at a low of 3.2% in the third quarter of 2024. In fact, it hit 3.1% in December, its lowest in nearly a decade.
The increase in the minimum wage to RM1,700 per month from Feb 1, 2025 and a review of the public service remuneration system (SSPA) for civil servants are concrete steps to enhance the quality of life and income for ordinary Malaysians while ensuring overall economic growth and investment.
Wage increases will result in higher consumer spending, further stimulating economic expansion.
Efforts to combat corruption, including the establishment of an accounting fraud task force, are also crucial for long-term economic integrity and investor confidence.
Malaysia’s economic recovery is still a work in progress — driven by reform, shaped by restraint, and tested by global forces.
Early gains in debt reduction, investment inflows, and wage reform offer cautious optimism. But sustaining this momentum will require consistency, transparency, and the political will to stay the course.
The views expressed are those of the writer and do not necessarily reflect those of FMT.