World Bank says Malaysia faces ‘year of economic restraint’ in 2026.
- MEIF
- Oct 8
- 2 min read
KUALA LUMPUR, October 2025 — Malaysia’s development expenditure is projected to decline to 4.1% of GDP in 2025, down from 4.4% last year, signaling a fiscal tightening trend that could constrain long-term growth, according to the World Bank.
World Bank Lead Economist for Malaysia Dr. Apurva Sanghi noted that average annual development spending under the 13th Malaysia Plan (13MP) is expected to fall to 3.3% of GDP, compared to 4.4% under the previous plan.
While acknowledging the need for fiscal consolidation, Dr. Apurva cautioned that excessive cuts to development spending could limit Malaysia’s capacity for infrastructure, education, and innovation investments crucial to sustaining growth.
He highlighted Malaysia’s debt-to-GDP ratio at 64%, with interest payments consuming RM16 of every RM100 in revenue, up sharply from a decade ago. Rising debt servicing costs, he said, are crowding out space for productive spending.
The World Bank projects Malaysia’s GDP growth to remain steady at 4.1% in 2026, with slower momentum driven by flat exports, moderating domestic demand, and global economic headwinds.
Dr. Apurva also addressed recent US-Malaysia tariff developments, noting tariffs on Malaysian exports were reduced from 24% to 19%. However, Malaysia remains vulnerable, particularly in the electrical and electronics (E&E) sector, which accounts for 55% of exports to the US.
He warned that structural challenges — such as low R&D investment, weak innovation, and declining share in advanced semiconductor segments — continue to limit Malaysia’s ability to capture higher value in global supply chains.
“Malaysia must protect and prioritise development investments that yield long-term returns,” he said. “Boosting innovation and R&D is critical for sustaining competitiveness.”
The World Bank’s findings were presented in its report, “From Bytes to Benefits: Digital Transformation as a Catalyst for Public Sector Productivity.”
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