OECD Urges Malaysia to Undertake Reforms to Sustain Economic Growth
The Organisation for Economic Co-operation and Development (OECD) has urged Malaysia to seize the momentum for a new wave of reforms to sustain strong economic growth and strengthen fiscal sustainability and productivity. While Malaysia’s economic progress in recent years has driven per capita income growth faster than many countries in the region, the OECD argues that reforms are still needed to maintain this trajectory.
To sustain high and resilient growth, Malaysia can optimise public spending and revenue, improve productivity through more pro-competition regulation, and enhance learning outcomes at all levels of the education system, said OECD Country Studies Director Luiz de Mello during the presentation of the OECD Economic Survey of Malaysia in Putrajaya on Tuesday.
The OECD forecasts Malaysia’s gross domestic product (GDP) growth will slow to 4.9% in 2026, down from 5.2% in 2025, before recovering to 5% in 2027. However, the outlook is overshadowed by risks including rising global trade tensions, commodity price spikes, and weakening global demand. Inflation is projected to rise to 2.1% in 2026, from 1.4% in 2025, and to 2.3% in 2027. The Paris-based organisation noted that strengthening fiscal sustainability is necessary to help control public debt.
Redirecting blanket energy subsidies into more targeted direct assistance would make the use of the national budget more efficient, the OECD stated. It also assessed that tax reform, including the reintroduction of a broad-based consumption tax and the expansion of the personal income tax base, could boost state revenue. The report further recommended expanding means-tested social pension programmes to strengthen social protection amid an ageing population trend.
On the productivity front, the OECD encouraged Malaysia to ease various market entry barriers, including foreign ownership restrictions and requirements for cross-border digital services. Such steps, it argued, would strengthen Malaysia’s position in the global supply chain while promoting knowledge transfer and innovation in the digital economy sector.
The OECD also suggested that business competition would be healthier if the government created a more level playing field between state-owned enterprises and private companies. Furthermore, the gradual removal of price control policies, replaced by more targeted assistance, was deemed capable of improving economic efficiency.
In the education sector, the OECD recommended comprehensive reforms from early childhood education to tertiary level. It assessed that free and compulsory preschool for children aged three to four could serve as a foundation for improving human capital quality, while performance-based incentives for teachers and greater school autonomy were believed to improve the quality of primary and secondary education. The OECD also noted that aligning higher education curricula with labour market needs is crucial to reducing workforce skills mismatches.
The OECD also highlighted the climate change challenges facing Malaysia, including the increasing frequency and intensity of floods. According to the report, an integrated climate adaptation strategy is essential, including strengthening climate risk data, expanding disaster insurance protection, and shifting away from fossil fuel subsidies. The implementation of carbon pricing and accelerating investment in renewable energy would strengthen economic resilience while helping to curb emissions.