Background

Malaysia occupies the peninsula on the southern border of Thailand as well as the northern portion of Borneo, bordering Indonesia. It occupies 329,847 square kilometers of territory, of which 23.2% is agricultural land while 62% is forest. Major natural resources include tin, petroleum, timber, copper, iron ore, natural gas, and bauxite. Malaysia suffers from air pollution from industrial and vehicular emissions, water pollution from raw sewage, and deforestation (CIA, 2015). The average annual rate of deforestation is 0.54%, and per capita CO2 emissions is 7.67 metric tons. 95.7% of Malaysians have access to improved sanitation, and 99.6% have access to an improved water source (GGKP, 2014).

Malaysia has a GDP per capita of US$10,513.70, a population of 29.7 million, and a Gini Index of 46.2 (GGKP, 2014). Since the 1970s, Malaysia has transformed from a producer of raw materials into a burgeoning multi-sector economy. Nevertheless, exports remain a key economic driver, specifically electronics, oil and gas, palm oil, and rubber. This dependence on exports makes Malaysia particularly vulnerable to a sluggish global economy.  Falling oil prices have recently had a negative effect on the government’s finances, and the government is trying to reduce its dependence on Petronas, the state oil producer. This represents a substantial commitment, as 29% of government revenue comes from the oil and gas sector. Unemployment is just 2.9%, and in 2013, the government launched the Bumiputra Economic Empowerment Program to advance the economic condition of ethnic Malays (CIA, 2015).

Fiscal Profile

Despite recent decreases in public spending, growth accelerated to 5.9% in 2014 due to the recovery of exports, strong private consumption, and growing private investment. Public expenditure has declined steadily since 2013, and projected expenditure for 2015 is 22.5% of GDP. Growth in 2015 is expected to decrease slightly to 4.8%. Revenues came in higher than expected in 2014 due to strong growth and high oil and gas production, and total projected revenue for 2015 is 19.3% of GDP, of which 14.8% will come from tax revenue. Although oil prices are projected to decline further in 2015, negative economic impacts will be mitigated by lower energy costs, which should stimulate activity in the non-oil sector. Financial conditions will remain accommodative but are beginning to tighten gradually. Malaysia’s economy is sensitive to changes in international capital flows due to substantial foreign holdings of local currency assets, but this vulnerability is mitigated by a flexible exchange rate, sufficiently credible monetary policy, well-timed fiscal adjustment, and financial cushions from large official reserves and institutional savings. As of 2013, Malaysia’s nominal gross public debt was 54.7% of GDP, and external debt was an even higher 67.6% of GDP. External debt is expected to decrease to about 57% by 2019 as a result of current account surplus (IMF, 2015).

Policy and Legal Framework for Green Economy

The National Green Technology Policy aims to position clean technology as a diver to accelerate Malaysia’s economy and promote sustainable development. Its strategic priorities include strengthening institutional frameworks, providing a conducive environment for green technology development, intensifying human capital development, increasing technological research and innovation, and promoting public awareness. Additionally, Malaysia’s National Policy on Climate Change aims to harmonize and consolidate existing policies, support climate-resilient development and investment, and adopt balanced adaptation and mitigation measures to strengthen conservation. It also seeks to support intensive research and capacity building of human resources, improve collaboration and communication among stakeholders, and increase awareness and community participation to promote behavior change. Furthermore, the Tenth Malaysia Plan incorporates an “AFFIRM” Framework to facilitate a transition to a green economy though improvements in awareness, faculty, finance, infrastructure, research, and marketing (Prime Minister’s Department, 2013). Malaysia is also a key part of one of the success stories of South-South Cooperation.  For instance, the Heart of Borneo Initiative is a voluntary, transboundary collaborative effort between Malaysia, Indonesia, and Brunei Darussalam to facilitate conservation and sustainable development. It seeks to improve the welfare of those living in Borneo while also saving forests and biodiversity from degradation and destruction by using natural capital values to help define the agenda for green growth (UNEP, 2013).

Fiscal Measures for Green Economy

The Tenth Malaysia Plan includes a Feed-in Tariff (FiT) for renewable energy. It applies to biogas, biomass, solar photovoltaics, and small hydropower. (SEDA, 2015) By guaranteeing grid access and setting a favorable per unit price, the government hopes to reinforce renewable energy generation as a viable long-term investment option for industries as well as individual households. The FiT rate will vary depending on the type of energy produced, the installed capacity, and date of installation. The Tenth Malaysia Plan also includes a Green Technology Financing Scheme to incentivize both the supply and demand of green technology. Through both commercial banks and development institutions, it finances investments in the production and utilization of green technology for legally registered Malaysian-owned companies. The total budget for this scheme is approximately US$400 million and includes credit guarantees of 60% for companies developing or using green technology. (Prime Minister’s Department, 2013). Additionally, a broad goods and services tax (GST) has recently been introduced and is expected to reduce Malaysia’s dependence on volatile oil and gas revenues by expanding the base of its fiscal system. The GST rate of 6% is the lowest in the region; most Asian countries have a GST of 10%.There is room for expansion of the GST to further reduce dependence on hydrocarbons by raising the tax rate on fuels and accounting for the carbon content of consumer products. (IMF, 2015)

Fossil Fuel Subsidy Reform

In 2009, fossil-fuel subsidies in Malaysia amounted to US$6.2 billion, or approximately 3% of GDP. In response to concerns, the Prime Minister formed a Subsidy Rationalization Lab. This included a public survey, which revealed that 67.5% of respondents believed that subsidies should be reduced over a period of three to five years. Despite an increase to US$7.2 billion in 2011, fossil fuel subsidy rationalization has made progress in recent years (IISD, 2012). Although successful in some regards, the reforms have been subject to a number of criticisms. These include being overly ad hoc in nature, not adequately preparing responses to negative impacts in advance, lacking clarity and consistency, and not sufficiently communicating why reform was a beneficial structural change (IISD, 2014). In 2013 and 2014, prices were raised by approximately 10% for diesel and RON95 petrol, and these are now set monthly to track international oil prices. In December 2014, subsidies for diesel and RON95 were completely removed. This removal is projected to provide a savings equal to 0.9% of GDP, but this is expected to be offset by lower oil and gas revenues. If Tapis (Malaysian crude oil) prices fall below US$60, Malaysia’s budget will experience a net loss (IMF, 2015).

Works Cited

CIA. (2015). The World Factbook: Malaysia. Retrieved from: https://www.cia.gov/library/publications/the-world-factbook/geos/my.html

GGKP. (2014). Malaysia. Retrieved from: http://www.greengrowthknowledge.org/country/malaysia

IMF. (2015). 2014 Article IV Consultation: Malaysia. Retrieved from: http://www.imf.org/external/pubs/ft/scr/2015/cr1558.pdf

IISD. (2012). A Forum for South East Asian Policy-makers – Fossil-Fuel Subsidy Reform: Challenges and Opportunities. Global Subsidies Initiative.  Retrieved from: https://www.iisd.org/gsi/sites/default/files/ffs_gsibali_meetingreport.pdf

IISD. (2014). Lessons Learned: Malaysia’s 2013 Fuel Subsidy Reform. Global Subsidies Initiative. Retrieved from: https://www.iisd.org/gsi/sites/default/files/ffs_malaysia_lessonslearned.pdf

Prime Minister’s Department, Malaysia. (2013). Initiatives Towards Green Economy in Malaysia. Retrieved from: http://www.switch-asia.eu/fileadmin/user_upload/RPSC/policy-dialogue/ap-meeting-10yfp/14._Session_6_-_Green_Economy_Plan_in_Malaysia__Muhamad_Sidek_.pdf

SEDA. (2015). Overview of the FiT System in Malaysia. Sustainable Energy Development Authority. Retrieved from: http://seda.gov.my/?omaneg=00010100000001010101000100001000000000000000000000&s=6

UNEP. (2013). Building Inclusive Green Economies: Success Stories from South-South Cooperation. Retrieved from: http://www.unep.org/greeneconomy/Portals/88/documents/UNEP_SSC_Success_Stories_lowRes.pdf