MALAYSIA ECONOMIC MONITOR APRIL 2024 Bending Bamboo Shoots: Strengthening Foundational Skills CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY MALAYSIA ECONOMIC MONITOR APRIL 2024 Bending Bamboo Shoots: Strengthening Foundational Skills © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Attribution: Please cite the work as follows: World Bank (2024) “Bending Bamboo Shoots: Strengthening Foundational Skills” Malaysia Economic Monitor (April), Washington, DC: The World Bank. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover image: bigstockphoto.com Credit for non-WB images: istockphoto.com / unsplash.com Cover design and layout: Kane Chong Sdn Bhd Acknowledgements This edition of the Malaysia Economic Monitor (MEM) was co-led by Shakira Teh Sharifuddin and Chong Yew Keat, with the Special Topic prepared by Tara Beteille, Lars Sondergaard and Suet Li Liew. The broader team comprised of Apurva Sanghi, Deisigan Shammugam, Fionne Lim Jing Wen, Yohendran Nadar Arulthevan, Ririn Salwa Purnamasari, Matthew Dornan, Amanina Abdur Rahman, Alyssa Farha Jasmin, Tatiana Didier, Philbert Tiki Yong, Shahira Zaireen Johan Arief Jothi, Aruhvi Krishnasamy, Robert Palacios, Fernando Blanco, Anna Maria Jul, Paul Cahu and Khin Thet Swe. The team is grateful to Rong Qian, Toby Linden, Samer Al Samarrai, Ergys Islamaj, Gonzalo Varela and the Khazanah Research Institute for their constructive input on the document and to Ndiame Diop, Yasuhiko Matsuda, Lars Christian Moller and Christian Aedo for their overall guidance. The MEM consists of two parts. Part 1 presents a review of recent economic developments and a macroeconomic outlook. Part 2 focuses on a selected special topic that is key to Malaysia’s medium- term development prospects and to the achievement of shared prosperity. This report benefited from productive discussions with staff from the Ministry of Economy, the Ministry of Finance, the Ministry of Education, Bank Negara Malaysia, and several other government ministries and agencies, all of whom provided valuable information and useful feedback. In particular, the team would like to thank the International Cooperation Division of the Ministry of Economy, the International Division of the Ministry of Finance and the Economics Department of Bank Negara Malaysia for close collaboration with the World Bank and for the crucial support to the launch of this report. Joshua Foong and Dina Murad led external communications, and Kane Chong led the production and design of the report. Jeannette Goon provided editing assistance, while Minisha Deepu provided administrative support. The report is based on information current as of April 8, 2024. Please contact Apurva Sanghi (World Bank Lead Economist for Malaysia) at asanghi@worldbank.org, Shakira Teh Sharifuddin (MEM task team leader and World Bank Senior Economist for Malaysia) at stehsharifuddin@worldbank.org or Yew Keat Chong (MEM co-task team leader and World Bank Senior Economist for Malaysia) at ychong@worldbank.org for questions, comments, or suggestions regarding the Malaysia Economic Monitor. MALAYSIA ECONOMIC MONITOR | APRIL 2024 3 Abbreviations 12MP Twelfth Malaysia Plan FPC Fiscal Policy Committee AE Advanced Economies GDP Gross Domestic Product ASEAN Association of Southeast Asian Nations GFCF Gross Fixed Capital Formation B10 Bottom 10 Percent (of the Population) GLC Government-Linked Company B40 Bottom 40 Percent (of the Population) GLIC Government-Linked Investment Company BIS Bank for International Settlements GST Goods and Services Tax BKC Bantuan Khas COVID-19 HCI Human Capital Index BKM Bantuan Keluarga Malaysia HDI Human Development Index BMI Body Mass Index HES Household Expenditure Survey BNM Bank Negara Malaysia HIC High Income Countries BPN Bantuan Prihatin Nasional HIES/BA Household Income, Expenditure and Basic Amenities Survey BPSM Bahagian Pengurusan Sumber Manusia HiFy High-Frequency Phone Survey BSH Bantuan Sara Hidup HIS Household Income Survey CCR Common Capital Ratio HQLA High Quality Liquid Assets CEFR Common European Framework of Reference for Languages IC Integrated Circuits CEQ Commitment to Equity ICT Information and Communication Technology CET1 Common Equity Tier 1 IFRS International Financial Reporting Standards CGT Capital Gain Tax IFS International Financial Statistics CIT Corporate Income Tax IIP International Investment Position COVID-19 Coronavirus Disease 2019 ILMIA Institute of Labour Market Information and Analysis CPI Consumer Price Index ILO International Labor Organisation DB Defined Benefit IMF International Monetary Fund DC Defined Contribution IPG Teacher Education Institutes DDI Domestic Direct Investment IPO Initial Public Offering DOSM Department of Statistics Malaysia ISCED International Standard Classification of Education DSR Debt Service Ratio IT Information Technology E&E Electricals and Electronics KEMAS Jabatan Kemajuan Masyarakat EAP East Asia and Pacific KWAP Kumpulan Wang Persaraan eBR1M Bantuan Rakyat 1Malaysia LCR Liquidity Coverage Ratio ECE Early Childhood Education LDR Loan-to-Deposit Ratio ECF Equity Crowdfunding LFPR Labor Force Participation Rate ECRL East Coast Rail Link LFS Labor Force Survey EdTech Educational Technology LHS Left Hand Side EIA Energy Information Administration LMIC Lower Middle-Income Countries ELTC English Language Teaching Centre LNPT Laporan Penilaian Prestasi Tahunan EMDE Emerging Market and Developing Economies LRT Light Rail Transit EMIS Sistem Maklumat Pengurusan Pendidikan M&E Machinery and Equipment EPF Employees Provident Fund M40 Middle 40 Percent (of the Population) FBMKLCI FTSE Bursa Malaysia Kuala Lumpur Composite Index MASCO Malaysia Standard Classification of Occupations FDI Foreign Direct Investment MEM Malaysia Economic Monitor 4 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Abbreviations MENA Middle East and North Africa ProELT Professional Upskilling for English Language Teachers MFRS Malaysian Financial Reporting Standards PT3 Penilaian Tingkatan 3 MGII Malaysian Government Investment Issues PTR Pupil-Teacher Ratio MGS Malaysian Government Securities PWM Progressive Wage Model MITB Malaysian Islamic Treasury Bills Q/Q Quarter-on-Quarter MNC Multinational Corporations REER Real Effective Exchange Rate MOE Ministry of Education Malaysia RHS Right Hand Side MOF Ministry of Finance Malaysia RTS Rapid Transit System MOH Ministry of Health Malaysia SEAMEO Southeast Asia Ministers of Education MPC Monetary Policy Committee Organization MRT Mass Rapid Transit SEA-PLM Southeast Asia Primary Learning Methods MSMEs Micro, Small and Medium Sized Enterprises SMEs Small and Medium Sized Enterprises MTFF Medium-Term Fiscal Framework SPM Sijil Pelajaran Malaysia MTRS Medium-Term Revenue Strategy SSB Sugar-sweetened Beverages myBSHR Bantuan Sara Hidup Rakyat Malaysia SST Sales and Services Tax MYR Ringgit Malaysia STR Sumbangan Tunai Rahmah NCD Non-Communicable Disease SWRC Social Wellbeing Research Center NGO Non-Governmental Organization SWS Salaries and Wage Survey NPL Non-Performing Loans T20 Top 20 Percent (of the Population) OE Operating Expenditure TALIS Teaching and Learning International Survey OECD Organization for Economic Co-operation and TARL Teaching at the Right Level Development TCR Total Capital Ratio OPR Overnight Policy Rate TFP Total Factor Productivity P2P Peer-to-Peer UKM Universiti Kebangsaan Malaysia PADU Pangkalan Data Utama or Education Performance and Delivery Unit UMIC Upper Middle-Income Countries PAJSK Pentaksiran Aktiviti Jasmani, Sukan dan UNCTAD United Nations Conference on Trade and Kokurikulum Development PBD Pentaksiran Bilik Darjah UNDP United Nations Development Programme PBS Pentaksiran Berasaskan Sekolah UNESCAP United Nations Economic and Social Commission for Asia and the Pacific PFFRA Public Finance and Fiscal Responsibility Act UNESCO United Nations Educational, Scientific and PICS-3 3rd Productivity and Investment Climate Survey Cultural Organization PISA Programme for International Student Assessment UNICEF United Nations Children’s Fund PIT Personal Income Tax UPSR Ujian Penilaian Sekolah Rendah PITA Petroleum Income Tax US United States PLI Poverty Line Income USD United States Dollar PLKS Pas Lawatan Kerja Sementara WHO World Health Organization PMI Purchasing Manager’s Index WP Wilayah Persekutuan PP Pentaksiran Pusat Y/Y Year-on-Year PPI Producer Price Index PPP Public Private Partnership PPsi Pentaksiran Psikometrik MALAYSIA ECONOMIC MONITOR | APRIL 2024 5 6 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Table of Contents Acknowledgements 3 Abbreviations 4 Executive Summary 8 Global and regional developments 8 Domestic developments 9 Economic outlook 14 Policy considerations 16 Bending Bamboo Shoots: Strengthening Foundational Skills 17 PART ONE 23 Recent Economic Developments 24 Global economic conditions was subdued in 2023 but is now edging up 24 Malaysia’s economy grew at a slower pace in 2023 26 Export growth was weighed down by weaker external demand and a global technology downcycle 27 Labor market conditions have broadly returned to pre-pandemic levels 30 Access to basic amenities is widespread, but some disparities remain 38 Inflationary pressures have eased 40 The Malaysian banking sector expanded while remaining well-capitalized 43 Capital market fundraising remained strong 46 Federal government revenue collection is expected to decline in 2024 49 Federal government subsidy spending is expected to decline in 2024 50 The share of rigid expenditures are projected to rise further in 2024 50 Higher federal government debt level in 2023 55 Economic Outlook 58 Global growth is expected to slow in 2024 58 Economic growth in Malaysia is projected to pick up in 2024 59 Risks to Malaysia’s growth outlook remain tilted to the downside 60 Successful fiscal reforms will require both good policy design and effective policy communication to secure broad-based support from the Rakyat 61 PART TWO 63 Bending Bamboo Shoots: Strengthening Foundational Skills 64 Malaysia’s successful transition to a high-income economy depends upon strengthening foundational skills 64 Malaysia has been successful in improving access to primary education with equitable allocation of resources 65 Yet, learning levels are low in the aggregate and significantly worse for the lower-income group 71 What explains poor student learning levels? 74 Early childhood education isn’t equipping children adequately with school-readiness skills 74 Teacher preparedness, effort and morale in primary schools remain uneven 75 Teacher performance management is not being implemented as prescribed in policy 80 How can Malaysia do better? 82 Start early and give all children a head start 83 Introduce better and more frequent measurement of student learning and teacher performance 83 Incentivize and support better teacher performance based on evidence 86 Teacher policies should be clear, doable, and rewarding for them to succeed 88 Summary of key recommendations 90 References 92 Annex 95 MALAYSIA ECONOMIC MONITOR | APRIL 2024 7 Executive Summary Global and regional PMI rose for the fourth consecutive month to 52.1 in February, with both the manufacturing and services developments sectors firming on the back of improving demand and diminishing tightness in financial conditions. There is a modest pickup of economic activity in many emerging Global economic conditions was subdued in 2023. markets and developing economies (EMDEs), partly Global trade in goods and services was almost flat supported by spillovers from resilient growth in the US in 2023, growing by an estimated 0.2 percent—the Global trade experienced a rebound in goods, while slowest expansion outside global recessions in the trade in services continued to expand. past 50 years. Inflation has continued to decline from 2022 peaks, although it remains above target in most Countries in the East Asia and Pacific (EAP) region advanced economies. With inflation moderating, grew faster than the rest of the world in 2023, monetary tightening in advanced economies is albeit slower than in the pre-pandemic period. The slowing down, but interest rates are expected to region benefitted from the ongoing recovery in the remain elevated for some time. Thus far, headwinds tourism sector, which stimulated economic activity. On to growth have been partially offset by household and the external front, exports remained weak mainly due business spending and resilient risk appetite, most to continued deceleration in global growth. Meanwhile, notably in the US. monetary and fiscal policies in the region generally remained non-expansionary amidst the risks of Global activity is showing signs of improvement exchange rate depreciation, uncertainty about inflation since the start of 2024. The global composite and limited fiscal space. 8 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Executive Summary Domestic (E&E) segment. The services sector, on the other hand, expanded by 4.2 percent (Q3 2023: 5.0 percent) developments as tourism activity continued to recover. The number of tourist arrivals reached 20 million in 2023 (Figure ES2). The construction, mining and agriculture sectors expanded by 3.6 percent, 3.8 percent, and 1.9 percent Growth was subdued in 2023 respectively (Q3 2023: 7.2 percent; -0.1 percent; 0.9 percent). The Malaysian economy moderated further to 3.0 percent in Q4 2023 (Q3 2023: 3.3 percent), bringing FIGURE ES2 the overall growth to 3.7 percent in 2023 (2022: Tourism activity continued to recover towards the 8.7 percent). Growth for 2023 stood lower than the pre-pandemic levels government’s projection of around 4 percent as the Number of tourist arrivals to Malaysia, Million economy continued to be weighed down by slower external demand. Malaysia’s moderating growth in 30 2023 was consistent with most other regional countries, 25.9 25.8 26.1 25 with a few countries also missing official growth targets. (Figure ES1). 20 20.1 15 FIGURE ES1 Malaysia’s moderating growth in 2023 was 10.1 10 consistent with most other regional countries, with a few also missing growth targets 4.3 5 Real GDP growth, y/y, Percentage 0.1 0 10 2017 2018 2019 2020 2021 2022 2023 9 Source: DOSM, Malaysian Tourism Promotion Board 8 7 6 5 As global economic conditions remained subdued, 4 export growth continued to contract in the last two 3 quarters of 2023. Gross exports contracted by 15.2 2 and 6.9 percent in Q3 and Q4 2023 respectively, driven 1 by a sustained broad-based slowdown in external 0 demand across all products, especially in the exports of the non-E&E segment. A smaller goods surplus, Philippines China Indonesia Vietnam Malaysia Thailand Korea Singapore coupled with a higher investment income accruing to foreign investors, contributed to the narrowing of the current account surplus to 0.1 percent of GDP in Q4 2022 GDP 2023 GDP 2023 govt. growth target 2023 (Q3 2023: 2.0 percent). Malaysia’s current account Source: DOSM, Haver surplus stood at 1.2 percent of GDP in 2023 (2022: 3.1 Note: Government growth target is the lower bound of target range. percent). In Q4 2023, growth slowed down due to weaker Growth in Malaysia’s foreign direct investment external demand and was mainly driven by (FDI) position slowed to 5.4 percent in 2023 domestic demand. Private consumption continued (2022: 12.4 percent). The slowdown experienced by to expand in Q4 2023, albeit at a more moderate Malaysia is in line with the FDI trends in the ASEAN rate of 4.2 percent (Q3 2023: 4.6 percent), supported region for 2023. EAP was the main contributing region by ongoing household consumption. On the supply to FDI, with Singapore and Hong Kong contributing side, the manufacturing sector contracted while 55.7 percent and 39.2 percent of the increases in net other economic sectors expanded in Q4 2023. The FDI inflows. Meanwhile, approved domestic direct manufacturing sector contracted by 0.3 percent (Q3 investment (DDI) increased by 35.1 percent year-on- 2023: -0.1 percent), reflecting a slowdown in external year, with the services sector emerging as the key demand, particularly in the electric and electronics contributor (see Box 1 on FDI and DDI trends in 2023). MALAYSIA ECONOMIC MONITOR | APRIL 2024 9 Executive Summary Labor market conditions have broadly this is not markedly higher than the unemployment improved to pre-pandemic levels rate of citizens (Figure ES4). Official statistics show that about 83,000 migrant workers were unemployed The unemployment rate declined to 3.3 percent in in Q4 2023, reflecting a mismatch between the supply Q4 2023 (Q4 2022: 3.6 percent), similar to what and demand of these workers. Among the unemployed it was before the pandemic (Q4 2019: 3.2 percent) migrant workers are those who were admitted between (Figure ES3). The decline in the unemployment rate January and March 2023—when the moratorium on the was mainly due to the decrease in unemployment hiring of migrant workers placed during the pandemic among younger persons, as well as the downward trend was temporarily lifted. in long-term unemployment. Simultaneously, the labor force participation rate also gradually increased in the FIGURE ES4 past year to 70.1 percent in Q4 2023 (Q4 2022: 69.5 The unemployment rate of migrant workers is percent). trending higher than before the pandemic Unemployment rate of non-citizens, Percentage FIGURE ES3 6 The unemployment rate has declined to pre- pandemic levels 5 Unemployment rate, labor force participation rate, Percentage 85 6 4 80 5 3 75 4 70 2 3 65 2 1 60 55 1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 50 0 2019 2020 2021 2022 2023 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2022 2023 Non-citizens Citizens Source: DOSM Unemployment rate (RHS) Labor force participation rate Labor force participation rate - Male Labor force participation rate - Female Nevertheless, evidence to support longstanding Source: DOSM concerns about migrant workers is limited. Migrant workers are an important source of labor as they help Meanwhile, both time- and skill-related under- fill a gap in the labor economy—which arises from the employment have remained somewhat stagnant in mismatch between the composition of the labor force the past year. Time-related underemployment, which and the number of and skill level required for available is the share of workers employed for less than 30 hours jobs. Studies analyzing the relationship between per week but are willing and able to work more hours, employment of low-skilled migrant workers and wages appears to have stabilized to its pre-pandemic level. In of Malaysians show that employment of low-skilled comparison, however, skill-related underemployment, migrant workers has little impact on the wages of defined as the share of tertiary educated workers in lower-skilled Malaysians (see Box 2 on migrant workers semi-skilled or low-skilled jobs, remains elevated, in Malaysia). with a mismatch between the demand and supply of tertiary-educated workers. The absolute poverty rate remains above the pre-pandemic rate Evidence to support concerns on migrant workers is limited The government recently announced that its target of zero hardcore poverty has been reached There have been repeated concerns of unemployment in some states, but incidence of absolute poverty among migrant workers in Malaysia. At 3.6 percent in remained higher than pre-pandemic levels. Incidence Q4 2023, the unemployment rate of migrant workers is of absolute poverty in 2022 is at 6.2 percent, higher substantially higher than before the pandemic, however than the pre-pandemic level (2019: 5.6 percent). 10 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Executive Summary Furthermore, while the number of hardcore poor following upward revision in water tariffs, while core households is below 150,000, nearly 490,000 Malaysian inflation remained unchanged at 1.8 percent (January: households still live below the average national poverty 1.8 percent). line. A broader view and a more ambitious target of poverty eradication than the current national hardcore FIGURE ES6 poverty target could be helpful in addressing poverty Headline inflation in Malaysia eased in 2023, incidences in Malaysia. broadly in line with other regional countries CPI, y/y, Percentage Recent data shows that regional disparities exist 10 when it comes to access to basic needs. Based on the 2022 Basic Amenities Survey Report, 96.7 percent 8 of households reported having access to piped water, 6 while the electrification rate is almost 100 percent. In addition, at least 95 percent of households have access 4 to primary schools and secondary schools within a 2 5-kilometer radius. However, regional disparities remain (Figure ES5). About 11 percent of rural households still 0 lived more than 5 kilometers from public healthcare centers, compared to 0 percent among urban -2 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 households. Nearly 20 percent of households in Sabah and Sarawak did not have access to secondary schools within 5 kilometers, five times higher than the national Malaysia Vietnam average of 4.7 percent. Philippines Indonesia Thailand Source: DOSM and World Bank staff calculations FIGURE ES5 Access to basic amenities is impressive at the There were less extensive price increases observed national average, but regional disparities remain throughout 2023. Inflation pervasiveness, which refers Share of households having accessibility, Percentage to the extent to which inflation is spread throughout the 100 economy, declined throughout the year (Figure ES7). The share of items in the consumer price index (CPI) 90 basket that recorded monthly price increases declined 80 to 36.3 percent in Q4 2023 (Q3 2023: 40.8 percent). The lower pervasiveness shows that inflationary pressures 70 have become more contained with less extensive price 60 increases. 50 FIGURE ES7 Piped water Electricity Public healthcare Primary schools Secondary schools Inflation pervasiveness declined in 2023 Share of CPI items recording month-on-month price increase, Percentage 60 56 51.2 National Urban Rural 50 2011-2019 average: 45.6 Sabah Sarawak 42.7 40.8 Source: DOSM 40 36.3 30 Easing inflationary pressures 20 Inflationary pressures continued to ease. Headline inflation moderated to 1.6 percent in Q4 of 2023 10 (Q3 2023: 2.0 percent), broadly in line with price developments in other regional countries (Figure 0 ES6). However, in February 2024, headline inflation Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 increased to 1.8 percent compared to January 2024 (1.5 percent), driven mainly by higher inflation for utilities Source: DOSM and World Bank staff calculations MALAYSIA ECONOMIC MONITOR | APRIL 2024 11 Executive Summary With inflation easing and growth outlook ratio of 8 percent. The TCR has remained stable as moderating, the overnight policy rate (OPR) was the increase in risk-weighted assets kept pace with maintained at 3.0 percent in January and March. At the increase in total capital. The liquidity coverage this current rate, the monetary policy stance is deemed ratio remained above the regulatory minimum of 100 appropriately supportive of the economy. Meanwhile, percent, climbing to 160.9 percent as of December the ringgit remained on a depreciating trend. From 2023 (December 2022: 151.5 percent), while banks’ January 1 to April 8, 2024, the ringgit weakened by holdings of high-quality liquid assets increased by 0.7 3.4 percent against the USD. The ringgit performance percent. Banking system deposits grew by 5.6 percent. has been mainly affected by interest rate differentials, global economic developments, as well as investor Asset quality remained solid, with gross impaired sentiments. Unlike its regional peers, Malaysia’s real loans ratio decreasing by 7 basis points in December effective exchange rate (REER) has been on a declining 2023 vis-à-vis December 2022. The gross impaired trend, depreciating by 6.5 percent between January loans ratio decreased to 1.65 percent at the end of 2022 to February 2024. December 2023 and remains low compared to regional peers. In addition, the share of total loans under The banking sector remains well repayment assistance programs continued to decline. capitalized and has ample liquidity The vast majority of borrowers who exited repayment assistance programs have been able to resume and The Malaysian banking sector remained stable. sustain loan repayments. While banks have reduced The total capital ratio (TCR), at 18.5 percent as of end their provisions for impaired loans, they have substantial December 2023, is above the regulatory minimum capacity to absorb potential increases. 12 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Executive Summary The federal government is expected to FIGURE ES9 remain on its fiscal consolidation path Debt service ratio is expected to be above its administrative prudent limit in 2024 Federal government revenue as a share of GDP is Debt service charges, Percentage of total federal government revenue expected to decline in 2024 due to lower petroleum- 17 related investment income (Figure ES8). Federal 16.2 government revenue increased to 17.3 percent of GDP 16 in 2023 (2022: 16.4 percent) and is projected to decline Administrative limit 15% of total revenue 15 to 15.6 percent of GDP in 2024. The lower revenue in 14.7 2024 is driven by lower investment income with lower 14 dividends from Petronas. 13 12 FIGURE ES8 Federal government revenue is expected to 11 decline in 2024 10 Federal government revenue, Percentage of GDP 9 25 8 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023e 2024f 20 17.3 15.6 Source: World Bank staff calculations based on OECD data 15 4.7 3.2 10 grow to RM 120 billion in 2040 (compounded annual growth rate: 8.6 percent), more than tripling the 2024 5 budgeted amount. The rising cost of pensions presents pressing concerns about the medium- and long-term fiscal implications attributed to the current civil service 0 pension plan. The proposed pension scheme could 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023e 2024f reduce pension-related spending in the long term and incur savings that will improve fiscal sustainability Tax revenue Non-tax revenue Total revenue (See Box 3 on reforming civil service pensions). The government, however, has yet to announce the timeline Source: World Bank staff calculations based on MOF data and the design of the defined contribution scheme for newly hired civil servants. For 2024, the government forecasts that subsidy spending will decline, and the share of rigid The Public Finance and Fiscal Responsibility Act expenditures will continue to increase. Subsidies (PFFRA) which was announced prior to the tabling and social assistance spending are expected to decline of Budget 2024 last year introduced several to 2.7 percent of GDP in 2024 from 3.9 percent in 2023, fiscal rules. The tabling and enactment of the PFFRA mainly from lower fuel subsidies. Rigid spending, which underscores the government’s commitment to improve includes payments related to emoluments, pensions, transparency and governance of its fiscal framework. and debt service charges, is projected to increase to It requires the government to publish public finance 58.6 percent of total operating expenditures in 2024 documents and adhere to several fiscal rules. Of (2023: 55.3 percent). Of note, the debt service ratio note, the mandatory publication of tax expenditure is projected to increase to 16.2 percent of federal statements is a key step towards improving overall government revenue in 2024 (2023: 14.7 percent), higher efficiency and effectiveness of the tax system. However, than the 15.0 percent administrative limit practiced by four aspects of the PFFRA could be strengthened, the government (Figure ES9). namely: (i) harmonizing compliance periods for various rules; (ii) including well-defined escape clauses; (iii) The proposed pension scheme for newly hired civil merging the rules on debt and financial guarantees servants could help manage the increase in rigid into a single rule; and (iv) establishing an independent expenditure in the future. Without any reform in the fiscal council to oversee compliance (see Box 4 on pension system, spending on pensions is estimated to understanding the PFFRA). MALAYSIA ECONOMIC MONITOR | APRIL 2024 13 Executive Summary Economic outlook (2023: 3.9 percent). This is mainly attributed to annual salary increments for civil servants and new hires for critical positions, particularly in health and education Global growth is expected to slow sectors. further in 2024 FIGURE ES10 Global growth is set to slow to 2.4 percent in 2024 Malaysia’s GDP growth is projected to pick up to (2023: 2.6 percent), marking the third consecutive 4.3 percent in 2024 year of deceleration. Growth in advanced economies Real GDP growth, y/y, Percentage is projected to bottom out at 1.2 percent in 2024 (2023: 1.5 percent), as growth in the US moderates, while euro 8.7 area growth increases marginally as lower inflation raises 8 real wages. Meanwhile, growth in EMDEs is projected 5.8 to be broadly unchanged at 3.9 percent for 2024 (2023: 6 4.8 4.0 percent). Global trade is projected to pick up to 2.3 4.4 4.4 4.3 4 3.7 percent in 2024 (2023: 0.2 percent), mirroring projected 3.3 growth in global output. 2 In the EAP region, growth is projected to slow to 0 4.5 percent in 2024 (2023: 5.1 percent), mainly reflecting a further deceleration in economic -2 activity in China. Growth in China is expected to -4 decline further to 4.5 percent in 2024 (2023: 5.2 percent) as the post-pandemic rebound wanes. In the rest of the -6 -5.5 region, growth is projected to pick up to 4.6 percent 2016 2017 2018 2019 2020 2021 2022 2023 2024f in 2024 (2023: 4.4 percent), underpinned by domestic demand and increased government spending in some Source: World Bank staff calculations based on DOSM data economies. In line with the likely recovery of global goods trade, regional trade growth is anticipated to increase modestly in the near term, offsetting the Gross fixed capital formation (GFCF) is projected impact of the slowdown in China. to grow at a sustained pace of 5.1 percent in 2024 (2023: 5.5 percent). Business investment will continue to be supported by ongoing multiyear investments and the realization of the recently approved investments Malaysia’s exports will in the manufacturing and services sectors. Capital spending by the government will continue to be benefit from a partial channeled towards upgrading public infrastructure recovery of global in the transportation, health, and education sectors. Meanwhile, investment activity by public corporations demand for goods will be supported by the ongoing strategic infrastructure projects such as the East Coast Rail Link (ECRL) and the Sabah-Sarawak Pan-Borneo Highway. Malaysia’s economic growth is On the external front, Malaysia’s exports will expected to pick up in 2024 benefit from a partial recovery of global demand for goods. Following a contraction in 2023, Malaysia’s Malaysia’s economy is projected to expand at a export growth is projected to increase modestly at 4.8 higher rate of 4.3 percent in 2024 (2023: 3.7 percent this year (2023: -7.9 percent), benefitting from percent) (Figure ES10). Private consumption is a modest pickup in global activity and base effects. expected to see a modest increase in growth to 5.2 Meanwhile, the services trade will be supported by the percent this year (2023: 4.7 percent), supported by continuing rise in international tourist arrivals from the continued improvements in labor market conditions surrounding region, including China. Malaysia’s imports and wage growth, as well as household income support are forecasted to expand at 5.3 percent this year (2023: from the government, including the Sumbangan -7.6 percent), mirroring the projected recovery of goods Tunai Rahmah (STR) cash aid. Public consumption is exports given the high share of intermediate input in forecasted to grow at a rate of 2.8 percent this year Malaysia’s imports. 14 MALAYSIA ECONOMIC MONITOR | APRIL 2024 MALAYSIA ECONOMIC MONITOR | APRIL 2024 15 Executive Summary Headline inflation is expected to remain at around While optimizing public spending can free 2.5 percent this year (2023: 2.5 percent), as global up budgetary resources, enhancing revenue commodity prices moderate. Underlying inflation, as mobilization remains vital to restore fiscal space measured by core inflation, will also likely trend lower and meet future fiscal needs. Malaysia’s ability to this year amid stabilizing cost and demand conditions. sustainably finance its long-term inclusive growth is These forecasts assume that the ceiling on retail fuel constrained by its relatively low tax capacity. Despite prices and price control measures on selected food recent tax reforms, projected revenue collection items will remain in place throughout the forecast remains modest. Further revenue mobilization efforts period. could focus on enhancing general consumption tax, broadening the bases of personal income tax and Growth will continue to face considerable downside capital gains tax, streamlining corporate tax incentives, risks. On the external front, among the main downside and strengthening tax administration. A forward- risks to the global growth outlook are heightened looking Medium-Term Revenue Strategy (MTRS) will geopolitical tensions including an escalation of the provide the government with greater clarity on its recent conflict in the Middle East, financial stress structural fiscal trends and allow for better planning to related to still-high real interest rates and elevated ensure adequate, well-timed and well-sequenced tax debt and weaker-than-expected growth in China. policy and administration reforms. The materialization of any of these risks could have considerable adverse spillovers to Malaysia through its global trade and financial linkages. A forward-looking Domestically, the key downside risks relate to Medium-Term Revenue uncertainties over the strength of household consumption. A policy-induced upside shock to Strategy will provide the inflation, weaker real disposable income growth and government with greater lagged effects of the post-pandemic monetary policy clarity on its structural nominalization could weigh more on the strength of domestic demand than is currently assumed. On the fiscal trends and allow for upside, there is a possibility that economic activity better planning to ensure in the US and some major economies could be more adequate, well-timed resilient than anticipated. Additionally, the continued resilience of domestic private investment and tourism- and well-sequenced tax related activity could also help bolster growth. policy and administration reforms Policy Over the medium-term, the government continues to focus on improving the rakyat’s standard of living, considerations as well as ensuring access to education, healthcare, and basic infrastructure. Malaysia’s current relatively high economic inequality suggests that the country still Successful fiscal reforms will require both good faces challenges in ensuring that proceeds of economic policy design and effective policy communication development are distributed more evenly. In addition, to secure broad-based support from the Rakyat. findings from the Basic Amenities Survey Report Proactive communication of expenditure rationalization suggest that while most Malaysians enjoy a high level initiatives, particularly in the context of subsidy reform, of access to fundamental needs, regional gaps exist, is essential. The implementation of targeted subsidies particularly in access to healthcare and education. can significantly improve expenditure efficiency and Improvements could be made to enhance spending lead to much-needed fiscal savings in Malaysia. Early efficiency and the quality of service delivery in these and clear communication of the subsidy reform plan two sectors (see Part 2, Bending Bamboo Shoots: is key to managing public expectations. Moreover, a Strengthening Foundational Skills). firm commitment to redirect savings to targeted social spending, such as increased cash transfers to targeted households, can help to gain broader support for the reform. 16 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Executive Summary Bending plan with solid principles, creation of a delivery unit to support implementation, stable pro-poor funding Bamboo Shoots: (Figure ES12), and strong political support. Strengthening To improve its human Foundational Skills capital index, Malaysia will need to improve its educational outcomes, With Malaysia aspiring to become a high-income beginning with economy, it will need to prioritize improving human foundational skills capital outcomes to match those of high-income countries. Malaysia’s human capital index at 0.61 is significantly below that of lower-income countries such Despite these successes, many children, particularly as Vietnam (0.69) as well as aspirational peers such as those from disadvantaged backgrounds, struggle Singapore (0.88). To improve its human capital index, with learning outcomes. The problem starts early, Malaysia will need to improve its educational outcomes, with a significant portion of children lacking school- beginning with foundational skills. Since learning is readiness skills, leading to challenges in reading, cumulative, strong foundational skills will give Malaysia writing, and mathematics throughout their schooling. the advanced skills it needs to sustain growth and While most children entering primary school attended transition into high-income status. early childhood centers and perform well on school- readiness indicators, approximately 24 percent still Malaysia has achieved near universal primary lack school-readiness skills. Most of these children education with equitable resources. In Malaysia, come from the lower-income quintiles (Figure ES13). students in the poorest quintile (Q1) and richest Since learning is cumulative, weak foundational skills in quintile (Q5) have very similar experiences in terms of early life leads to low skills in later life. By the end of mathematics practice, teacher effort, and frequency Grade 5, 42 percent of students cannot read a grade- of mathematics and language lessons (Figure ES11). appropriate paragraph with comprehension. By the Malaysia’s success with universalizing primary education age of 15, Malaysian students lag aspirational peers equitably can be attributed to factors such as the in reading, mathematics, and science as measured by expansion of preschool education, having a strategic international assessments (Figure ES14). FIGURE ES11 FIGURE ES12 Distribution of resources and learning experience Public spending is pro-poor at the primary level in in Malaysia is equitable Malaysia Gap between Q5 vs Q1 if statistically signi cant Per student public spending on primary education and state’s absolute poverty level 0.5 10,000 0.4 9,000 0.3 Sarawak 0.2 8,000 Perak Perlis Sabah Pahang Kelantan 0.1 Terengganu Melaka Kedah 7,000 Negeri 0 WP Labuan Sembilan -0.1 Pulau Johor 6,000 Pinang -0.2 WP Kuala Lumpur Math practices Teacher absence Teacher tardiness Math lesson every day Lang. lesson every day Both textbooks Proper toilets 5,000 Selangor WP Putrajaya 4,000 0 5 10 15 20 25 Cambodia Lao PDR Myanmar Malaysia Philippines Vietnam Absolute poverty (%), 2019 Source: SEA-PLM 2019 Source: World Bank staff calculations from MOE data MALAYSIA ECONOMIC MONITOR | APRIL 2024 17 Executive Summary FIGURE ES13 on these different trajectories, without sacrificing the Students from the poorest quintile are far less learning of other students in the classroom. Inclusive likely to perform well on school readiness and special needs education helps teachers meet the Share of children unable to perform early language and mathematical tasks specific needs of certain students effectively. While prior to primary education, Percentage 40 Malaysia has training programs in these areas, they do not reach many teachers and their effectiveness has 35 not been evaluated. In contrast, in Vietnam, which is a 30 global leader in student performance, a much higher 25 percentage of students are taught by teachers who 20 have been trained in these areas. Another concerning finding is the unexpectedly high teacher absence rates 15 in Malaysia reported by Grade 5 students (Figure ES16). 10 5 FIGURE ES15 0 Q1 (poorest) Q2 Q3 Q4 Q5 (richest) There are weaknesses in training, particularly in differentiated instruction and special needs Source: SEA-PLM 2019 education content Share of Grade 5 children, Percentage FIGURE ES14 100 Malaysian students lag behind aspirational peers in reading, mathematics, and science as measured 80 by international assessments 60 PISA score, Score points 40 525 Reading Mathematics Science 20 500 0 Classroom management Student assessment ICT General teaching methods/pedagogy Inclusive education Differentiated instruction 475 450 440 438 421 422 425 414 415 420 416 409 400 404 Malaysia Vietnam 398 Source: SEA-PLM 2019 388 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2006 2008 2010 2012 2014 2016 2018 2020 2022 Mean performance Best- tting trend OECD Average FIGURE ES16 (23 countries) Unexpectedly high teacher absence rates in Malaysia reported by Grade 5 students Source: OECD 2023 and PISA 2022 Share of Grade 5 students who report that their teachers are often or sometimes absent, Percentage 40 Malaysia has made considerable efforts to address 35 these challenges, though gaps still exist. Various 30 programs such as the Reading Aid Programme and the Primary School Literacy and Numeracy Program have 25 been implemented by the Ministry of Education (MOE) 20 to alleviate the issue of learning poverty. The teacher 15 strategy outlined in the Malaysia Education Blueprint 10 2013-2025 also aligns with global good practices, but there are important gaps in teacher training, 5 particularly in differentiated instruction and special 0 needs education (Figure ES15). In any given classroom, Malaysia Vietnam children are at different levels of learning or have Often Sometimes different learning trajectories. Training in differentiated instruction allows teachers to meet the needs of learners Source: SEA-PLM 2019 18 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Executive Summary Malaysia’s education system is Teachers play a crucial role in assessing student already on solid ground, but given the learning, interpreting curricula, and adapting their country’s economic ambitions, there is teaching methods accordingly. However, policymakers room for improvement frequently disregard teachers’ perspectives and fail to consider the practical challenges they face. For To improve, Malaysia should focus on several areas: instance, teacher professional development often lacks sufficient in-classroom practice and feedback. Similarly, Firstly, start early and give all children a head start. curriculum reforms often add new material without Malaysia has made noteworthy progress in expanding removing existing content, burdening teachers with preschool education, but there is room to reach the last more material to cover in the same amount of time. mile. Malaysia will need to improve the accessibility, equity, and quality of preschool education. This includes ensuring free and compulsory preschool education, conducting mapping exercises to identify Malaysia has made enrollment gaps, and providing financial aid to parents and operators. Improvements in teacher qualifications, noteworthy progress teacher professional development, quality assurance in expanding preschool systems, and curriculum delivery are fundamental. Effective governance, financing, and stakeholder education, but it cooperation will be essential for implementing these will need to improve measures and achieving preschool education goals. the accessibility, Secondly, have better and more frequent equity, and quality of measurements of student learning and teacher performance. To improve, Malaysia should preschool education rigorously measure learning outcomes and continue to benchmark them to international standards. The School-Based Assessment or Pentaksiran Berasaskan Addressing the what, how and why barriers are key Sekolah (PBS) was introduced more than a decade ago, to effective implementation of policies; teachers but its effectiveness in measuring learning outcomes need to know what is expected, how they can should be evaluated and strengthened. As Malaysia change and why they should. To improve early-grade continues improving PBS, it is also important that it reading outcomes, for instance, teachers require clear continues to participate in international tests of student expectations and effective lesson plans. If lesson plans learning—aligning local test instruments and grading are unclear or difficult to implement, teachers are less with international ones. Similarly, measuring teacher likely to follow them. Even if teachers understand how performance objectively is essential. Improving teacher to implement new practices, they need motivation and effectiveness starts with identifying their capacity, support to sustain these changes in their teaching. followed by strengthening the teacher appraisal Overcoming these “how” and “why” barriers is system. Significant reforms and reorientation in this essential for successful policy implementation and area are needed. For appraisals to be useful, there long-term improvement in teaching practices and must be robust procedures, investment of time and student outcomes. knowledge, and linkage to student learning. Thirdly, support and incentivize improvement in teacher performance. Effective teacher training programs emphasize content knowledge, practice with colleagues, follow-up support, and career incentives. Mentoring, coaching, structured lesson plans, targeted instruction, educational technology, and the dual teacher model are potential tools for supporting teachers. To improve the success of teacher policies, it is crucial to integrate teachers’ experiences into their design and implementation. The success of these policies hinges on teachers making changes that enhance the teaching-learning experience for students. MALAYSIA ECONOMIC MONITOR | APRIL 2024 19 Recent trends in Malaysia’s economy Growth in Q4 2023 continued to be Export growth contracted for the last three supported by domestic demand quarters of 2023 Contribution to real GDP growth and real GDP growth, y/y, Percentage Contribution to export growth, y/y, Percentage (4-quarter moving average) 20 60 15 40 10 5 20 0 0 -5 -10 -20 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2015 Q3-2015 Q1-2016 Q3-2016 Q1-2017 Q3-2017 Q1-2018 Q3-2018 Q1-2019 Q3-2019 Q1-2020 Q3-2020 Q1-2021 Q3-2021 Q1-2022 Q3-2022 Q1-2023 Q3-2023 Private Consumption Public Consumption E&E - Semiconductors E&E - Non-semiconductors GFCF Change in Inventory Non E&E Commodities Net Exports Real GDP growth Exports, y/y Labor market conditions have improved to Lower headline in ation was primarily due to pre-pandemic levels lower price increases in food Unemployment rate, labor force participation rate, Percentage Contribution to CPI, y/y, Percentage 85 6 6 80 5 4 75 4 70 3 2 65 2 60 0 55 1 -2 50 0 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 01/2024 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2022 2023 Unemployment rate (RHS) Others Headline in ation Labor force participation rate Transport Core in ation Labor force participation rate - Male Housing, water, electricity, gas Labor force participation rate - Female Food and non-alcoholic beverages Global growth is projected to slow to 2.4 Malaysia’s economic growth is projected to percent in 2024 pick up to 4.3 percent in 2024 Real GDP, y/y, Percentage Real GDP, y/y, Percentage 5 8.7 8 4 6 3.7 4.3 4 3 2 0 2 -2 1 -4 -6 0 -8 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f World Advanced Emerging Market Economies and Developing Economies Private Consumption Public Consumption Latest Estimates (January 2024) GFCF Change in Inventory Previous Estimates (June 2023) Net Exports Real GDP,y/y 20 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Bending Bamboo Shoots: Strengthening Foundational Skills At 99.5 percent, primary education is nearly Public spending is pro-poor at the primary universal in Malaysia level in Malaysia Total net enrollment rates in Malaysia by gender at primary level, Per student public spending on primary education and state’s absolute Percentage poverty level, GDP per capita 100 10,000 9,000 98 Sarawak 8,000 Perak Perlis Sabah 96 Pahang Kelantan Terengganu Melaka Kedah 7,000 Negeri WP Labuan Sembilan 94 Pulau Johor 6,000 Pinang 92 WP Kuala Lumpur 5,000 Selangor WP Putrajaya 90 4,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 5 10 15 20 25 Female Male Absolute poverty (%), 2019 Students from the poorest quintile are far Malaysian students lag behind aspirational less likely to perform well on school peers in reading, mathematics, and science readiness as measured by international assessments Share of children unable to perform early language and mathematical tasks PISA score, Score points prior to primary education, Percentage 40 525 Reading Mathematics Science 35 500 30 475 25 450 440 20 438 421 422 425 15 414 415 420 416 409 10 400 404 398 388 5 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2006 2008 2010 2012 2014 2016 2018 2020 2022 0 Mean performance Best- tting trend OECD Average Q1 (poorest) Q2 Q3 Q4 Q5 (richest) (23 countries) There are weaknesses in training, particularly Nearly 40 percent of Grade 5 students in differentiated instruction and special reported that their teachers are sometimes needs education content or often absent Share of Grade 5 children, Percentage Share of Grade 5 students who report that their teachers are often or sometimes absent, Percentage 100 40 80 35 60 30 40 25 20 20 0 15 Classroom management Student assessment ICT General teaching methods/pedagogy Inclusive education Differentiated instruction 10 5 0 Malaysia Vietnam Malaysia Vietnam Often Sometimes MALAYSIA ECONOMIC MONITOR | APRIL 2024 21 22 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE Recent Economic Developments and Outlook MALAYSIA ECONOMIC MONITOR | APRIL 2024 23 PART ONE - Recent Economic Developments and Outlook Recent Economic Developments Global economic conditions was subdued in 2023 but is now edging up Global growth is estimated to have weakened After another year of deceleration in 2023, global in 2023 to 2.6 percent (2022: 3.0 percent) as activity is showing signs of improvement since the economic conditions remain soft (Figure 1). start of 2024. The global composite PMI rose for the Although the 2023 estimation is 0.5 percentage points fourth consecutive month to 52.1 in February, with both higher than the Bank’s previous forecast in June 2023, the manufacturing and services sectors firming on the it is largely driven by better-than-expected growth in back of improving domestic demand and diminishing the US. Outside of the US, global economic conditions tightness in financial conditions. There is a modest remained subdued in 2023. Global trade in goods pickup of economic activity in many EMDEs, partly and services was almost flat last year, growing by an supported by spillovers from resilient growth in the estimated 0.2 percent—the slowest expansion outside US Global goods trade increased by 0.4 percent year- global recessions in the past 50 years. Services trade on-year in January, marking the first expansion after has recovered from the effects of the pandemic, while nine consecutive months of contraction. The global goods trade contracted due to the sharp slowdown in index for manufacturing suppliers’ delivery times global industrial production. Global headline and core also improved slightly in February, suggesting little inflation have continued to decline from 2022 peaks but change in the impact of shipping disruptions on the remain above target in most advanced economies. ability of manufacturers to procure inputs. Meanwhile, FIGURE 1 FIGURE 2 Global growth is estimated to have weakened in EAP countries grew faster than the rest of the 2023 to 2.6 percent world in 2023 Real GDP, y/y, Percentage GDP growth across country groups, y/y, Percentage 8 8 6.2 7 6 6 4 5 3.2 3.0 2.5 2.6 4 2 3 0 2 1 -2 0 China EAP EAP (excluding Advanced -3.2 China) economies -4 2018 2019 2020 2021 2022 2023e 2015-2019 2020-2022 2023 Source: World Bank Global Economic Prospects Source: World Bank East Asia Pacific Economic Update April 2024 24 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook the services trade is recovering driven by robust 4.4 percent in 2023 (2022: 5.8 percent) amid weak travel demand. PMI readings for new export orders external demand and moderating private consumption. for services indicate an expansion for the second Private investment was affected by low export demand consecutive month. and high interest rates, while public investment was weighed down by high public debt. On the external EAP countries grew faster than the rest of the world front, goods and commodity exports remained weak in 2023, but slower than in the pre-pandemic period due to continued deceleration in global growth and, to (Figure 2). China’s economy grew by 5.2 percent in some extent, protectionist policy measures across the 2023 as growth rebounded in the beginning of the year world. Meanwhile, monetary and fiscal policies in the following the lifting of pandemic restrictions. However, region generally remained non-expansionary amidst this growth slowed through the middle of the year, partly the risks of exchange rate depreciation, uncertainty reflecting a renewed downturn in the property sector. about inflation, and limited fiscal space. In the rest of the region, growth eased to an estimated MALAYSIA ECONOMIC MONITOR | APRIL 2024 25 PART ONE - Recent Economic Developments and Outlook Malaysia’s economy grew at a slower pace in 2023 The Malaysian economy moderated further to to expand in Q4 2023, albeit at a more moderate rate 3.0 percent in Q4 2023 (Q3 2023: 3.3 percent), of 4.2 percent (Q3 2023: 4.6 percent), supported by bringing the overall growth to 3.7 percent in 2023 further improvement in labor market conditions and (2022: 8.7 percent). Growth for 2023 was mainly household income support from the government. driven by domestic demand amid slower global growth. For 2023, private consumption growth moderated Malaysia’s moderating growth in 2023 was consistent to 4.7 percent (2022: 11.2 percent), partly due to the with most other regional countries as the economies high-base effect in 2022 driven largely by pandemic- normalized from the post-pandemic rebound in 2022 related measures and pent-up demand.  Meanwhile, and were affected by the slowdown in the external public consumption expanded by 7.3 percent in Q4 sector (Figure 3). Several other countries in the region, 2023 (Q3 2023: 5.8 percent) on increased spending including the Philippines, Thailand and Vietnam, also on supplies and services. Gross fixed capital formation missed their respective official growth targets1 last (GFCF) expanded by 6.4 percent (Q3 2023: 5.1 year (Figure 3). Like Malaysia, growth in Thailand and percent) as higher private and public capital spending Vietnam were below targets due to weaker external on infrastructure, machinery and equipment (M&E), environments, while for the Philippines, growth fell and the government’s fixed assets contributed to short of the target as household spending was affected further improvement in investment activity (Figure 5). by higher inflation. On a quarter-on-quarter seasonally adjusted basis, the economy contracted by 2.1 percent (Q3 2023: Growth was mainly driven by domestic demand in 2.6 percent), reflecting the continued moderation in Q4 2023 (Figure 4). Private consumption continued growth. FIGURE 3 FIGURE 4 Malaysia’s moderating growth in 2023 was Growth in Q4 2023 was supported by domestic consistent with most other regional countries demand, as labor market conditions continued to improve Real GDP growth, y/y, Percentage Contribution to real GDP growth and real GDP growth, y/y, Percentage 10 20 9 15 8 7 10 6 5 5 4 0 3 -5 2 1 -10 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 0 Philippines China Indonesia Vietnam Malaysia Thailand Korea Singapore Private Consumption Public Consumption GFCF Change in Inventory 2022 GDP 2023 GDP 2023 govt. growth target Net Exports Real GDP growth Source: DOSM, Haver Source: DOSM Note: Government growth target is the lower bound of target range. 1 Official government growth target was used for China, the Philippines,and Vietnam; government or central bank projections were used for Indonesia, Korea, Singapore, and Thailand. 26 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook On the supply side, the manufacturing sector continued to recover. In 2023, Malaysia recorded 20 contracted while other economic sectors expanded million tourist arrivals2 inching closer towards the pre- in Q4 2023. The manufacturing sector contracted pandemic levels (Figure 6). The construction sector by 0.3 percent (Q3 2023: -0.1 percent), reflecting a expanded by 3.6 percent (Q3 2023: 7.2 percent) mainly slowdown in external demand, particularly in the electric due to the further expansion of civil engineering works. and electronics (E&E) segment which contracted The mining sector rebounded by 3.8 percent (Q3 2023: further by 10 percent (Q3 2023: -4.8 percent). Exports -0.1 percent) as natural gas and crude oil production of refined petroleum as well as M&E also contracted expanded. In agriculture, the expansion in palm oil by 3.3 and 3.2 percent, respectively (Q3 2023: -8.4 and production contributed to the sector’s growth of 1.9 -4.5 percent). Meanwhile, the services sector expanded percent (Q3 2023: 0.9 percent). by 4.2 percent (Q3 2023: 5.0 percent) as tourism activity FIGURE 5 FIGURE 6 Higher private and public capital spending Tourism activity continued to recover, inching contributed to further improvement in investment closer to the pre-pandemic levels activity Contribution to GFCF growth and GFCF growth, y/y, Percentage Number of tourist arrivals to Malaysia, Million 20 30 15 25.9 25.8 26.1 25 10 20.1 5 20 0 15 -5 10.1 -10 10 -15 5 4.3 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2022 Q2-2023 Q3-2023 Q4-2023 0.1 0 Public investment Private investment GFCF 2017 2018 2019 2020 2021 2022 2023 Source: DOSM Source: DOSM, Malaysian Tourism Promotion Board Export growth was weighed down by weaker external demand and a global technology downcycle As global economic conditions remained subdued, 2023 respectively, driven by a sustained broad-based export growth continued to contract in the last slowdown in external demand across all products, two quarters of 2023 (Figure 7). Gross exports including exports in semiconductors. However, the contracted by 15.2 and 6.9 percent in Q3 and Q4 main driver of the slowdown was the decline in exports 2 https://www.thestar.com.my/news/nation/2023/12/03/malaysia-records-26-million-tourist-arrivals-from-jan-1-to-nov-15-says-ministry MALAYSIA ECONOMIC MONITOR | APRIL 2024 27 PART ONE - Recent Economic Developments and Outlook of non-E&E products, especially petroleum-related The current account surplus narrowed to 0.1 products. Overall, exports in goods and services percent of GDP in Q4 2023 (Q3 2024: 2.0 percent) experienced a decline of 7.9 percent in 2023 (2022: (Figure 8). The decline in the current account surplus 14.5 percent), driven by weaker external demand and was driven by higher investment income accruing to the global technology downcycle. Meanwhile, gross foreign investors and a smaller goods surplus. This was imports experienced a sharp rebound in Q4 2023, offset by a sustained goods surplus and smaller services recording positive growth of 1.3 percent (Q3 2023: deficit following the recovery in inbound tourism. -16.3 percent), driven by higher imports of capital and Overall Malaysia’s current account surplus stood at 1.2 intermediate goods. percent of GDP in 2023 (2022: 3.1 percent). FIGURE 7 FIGURE 8 Export growth contracted for the last two Current account surplus declined to 0.1 percent of quarters of 2023 GDP in Q4 2023 Contribution to export growth, y/y, Percentage Current account balance, Current account balance, RM billion Percentage of GDP 60 8 40 6 40 4 20 -10 2 0 -60 0 -20 Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2015 Q3-2015 Q1-2016 Q3-2016 Q1-2017 Q3-2017 Q1-2018 Q3-2018 Q1-2019 Q3-2019 Q1-2020 Q3-2020 Q1-2021 Q3-2021 Q1-2022 Q3-2022 Q1-2023 Q3-2023 Secondary Income Current account E&E - Semiconductors E&E - Non-semiconductors Primary Income balance (RHS) Non E&E Commodities Services Exports, y/y Goods Source: World Bank Staff calculations based on BNM and DOSM data Source: World Bank Staff calculations based on BNM and DOSM data TABLE 1 Current account surplus declined in Q4 2023 while exports increased Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2021 2021 2021 2021 2022 2022 2022 2022 2023 2023 2023 2023  Balance of Goods & Services 6.0 6.8 7.1 8.8 6.1 5.0 7.9 9.7 6.1 4.1 4.8 4.9 (% of GDP) Current Account Balance 3.2 3.3 5.2 3.8 1.4 0.6 4.2 5.9 1.0 2.1 2.0 0.1 (% of GDP) Total Exports 66.3 70.7 72.7 72.5 72.3 77.3 80.7 77.2 68.1 68.9 67.2 69.5 (% of GDP) Total Imports 60.3 64.0 65.5 63.7 66.1 72.3 72.8 67.5 62.0 64.7 62.4 64.5 (% of GDP) Net Portfolio Investment -0.1 20.2 -3.9 2.6 -8.9 -15.4 0.5 -26.7 -33.3 8.1 -14.1 -6.4 (RM billion) Net Official Reserves 451.0 461.6 482.6 486.9 85.9 480.1 492.0 503.4 509.9 522.1 527.2 529.7 (RM billion) Net Official Reserves 105.0 107.6 108.6 111.1 115.2 116.9 115.6 109.0 106.1 114.7 115.5 111.4 (US$ billion) Source: World Bank Staff calculations based on BNM and DOSM data 28 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook BOX 1 Foreign direct investment and domestic direct investment trends in 2023 While growth in Malaysia’s FDI position3 slowed Overall, Malaysia recorded net FDI inflows of RM to 5.4 percent in 2023 (2022: 12.4 percent), the 39.5 billion for 2023, mainly channeled through country remained as an attractive destination the EAP region. Specifically, FDI channeled through for manufacturing investments (Figure 9). The Singapore and Hong Kong SAR, China, contributed slowdown in the growth of Malaysia’s FDI position respectively to 55.7 percent and 39.2 percent of was in line with FDI trends in the ASEAN region for Malaysia’s total net FDI inflows. The services sector 2023. Despite being the usual engine of FDI flows, the was the main recipient (Figure 10), receiving 94 percent ASEAN region experienced a 16 percent decline in FDI of the net FDI inflows. This was largely in the financial for 2023 (UNCTAD Global Investment Trends Monitor, services sector, which received 36.5 percent of total 2023). However, both Malaysia and ASEAN remained net FDI inflows, followed by the information and attractive destinations for manufacturing investments. communication technology (ICT) sector (23.6 percent), Greenfield investment inflows into ASEAN rose by and the healthcare sector (15.0 percent)., Meanwhile, 43 percent, accounting for 40 percent of the total the manufacturing sector received 6.6 percent of the greenfield FDI in EAP for 2023. Malaysia, which is the total net FDI inflows in 2023. second largest recipient of greenfield FDI in the region, after Indonesia, experienced an investment increase of Approved DDI increased by 35.1 percent year-on- 37 percent to US$ 29.5 billion. Within ASEAN, Malaysia year in 2023. Malaysia recorded total approved DDI attracted 22 percent of the intraregional investments, of RM 141.1 billion in 2023, which is 42.8 percent of coming in third after Indonesia (40 percent) and the total approved investment of RM 329.5 billion. The Vietnam (23 percent). This includes an investment of key contributing sector to the total approved DDI in US$ 10 billion by China’s Zhejiang Geely Holding Group 2023 was the services sector, which accounted for 78.3 in Malaysia’s automobile sector to establish an auto- percent. making hub (UNESCAP, 2023).4 FIGURE 9 FIGURE 10 Growth of FDI stock in Malaysia slowed to 5.4 The services sector was the key recipient of the percent in 2023 net FDI inflows in 2023 FDI stock, y/y, Percentage Sector contribution to net FDI in ows, Percentage 16 100 14 80 12.4% 51.1 12 60 85.0 10 40 120.3 8 249.4 20 6 5.4% 0 4 2 -20 0 -40 -2 Q1-2023 Q2-2023 Q3-2023 Q4-2023 2016 2017 2018 2019 2020 2021 2022 2023 Others Manufacturing Construction Services Source: World Bank Staff calculations based on Haver and DOSM data Source: World Bank Staff calculations based on BNM data 3 FDI position refers to the total stock of foreign direct investment in Malaysia as at the end of reference period. The end position is derived from opening stock plus financial flows plus other changes (price changes, exchange rate changes and other changes). 4 UNESCAP foreign direct investment trends and outlook in Asia and the Pacific 2023/2024. MALAYSIA ECONOMIC MONITOR | APRIL 2024 29 PART ONE - Recent Economic Developments and Outlook Labor market conditions have broadly returned to pre-pandemic levels Labor market conditions have been steadily 44 fell to 1 percent in Q4 2023 (Q4 2022: 1.4 percent). improving in the past year, reflecting a declining In comparison, the unemployment rate of workers unemployment rate and an increasing labor force ages 45 to 54 and 55 to 64 increased to 1.4 percent participation rate. The national unemployment (Q4 2022: 1 percent) and 2.6 percent (Q4 2022: 1.8 rate declined to 3.3 percent in Q4 2023 (Q4 2022: percent) respectively. Importantly, the duration spent in 3.6 percent), like pre-pandemic levels (Figure 11). At unemployment has also decreased, with 67.6 percent of the same time, the labor force participation rate has those unemployed in Q4 2023 (Q4 2022: 60.8 percent; gradually increased in the past year to 70.1 percent in Q4 2019: 45.3 percent) having been unemployed for Q4 2023 (Q4 2022: 69.5 percent). This increase occurred less than three months. Similarly, only 5.6 percent of for both men and women. More specifically, the male those unemployed in Q4 2023 (Q4 2022: 7 percent, Q4 labor force participation rate rose to 83 percent in Q4 2019: 11.5 percent) have been unemployed for more 2023 (Q4 2022: 82.3 percent), while the female labor than one year. force participation rate rose to 56.3 percent (Q4 2022: 55.9 percent). However, the gender gap in the labor Both time- and skill-related underemployment force participation rate has also increased. have remained somewhat stagnant in the past year. 5 Time-related underemployment stood at 1.1 The decline in the unemployment rate can primarily percent in Q4 2023 (Q4 2022: 1.1 percent) (Figure 13), be attributed to a decrease in unemployment among while skill-related underemployment stood at 37.4 younger persons (Figure 12) and a downward trend percent (Q4 2022: 37.4 percent) (Figure 14). Time- in long-term unemployment. The unemployment rate related underemployment appears to have stabilized of youth workers ages 15 to 24 fell in the past year to 10.1 to its pre-pandemic level. In comparison, skill-related percent in Q4 2023 (Q4 2022: 10.7 percent). In the same underemployment remains higher than before the period, the unemployment rate of workers ages 25 to pandemic. The elevated skill-related underemployment 34 declined to 2.7 percent in Q4 2023 (Q4 2022: 3.4 suggests a mismatch between the demand and supply percent). The unemployment rate of workers ages 35 to of tertiary-educated workers. FIGURE 11 FIGURE 12 The labor force participation rate has been increasing, ...with the largest declines in the unemployment while the unemployment rate has been declining... rate seen for younger persons Labor force participation, Percentage Unemployment, Percentage Unemployment by age group, Percentage 85 6 14 80 5 12 75 4 10 70 3 8 65 2 6 60 1 4 55 50 0 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 0 2019 2020 2021 2022 2023 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Unemployment rate (RHS) 2019 2020 2021 2022 2023 Labor force participation rate Labor force participation rate - Male 15-24 25-34 35-44 Labor force participation rate - Female 45-54 55-64 Source: DOSM Source: DOSM 5 The time-related underemployment rate reflects the share of workers employed for less than 30 hours per week but are willing and able to work more hours. The skill-related underemployment rate reflects the share of workers with tertiary education who are employed in semi- or low-skilled jobs. 30 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 13 FIGURE 14 Time-related underemployment has remained ...as has skill-related underemployment somewhat stagnant... Time-related underemployment by gender, Percentage Skills-related underemployment by gender, Percentage 3.0 45 2.5 40 2.0 1.5 35 1.0 30 0.5 0.0 25 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Source: DOSM Source: DOSM While employment growth has moderated, it is main contributor here was the manufacturing sector, trending higher than pre-pandemic levels (Figure which grew at 3.0 percent in Q4 2023 (Q3 2023: 3.0 15). Like labor productivity growth, employment percent). Within the manufacturing sector, the largest growth was high in 2022—the period following the contributors are the wood products, furniture, paper pandemic—but has since moderated. That said, in products, and printing subsector (5.8 percent; Q3 2023: contrast to labor productivity growth, employment 4.7 percent), as well as the vegetable and animal oils growth in 2023 is trending higher than its pre-pandemic and fats and food processing subsector (5.4 percent; level, especially in the manufacturing, construction, and Q3 2023: 6.8 percent). Employment growth in the services sectors. Year-on-year employment growth was E&E subsector—which experienced a contraction in 2.5 percent in Q4 2023 (Q3 2023: 2.7 percent). The output—has been declining and is relatively low at 1.4 FIGURE 15 Employment growth is gradually declining Employment by sector, y/y, Percentage 5 4 3 2 1 0 -1 Agriculture Mining and Manufacturing Construction Services Total quarrying Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Source: DOSM MALAYSIA ECONOMIC MONITOR | APRIL 2024 31 PART ONE - Recent Economic Developments and Outlook percent (Q3 2023: 2.8 percent). This is followed by the growth in the construction and services sectors fell to services sector at 2.9 percent (Q3 2023: 3.1 percent). The 2.4 percent and 1.2 percent respectively in Q4 2023 employment growth in the construction, agriculture, (Q4 2022: 10.0 percent; 4.1 percent). The decline in and mining and quarrying sectors in Q4 2023 stood at labor productivity growth in the services sector results 1.2 percent, 0.8 percent, and 0.2 percent respectively from a decline in output, an increase in employment (Q3 2023: 1.4 percent; 0.6 percent; 0.4 percent). in the finance and insurance, food and beverages, and accommodation subsectors. Labor productivity growth6 remains slow and is lower than the levels seen before the pandemic Recently, there have been concerns of unemployment (Figure 16). After the recovery in 2022, labor among migrant workers in Malaysia. At 3.6 percent productivity growth has since moderated. Except for in Q4 2023, the unemployment rate of migrant workers the construction sector, labor productivity growth is is substantially higher than before the pandemic (Figure slower than in 2019. Zooming in on recent quarters, 17). The migrant worker landscape in Malaysia has been labor productivity growth stood at 0.5 percent in Q4 in flux since the pandemic when a moratorium was 2023 (Q4 2022: 3.7 percent), which is lower than in most placed on the hiring of migrant workers. This was only earlier quarters. The low labor productivity growth can temporarily lifted between January and March 2023, be attributed to negative labor productivity growth after which the hiring of migrant workers remains halted. in the manufacturing sector since Q2 2023. The -3.2 This has resulted in a sharp decline in the number and percent labor productivity growth in the sector in Q4 share of migrant workers in the labor force since then 2023 (Q4 2022: 1.6 percent) was a result of the lower (Figure 18). The temporary lifting of the moratorium output and greater employment in the E&E and the saw the approval of almost one million migrant petroleum, chemical, rubber, and plastic products workers.7 However, about 83,000 migrant workers subsectors. During the same period, the mining and were unemployed in Q4 2023, reflecting a mismatch quarrying sector had the highest labor productivity between the supply and demand. Furthermore, official growth at 3.6 percent (Q4 2022: 6.0 percent), while statistics are likely to underestimate the unemployment in the agriculture sector growth stood at 1.1 percent rate among migrant workers due to sampling methods.8 (Q4 2022: 1.7 percent). Meanwhile, labor productivity Among the unemployed migrant workers are those FIGURE 16 Labor productivity growth has remained slow Labor productivity by sector, y/y, Percentage 15 10 5 0 -5 Agriculture Mining and Manufacturing Construction Services Total quarrying Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Source: DOSM 6 Labor productivity growth is measured by the growth in output or value-added relative to the growth in employment. 7 New Straits Times (2023). “Application and approval of foreign worker quota to be temporarily discontinued, says Sivakumar”. Retrieved from: https://www.nst. com.my/news/nation/2023/03/890353/application-and-approval-foreign-worker-quota-be-temporarily-discontinued 8 Data on unemployment is obtained from the Labour Force Survey (LFS) administered by DOSM. The LFS is a household-based sample survey which excludes communal housing, where many foreign workers working in the agriculture, manufacturing, and construction sectors are likely to live. This leads to an underestimation of the number of foreign workers. At the same time, the LFS captures both regular and irregular foreign workers that are not captured through other official data sources (World Bank 2015). While the resulting representativeness of the LFS in capturing foreign workers is unknown, underestimation remains to be likely given the prevalence of communal housing among foreign workers, both regular and irregular alike. 32 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 17 FIGURE 18 The unemployment rate of migrant workers is ...while both the number and share of migrant trending higher than before the pandemic... workers in the labor force have been decreasing over time Unemployment rate of non-citizens, Percentage No. of workers in labor force, Share of non-citizens in labor force, Millions Percentage 6 20 20 5 15 15 4 10 10 3 2 5 5 1 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2021 2022 2023 Non-citizens Share of non-citizens (RHS) Non-citizens Citizens Citizens Source: DOSM Source: DOSM who were admitted between January and March 2023 the country’s economy. In 2022, mid- and low-skilled without available jobs. Since job availability is a pre- jobs made up 58.4 percent and 12.0 percent of all jobs requisite for approval, the admission of these workers is respectively.10 At the same time, the share of Malaysians currently being investigated by the government.9 Other with secondary education or higher has continued to migrant workers who are unemployed may include increase, from 19.8 percent in 2010 to 30.7 percent those who have overstayed their visas, as well as those in 2022.11 The increase in educational attainment has who have entered the country lawfully and are seeking allowed Malaysian workers to obtain more skilled jobs, work, but do not hold the appropriate visas (World as reflected by the increasing share of employment in Bank 2020). The latter group includes those who have mid-skilled jobs and decreasing share of employment failed their medical tests in Malaysia, and those who in low-skilled jobs (Figure 19). The mismatch between have a Visitor Pass (Temporary Employment) but have the composition of the labor force, and the number been laid off and are seeking new employment (which and skill level required of available jobs calls for is not allowed) (World Bank 2020). migrant workers to fill the gaps (World Bank 2015). Subsequently, an increasing share of migrant workers Migrant workers are an important source of are employed in low-skilled jobs (Figure 19). The level labor in Malaysia. While Malaysians have increased of education among migrant workers is also relatively educational attainment in the last decades, lower- low, with the majority of them (65.8 percent) having a skilled sectors and employment remain important in primary education at most (Figure 20). 9 Channel News Asia (2024). “’Limit their numbers’: Malaysia’s scammed, jobless migrant workers problem highlights its foreign labour dependence”. Retrieved from: https://www.channelnewsasia.com/asia/malaysia-foreign-worker-dependence-jobs-labour-4034881 10 Occupational skill level is based on the mapping of the Malaysia Standard Classification of Occupations (MASCO) to the International Standard Classification of Education 1997 (ISCED-97) adapted from ILO (2012). High-skilled occupations include managers, professionals, and technicians and associate professionals, which require tertiary education. Mid-skilled occupations include clerical support workers, services and sales workers, skilled agricultural, forestry, and fishery workers, craft and related trades workers, plant and machine operators, and assemblers, which require secondary education. Low-skilled occupations include elementary occupations, which require primary education. 11 The statistics on the education level of Malaysian and migrant workers were computed using Labour Force Survey microdata for the years 2010 to 2022. Those who have completed primary education are those who have completed the Primary School Achievement Test (Ujian Penilaian Sekolah Rendah, UPSR), the Form Three Assessment (Penilaian Tingkatan 3, PT3), or equivalent qualifications. Those who have completed secondary education are those with the Malaysian Certification of Examination (Sijil Pelajaran Malaysia, SPM) or equivalent qualifications. Those who have completed post-secondary education are those with the Malaysian Higher School Certificate (Sijil Tinggi Persekolahan Malaysia, STPM), a certificate, a diploma, or equivalent qualifications. Those who have completed tertiary education are those with at least a Bachelor’s degree. MALAYSIA ECONOMIC MONITOR | APRIL 2024 33 PART ONE - Recent Economic Developments and Outlook FIGURE 19 FIGURE 20 An increasing share of migrant workers are ...reflecting their relatively lower levels of employed in low-skilled jobs... educational attainment Share of employment, Percentage Share of workers, Percentage 100 80 Non- citizens 60 40 Citizens 20 0 High-skilled Mid-skilled Low-skilled High-skilled Mid-skilled Low-skilled 0 20 40 60 80 100 Share of workers, Percentage No formal education Primary 2010 2022 Secondary Post-secondary Citizens Non-citizens Tertiary Source: World Bank staff calculations based on DOSM data Source: World Bank staff calculations based on DOSM data Evidence to address longstanding concerns on higher costs. This is to ensure that the migrant workers migrant workers12 is limited. Some of the cited being admitted into the country are truly in demand effects of hiring low-skilled migrant workers include: in the economy. The system can potentially prevent (i) weaker incentives for firms to substitute labor with wage depression, underinvestment in technology and technology and create high-skilled and high-paying forestalling of automation, or use of migrant workers jobs, (ii) lower productivity, as well as (iii) the depression in situations where native workers can be upskilled of Malaysian workers‘ wages (Ang, Murugasu and Chai (World Bank 2015). While there is indeed potential for 2018; BNM 2021). These concerns are widely accepted, the multitier levy system to address the concerns on and form part of the MADANI Economy framework. the hiring of migrant workers, the design of the system Notwithstanding this, the evidence in support of such and associated levies is of critical importance to ensure concerns is limited and mixed (see Box 2). it meets its objectives (see Box 2 on Migrant workers in Malaysia). The labor market impacts of migration are greatly affected by the regulatory environment and the migrant worker management system in place. The The government has government has been discussing the implementation of a multitier levy system to minimize the risk of a been discussing the mismatch between the supply and demand of low- implementation of a skilled migrant workers. The multitier levy system being proposed is one with a differing levy rate based on the multitier levy system economic sector and the share of low-skilled migrant to minimize the risk of workers employed by each firm—similar to the system implemented in Singapore (ILMIA 2018). Firms with a mismatch between higher shares of low-skilled migrant workers are pushed the supply and demand into a higher levy rate (or a higher tier). The purpose of the multitier levy system is to increase the cost of of low-skilled migrant hiring low-skilled migrant workers, that is, firms with workers high shares of low-skilled migrant workers will have 12 In the Malaysian context, low-skilled migrant workers—typically referred to as “foreign workers” are those who are admitted into the country using the Visitor Pass (Temporary Employment) (Pas Lawatan Kerja Sementara, PLKS). They are typically employed as services and sales workers, craft and related trades workers, plant and machine operators and assemblers, and elementary occupations. This is different (broader) from the typical classification of only those employed in elementary occupations as low-skilled workers. 34 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook BOX 2 Migrant workers in Malaysia 13 Migrant workers in Malaysia are primarily employed One of the main reasons for the perception of an in low-skilled jobs, and increasingly so. More adverse relationship between immigration and specifically, in 2022, about 46.4 percent of migrant labor market outcomes of Malaysians is the lump of workers were employed in elementary occupations, labor fallacy, or the (false) belief that the demand or low-skilled jobs, which is a substantial increase for labor in an economy is fixed, or that there is from 41.5 percent in 2013 (Figure 21). In parallel, the fixed number of jobs in an economy. This would mean share of migrant workers employed in mid-skilled jobs that the employment of migrants would decrease the decreased from 54.4 percent to 45.1 percent, while the employment opportunities available to Malaysians. That share employed in high-skilled jobs doubled from 4.1 said, it is referred to as a fallacy because an increase percent to 8.5 percent. In parallel, a higher share of in labor demand (for migrant workers or otherwise) migrant workers is employed in the agriculture sector, translates to an increase in aggregate demand in an which typically requires lower-skilled, manual labor economy through an increase in consumption by these (Figure 22). The share of migrant workers employed workers, subsequently increasing the demand for labor in the manufacturing and construction sectors has further. In other words, a growing economy with an declined, which likely reflects the restrictive migration increasing demand for migrant labor will likely also policies introduced during the pandemic. Between experience an increase in demand for other workers, 2013 and 2022 there was an increase in the share of including Malaysian workers. Moreover, migrant workers both migrant workers and citizens employed in the are not necessarily substitutes for Malaysian workers, services sector, reflecting the growing importance of given different skillsets, roles, and tasks performed. the services sector in the Malaysian economy. Malaysian workers are typically more highly educated, FIGURE 21 FIGURE 22 Migrant workers are increasingly employed in ...and in the agriculture sector elementary occupations... Share of employment, Percentage Share of workers, Percentage Elementary Occupations Non-citizen Plant Workers 2022 Service and Sales Workers Craft Workers Citizen Skilled Agricultural Workers Managers Non-citizen Professionals 2013 Associate Professionals Citizen Clerical Support Workers 0 10 20 30 40 50 0 20 40 60 80 100 Share of migrant workers (%) Share of employment (%) 2013 2022 Agriculture Mining Manufacturing Construction Services Source: World Bank staff calculations using data from LFS (DOSM) Source: World Bank staff calculations using data from LFS (DOSM) 13 Source: Abdur Rahman, Bilo, Chatterjee and Cheng (forthcoming). MALAYSIA ECONOMIC MONITOR | APRIL 2024 35 PART ONE - Recent Economic Developments and Outlook and the expansion of employment of migrant workers An instrumental variable analysis—which accounts in elementary occupations has facilitated the ability of for reverse causality and allows for estimation of Malaysians to work in mid-skilled occupations, such as the causal impact of migration on labor market mid-level managers (World Bank 2015). Nonetheless, outcomes—reveals similar findings. The immigration the question remains: What does the empirical evidence rate, as measured by the ratio of non-citizens to citizens say about the impact of hiring migrant workers on in a given state, was found to have no significant Malaysian workers? relationship with the employment rate, the labor force participation rate, and wages of Malaysians in Econometric analysis generally finds a favorable, the state. There is, however, a statistically significant or no significant relationship between immigration negative relationship between the immigration rate and labor market outcomes of Malaysians. More and the unemployment rate, suggesting that a one specifically, an ordinary least squares analysis of the percentage point increase in the immigration rate whole economy using data for the period 2010 to 2021 leads to a 0.29 percentage point decrease in the finds that one additional migrant is associated with unemployment rate of Malaysians. Similar results 0.2 additional employed Malaysians in a given state are found even when one analyzes the relationship and sector, with the relationship being statistically between the immigration rate of migrants with different significant (Figure 23). Similarly, the analysis finds that levels of education and the labor market outcomes there is no significant relationship between immigration of Malaysians using instrumental variable analysis. with unemployment and labor force participation of Overall, these findings show that there is no evidence Malaysians in a given state. Further, an additional of an adverse relationship between immigration and migrant in a given state and sector is associated labor market outcomes of Malaysians. Instead, there is with higher levels of employment among Malaysians some evidence of a fall in unemployment resulting from aged 30 and older, and Malaysians with secondary immigration, as well as a positive relationship between education, as reflected by statistically significant immigration and the employment rate of Malaysians, positive relationships (Figure 24). particularly among those who are aged 30 and older FIGURE 23 FIGURE 24 An increase in migrant workers is associated ...especially among those who are 30 and older with an increase in the employment of Malaysian and have a secondary education workers... Number of Malaysians Number of workers 1.5 0.3 1.0 0.2 0.1 0.5 0 0.0 -0.1 -0.5 15-19 20-29 30-49 50-64 No formal Primary Lower secondary Upper secondary Certi cate/diploma Degree and above -1.0 Overall Male Female Overall Male Female Overall Male Female Malaysian Malaysian Malaysians out Malaysian employment Malaysian employment employment unemployment of labor force by age by education Source: World Bank staff calculations using data from LFS (DOSM) Source: World Bank staff calculations using data from LFS (DOSM) Note: The analysis is conducted using data for the years 2010-2020. 36 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook and those with a secondary education, which may 10 percent increase in the employment of low-skilled suggest complementarity between migrant workers migrant workers results in a 1.3 percent decline in the and Malaysian workers. wages of all low-skilled workers. Importantly, there is also evidence that the employment of migrant Other studies that have also analyzed the workers increases the employment of Malaysians as relationship between the employment of low-skilled well as increases the wages of Malaysian workers who migrant workers on the labor market outcomes have at least some secondary education (Özden and of Malaysians find limited and mixed results. In Wagner 2014; World Bank 2015). This suggests that particular, they confirm a statistically significant negative the distributional impacts of low-skilled migrant labor impact of the employment of low-skilled migrant are mixed. A study by Tan and Ng (2018) found that an workers on the wages of lower-skilled Malaysians, increase in foreign worker employment does not have but this impact is small. Specifically, a 10 percent a statistically significant impact on the employment increase in the employment of low-skilled migrant of Malaysian workers, or on overall labor productivity. workers decreases the wages of Malaysians working They also find no relationship between foreign worker in less-skilled occupations by 0.7 percent (World Bank employment and capital intensity (Tan and Ng 2018). 2015). Athukorala and Devadason (2012) found that a MALAYSIA ECONOMIC MONITOR | APRIL 2024 37 PART ONE - Recent Economic Developments and Outlook Access to basic amenities is widespread, but some disparities remain The government’s target of zero hardcore poverty Lower-income households have experienced higher has been reached in some states, but the incidence of inflation, eroding their purchasing power. In absolute poverty in Malaysia remained higher than December 2023, the inflation for the below RM3,000 the pre-pandemic level. The latest official estimates (US$ 630) income group was 1.7 percent, above the from 2022 showed that the incidence of hardcore headline inflation of 1.5 percent. In the same period, poor in Malaysia was only 0.2 percent. Some states, inflation for the food and beverages category stood at including the Federal Territory of Kuala Lumpur, Labuan 2.3 percent. This inflation disproportionately impacted and Putrajaya, have recorded zero hardcore poverty the poorer group, as they spent more of their income in 2022. However, some other states still reported on basic necessities, leaving them with few ways to hardcore poverty rates above the national average, cope with the higher cost of living. including Sabah (1.2 percent), Kelantan (0.8 percent) and Sarawak (0.4 percent).14 Meanwhile, the incidence In an effort to more effectively address the of absolute poverty in 2022 was at 6.2 percent,15 higher issue of rising cost of living, the government than the pre-pandemic level (2019: 5.6 percent). This recently announced a plan to distribute targeted implies that nearly 490,000 Malaysian households still subsidies to eligible households through direct cash lived below the average national poverty line with transfers.16 The elevated cost of living has become an monthly household income of RM2,589. Against this increasing concern for Malaysian households, despite the backdrop, a broader view and more ambitious target moderating trend of inflation. This is because ”cost of of poverty eradication that is commensurate with living” is often used to reflect wider impacts on household Malaysia’s aspirations and level of development beyond budgets and well-being, beyond price increases.17 A mix the current national hardcore poverty is needed. of measures have been implemented by the government FIGURE 25 The current levels of inequality are still high compared to peer countries Gini index, ASEAN, OECD and recently transitioned HICs, most recent data 50 40 30 20 10 0 MMR THA* VNM PHL* IDN LAO MYS PHL THA SVN CZE POL HUN POL EST KOR PRT LVA LTU ARG PAN BEL NLD NOR SWE IRL AUT FRA DEU USA TUR CHL MEX HRV URY SVK DNK ASEAN Transitional OECD Source: World Bank Poverty and Inequality Platform and World Bank staff calculations based on DOSM data 14 Hardcore poverty refers to household with a monthly income less than food Poverty Line Income (PLI). The national average food PLI in 2022 was RM1,198. Source: DOSM, Poverty in Malaysia 2022. 15 At the average national poverty line of monthly household income of RM2,589. Source: DOSM, Household Income Survey Report 2022. 16 https://www.malaysiakini.com/news/697257 17 See World Bank (2020). Aspirations Unfulfilled: Malaysia’s Cost of Living Challenges. Malaysia Development Experience Series. World Bank, Malaysia. http://hdl. handle.net/10986/34331 38 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 26 Access to basic amenities is impressive at the national average, but regional disparities remain Share of households having accessibility, Percentage 100 90 80 70 60 50 Piped Electricity Public Primary Secondary water healthcare schools schools National Urban Rural Sabah Sarawak Source: DOSM to mitigate the rising cost of living. It is indicated that water, electricity, healthcare, and education (Figure 26). targeted subsidies will be rolled out in the second quarter In 2022, 96.7 percent of households reported having of 2024, but the details and exact timing have not been access to piped water, while the electrification rate communicated. Meanwhile, the government’s initiative in is almost 100 percent. Meanwhile, nearly 98 percent establishing PADU (Pangkalan Data Utama), the national of households are within a 5-kilometer distance of household socioeconomic database for identifying public health institutions. On education, the statistics eligible beneficiaries, plays a critical role to ensure the show that 98.5 percent of households have access planned targeted subsidy and other targeted social to primary schools and 95.3 to secondary schools, protection measures are delivered and that protection is within a 5-kilometer radius. Malaysia’s progress on this improved for those who need it most. front is reflected in the Human Development Index (HDI), a summary measure of average achievement in In addition to the rise in absolute poverty, progress key dimensions of human development: a long and in reducing income inequality has stagnated, healthy life, being knowledgeable, and having a decent and current levels are still high compared to peer standard of living.18 Malaysia’s score in the HDI in 2022 countries. Income inequality, measured by the Gini was 0.82, placing the country at a very high level of index based on total household gross income, stood development category. at 40.4 in 2022 (2019: 40.7). However, the trend varied across states, with some states including Kelantan, Although access to healthcare facilities is impressive Pulau Pinang, and the Federal Territory of Kuala Lumpur at the national average, regional disparities remain, experiencing a widening income gap. Malaysia’s and stunting is still a serious concern among inequality trajectory also stands out in the international Malaysian children. The Basic Amenities Survey context, with the current level of inequality still high Report 2022 reveals that about 11 percent of rural compared to both recently transitioned and established households still lived more than 5 kilometers from high-income countries (Figure 25). public healthcare centers, compared to 0 percent among urban households. Across states, the gaps are Meanwhile, progress in the overall provision of more prominent. About 12 percent of households in basic amenities in Malaysia has been remarkable. Sabah and 14 percent in Sarawak could not find public According to the Basic Amenities Survey Report 2022 healthcare centers within a 5-kilometer radius (Figure recently released by DOSM, Malaysians enjoy a high 26). Furthermore, one in five children under the age of level of access to fundamental needs, including piped five in Malaysia are stunted. The rates were the highest 18 The HDI is the geometric mean of normalized indices for each of the three dimensions. The health dimension is assessed by life expectancy at birth, the education dimension is measured by mean of years of schooling for adults aged 25 years and more and expected years of schooling for children of school entering age. The standard of living dimension is measured by gross national income per capita (UNDP 2022). MALAYSIA ECONOMIC MONITOR | APRIL 2024 39 PART ONE - Recent Economic Developments and Outlook in Pahang (28 percent) and Sabah (25 percent), but even and Sarawak did not have access to secondary schools for urban poor families in Kuala Lumpur and Putrajaya within 5 kilometers. This is five times higher than the stunting remains a problem. national average of 4.7 percent. Beyond subnational gaps in access to education facilities, there are Similarly, there are still gaps with regard to access indications that Malaysian students also experience to basic education, with children from the poorest problems with their learning at school—with children families receiving lower quality education. In rural from poor families faring worse than those from richer areas, more than 5 percent of children live more than families. This is concerning as quality of education is a 5 kilometers away from the closest primary school, crucial investment for a range of economic and broader while 18 percent live more than 5 kilometers away social outcomes in an individual’s future—and hence from the closest secondary school. In contrast, almost for the country’s economic growth. This critical issue all children living in urban areas have access to both of education performance gaps is discussed in more primary and secondary schools within 5 kilometers. detail in Part 2, Bending Bamboo Shoots: Strengthening Meanwhile, nearly 20 percent of households in Sabah Foundational Skills. Inflationary pressures have eased Headline inflation in Malaysia declined steadily in 2023, primarily due to the easing of prices in certain 2023. The decrease in the inflation rate continued services sectors. These include food away from home, as headline inflation moderated to 1.6 percent in Q4 that is, all food produced and consumed outside the 2023 (Q3 2023: 2.0 percent), broadly in line with price home, as well as repair and maintenance of personal developments in other regional countries (Figure 27). transport. Overall, headline inflation for 2023 recorded In Malaysia, the year-end moderation was due to the a decline to 2.5 percent (2022: 3.3 percent), while lower price increases for fresh food and core inflation19 core inflation remained at 3 percent (2022: 3 percent). (Figure 28). Core inflation continued to decline in Q4 In February 2024, headline inflation increased to 1.8 FIGURE 27 FIGURE 28 Malaysia’s headline inflation rate has steadily The lower headline inflation in 2023 is primarily eased in 2023, broadly in line with other countries due to lower food price increases in the region CPI, y/y, Percentage Contribution to CPI, y/y, Percentage 10 6 8 4 6 2 4 2 0 0 -2 -2 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 01/2024 01/2021 04/2021 07/2021 10/2021 01/2022 04/2022 07/2022 10/2022 01/2023 04/2023 07/2023 10/2023 01/2024 Others Headline in ation Malaysia Vietnam Transport Core in ation Philippines Indonesia Housing, water, electricity, gas Thailand Food and non-alcoholic beverages Source: DOSM and World Bank staff calculations Source: DOSM and World Bank staff calculations 19 Core inflation excludes price-volatile and price-administered items. 40 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 29 Inflation pervasiveness declined in 2023 Share of CPI items recording month-on-month price increase, Percentage 60 56 51.2 50 2011-2019 average: 45.6 42.7 40.8 40 36.3 30 20 10 0 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q4-2023 Source: DOSM and World Bank staff calculations percent compared to January 2024 (1.5 percent), driven mainly by higher inflation for utilities following upward revision in water tariffs, while core inflation remained Core inflation continued unchanged at 1.8 percent (January: 1.8 percent). to decline in Q4 2023, There were less extensive price increases primarily due to the throughout 2023. Inflation pervasiveness20 declined easing of prices in certain throughout the year, with only 36.3 percent of the items in the CPI basket recording monthly price increases in services sectors Q4 2023 (Q3 2023: 40.8 percent) (Figure 29). This figure is now below the long-term average of 45.6 percent from 2011 to 2019. The lower pervasiveness shows that The ringgit remained on a depreciating trend. The the inflationary pressures have become more contained ringgit weakened by 3.9 percent against the USD with less extensive price increases, indicating a potential between January 1 and April 8, 2024. Following this, easing of the broad inflationary trends that affect the the real effective exchange rate (REER) continues to consumer’s purchasing power. decline (Figure 30).21 Unlike other countries in the region, Malaysia’s REER has been on a downward With inflation easing and growth outlook trend (Figure 31), declining by almost 2.9 percent moderating, the OPR was maintained at 3 percent between January 2022 to December 2023. The ringgit in January and March 2024. After raising the OPR performance has been mainly affected by interest by 25 basis points in March 2023, the Monetary Policy rate differentials, global economic developments, Committee decided to maintain the policy rate in the as well as investor sentiments. Analysis on the two last five meetings, including in March 2024. The central largest episodes of ringgit depreciation over the last bank expects inflation to remain moderate in 2024 decade, 2014-2016 and 2021-2023, shows several amid contained cost pressures. At this OPR level, the factors driving exchange rate movements.22 In the monetary policy stance is considered to be supportive former period, ringgit depreciation was largely driven of the economy. by lower oil prices and capital outflows. In the latter 20 Inflation pervasiveness refers to the extent to which inflation is spread throughout the economy. When inflation is pervasive, it means rising prices are not limited to specific items or areas but are affecting a broader range of products and services. 21 The REER is a more appropriate measure of external competitiveness, compared to bilateral exchange rates since the REER is the weighted average of the bilateral real exchange rates between the country and all of its trading partners. The weights are the respective trade shares of each partner. 22 See World Bank (2023) “Raising the Tide, Lifting All Boats” Malaysia Economic Monitor (October), World Bank, Washington, DC. MALAYSIA ECONOMIC MONITOR | APRIL 2024 41 PART ONE - Recent Economic Developments and Outlook period, ringgit depreciation was mainly due to US linked companies (GLCs) and government-linked monetary policy tightening, as well as movements in oil investment companies (GLICs) have been encouraged prices. To address the recent weakening in the ringgit, to consistently repatriate foreign investment income Bank Negara Malaysia (BNM) is collaborating with the and convert it to ringgit. Furthermore, BNM has government to increase inflows that would allow the stepped up engagements with exporters and ringgit to appropriately reflect the fundamentals and international investors to further promote conversions prospects of the Malaysian economy. Government- and to underscore Malaysia’s investment appeal. FIGURE 30 FIGURE 31 The ringgit remained on a long-term depreciating Unlike its regional peers, Malaysia’s REER has trend been on a declining trend MYR/ USD Change in REER, Jan 2022 – Feb 2024, Percentage 5.00 4.80 Singapore 4.60 4.40 Philippines 4.20 4.00 Indonesia 3.80 3.60 Thailand 3.40 3.20 3.00 Malaysia 01/2014 10/2014 07/2015 04/2016 01/2017 10/2017 07/2018 04/2019 01/2020 10/2020 07/2021 04/2022 01/2023 10/2023 -10 -5 0 5 10 15 Source: BNM Source: World Bank staff calculations based on Bank for International Settlements (BIS) data 42 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook The Malaysian banking sector expanded while remaining well-capitalized The Malaysian banking sector maintained adequate capital buffers. The total capital ratio (TCR) remained Total capital ratio remained stable at 18.5 percent as of end-December 2023, above the regulatory minimum ratio (Figure 32).23 The well over the regulatory increase in risk-weighted assets (RM1,916 billion as of minimum capital level end-December 2023 vs. RM1,789.7 billion as of end December 2022) kept pace with the increase in total capital (December 2023: RM355.1 billion vs. December Credit to the private sector has grown, with 2022: RM339.9 billion). expansion in both credit to businesses and households. The banking system’s outstanding loans The banking sector continued to operate with grew by 5.3 percent y/y by the end of December 2023 robust liquidity and funding conditions. The to RM2,131.5 billion, slower than the 5.7 percent y/y Liquidity Coverage Ratio (LCR) remained above the growth recorded at the end of December 2022. Loans regulatory requirement of 100 percent, climbing to to households and to businesses increased by 5.6 160.9 percent as of end-December 2023 (December percent and 3.6 percent y/y respectively in December 2022: 151.5 percent), while banks’ holdings of high- 2023, with a marked expansion of business loans in the quality liquid assets (HQLA) increased by 0.7 percent second half of the year (Figure 33). In addition, volumes y/y to RM758.3 billion. Banking system deposits also of both business loan applications and approvals in grew by 5.6 percent y/y to RM2,485.9 billion as of end 2023 saw increases compared to the preceding four December 2023 vis-à-vis December 2022. years (Figure 34). FIGURE 32 Total capital ratio remained well over the regulatory minimum capital level Total capital ratio and Tier 1 capital ratio, Percentage 25 20 TCR, 18.5% Tier 1, 15.5% 15 CET 1, 14.6% 10 TCR Minimum Capital Adequacy Ratio, 8% Tier 1 Minimum Capital Adequacy Ratio, 6% 5 CET 1 Minimum Capital Adequacy Ratio, 4.5% 0 2019 2020 2021 2022 2023 Source: BNM 23 As defined by BNM: (i) Common Equity Tier 1 (CET1) refers to capital comprising ordinary shares issued by a banking institution, retained earnings and other reserves; (ii) Tier 1 Capital is the sum of CET1 and Additional Tier 1 Capital which includes instruments that are not included in CET1, are perpetual, and can be written down or converted into ordinary shares if the bank encounters financial distress; and (iii) Total Capital is the sum of Tier 1 Capital and Tier 2 Capital which includes instruments that are not included in Tier 1 and have maturities of five years or more. Each capital ratio is the respective capital balance in question scaled by Risk-Weighted Assets. MALAYSIA ECONOMIC MONITOR | APRIL 2024 43 PART ONE - Recent Economic Developments and Outlook The household sector remained the largest credit remained stable at around 25 percent of household segment. 24 The household sector represented borrowers in December 2023.25 Household debt is 59.4 percent of the total outstanding loan volume concentrated around middle-income and high-income as of December 2023. The share of borrowers with borrowers, who typically have larger financial buffers in debt service ratios (DSRs) exceeding 60 percent has the event of financial shocks.26 Indeed, household debt FIGURE 33 Growth in credit to the private sector continued, with marked pick up in business loans in the second half of 2023 Annual Growth of Outstanding Loans to Household and Business, Percentage 7 6 5 4 3 2 1 0 07/2022 08/2022 09/2022 10/2022 11/2022 12/2022 01/1023 02/2023 03/2023 04/2023 05/2023 06/2023 07/2023 08/2023 09/2023 10/2023 11/2023 12/2023 Household Loans Business Loans Outstanding Loans to Household and Business Source: BNM FIGURE 34 Business loan applications and approvals are higher than pre-pandemic levels Volume of Business Loan Applications & Approvals by SMEs and Non-SMEs, RM billion 700 600 500 400 300 200 100 0 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Loan Applications Loan Approvals SMEs Non-SMEs Source: BNM 24 Malaysia’s household debt to GDP ratio stood at 84.2 percent as of December 2023. Although it has moderated from its peak during the Covid-19 pandemic (December 2020: 93.1 percent), it remains above most of Malaysia’s regional middle-income peers. Malaysia’s household debt to GDP ratio is higher than that of comparator countries such as Indonesia (16.3 percent), the Philippines (84.2 percent), Singapore (46.4 percent), and Japan (66.2 percent), but ranks second to Thailand (91.8 percent). All figures are as of third quarter of 2023. Source: BIS. 25 Borrowers with high DSRs are more susceptible to repayment stress as a majority of their monthly incomes are channeled towards debt repayments. 26 Middle-income group refers to individuals earning a monthly income of between RM5,000 and RM10,000. High-income borrowers are those with a monthly income above RM10,000. 44 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook FIGURE 35 Mortgages account for the largest share of household debt in Malaysia Household debt by purpose, Percentage 1.2 6.1 3.7 4.3 6.1 10.9 12.6 15.0 5.5 3.0 3.5 13.2 22.9 15.5 5.3 7.6 60.5 54.5 48.6 2007 2015 2023 Residential Properties Non-Residential Properties Vehicles Credit Card Personal Financing Securities Other Purpose Source: BNM Financial Stability Report 2007, 2015 and Financial Stability Review 2H 202327 is supported by strong asset coverage as mortgage the corresponding period in 2022 (RM1.1 billion). debt accounts for the bulk of it, at 60.5 percent as of Authorities noted that these SME applications for December 2023 (Figure 35). Mortgage loans have repayment assistance only account for 0.6% of total been on the rise over the past decade, with the growth SME loans. This increase can be partly explained by underpinned by rising household incomes, increasing greater awareness of tailored debt counseling services financial market depth, and government policies aimed offered by BNM. Meanwhile, the share of total loans in at home ownership.28 As such, the high proportion of the banking system classified under Stage 2 continued mortgage debt warrants close monitoring of real estate to decline to below pre-pandemic levels, reaching market dynamics—particularly risks from sharp declines 7.2 percent in December 2023 (December 2022: 8.8 in property prices. percent).31 The vast majority of borrowers who exited repayment assistance programs have been able to Asset quality remained solid, with gross impaired resume and sustain loan repayments.32 loans ratio decreasing by 7 basis points y/y, to 1.65 percent at the end of December 2023, its lowest Banks continued to maintain substantial capacity since 2021 (Figure 36). 29 Malaysia’s gross impaired to absorb potential increases in impaired loans. loans ratio remained low compared to regional peers Total provisions accounted for 1.5 percent of total loans, (Table 2). In addition, the share of total loans under above pre-pandemic historical average levels, in spite repayment assistance programs continued to decline.30 of a 5.2 percent y/y decline in provisions to RM32.3 There has been however an increase in applications billion as of end-December 2023.33 Meanwhile, the for loan repayment assistance in selected pockets of loan loss coverage ratio (excluding regulatory reserves) borrowers such as SMEs, whose applications doubled remained at 92 percent of impaired loans as of end- in second half of 2023 (RM2.2 billion) compared to December 2023 (December 2022: 98 percent). 27 Note: 1) 54.5 percent of household debt in 2007 was attributed to properties (residential and non-residential). 2) 6.1 percent of household debt in 2007 was classified as “other purpose”, which includes purchase of securities. 28 Source: BIS Paper No 46 Household Debt in Malaysia. 29 Malaysia uses the impaired loans classification by the Malaysian equivalent of the International Financial Reporting Standards (IFRS) 9 Financial Instruments. The standard uses a three-stage impairment model based on changes in credit quality. 30 As of December 2023, total SME loans under repayment assistance dropped to 5.4 percent (or 0.9 percent of total loans outstanding) compared to 5.6 percent in December 2022. Similarly, household loans under repayment assistance also declined to 1.6 percent of total outstanding loans (December 2022: 1.9 percent). 31 Stage 2 refers to the underperforming loans classified under the Malaysian Financial Reporting Standard 9 (MFRS 9). 32 Statistics are from BNM Financial Stability Review – Second Half 2023. 33 Provisions over total loans in the banking system was at 1.3 percent for the period 2015-2019 (pre-pandemic years). Source: BNM Financial Stability Review – First Half 2023. MALAYSIA ECONOMIC MONITOR | APRIL 2024 45 PART ONE - Recent Economic Developments and Outlook FIGURE 36 Gross impaired loans ratio decreased to 1.65 percent as of December 2023 Gross Impaired Loans Ratio and Top 3 Sectors34, Percentage 2.5 Wholesale, retail, hospitality, 2.35 2.0 Gross impaired loans ratio, 1.65 1.5 Financing, insurance, real estate and business services, 1.59 Households, 1.23 1.0 0.5 0 10/2020 02/2021 04/2021 06/2021 08/2021 10/2021 10/2021 02/2022 04/2022 06/2022 08/2022 10/2022 12/2022 02/2023 04/2023 06/2023 08/2023 10/2023 12/2023 Source: BNM TABLE 2 Malaysia has among the lowest gross impaired loans ratio in the ASEAN region Gross impaired loans ratio, Percentage Malaysia Thailand Singapore Indonesia Philippines (Q4 2023)* (Q3 2023) (Q4 2023) (Q4 2023) (Q4 2023) Gross impaired loans ratio 1.7 2.8 1.7 2.0 2.9 Source: BNM, IMF Financial Soundness Indicators, national sources *Figures are updated based on recent available data. Capital market fundraising remained strong Malaysia’s equity market was largely stable in hikes and the stronger USD environment weighed on 2023. Overall market capitalization increased by investor appetite for emerging market assets. ASEAN 3.4 percent to RM1.80 trillion as at end-2023 from markets faced additional headwinds, including from RM1.74 trillion as at end-2022, supported by gains in weaker Chinese growth. the mid and small-cap segments of the equity market. Meanwhile, the benchmark FTSE Bursa Malaysia Kuala Meanwhile, Malaysian bond yields eased, and Lumpur Composite Index (FBMKLCI) declined by 2.7 corporate spreads narrowed as domestic monetary percent y/y as of end-2023, amid external headwinds policy remained accommodative. The 10-year and weaker-than-expected earnings in several large Malaysian Government Securities (MGS) yield eased corporates. to 3.74 percent as of end-2023 from 4.07 percent as of end-2022.35 Malaysia’s sovereign yield curve shifted The performance of Malaysia’s benchmark equity downwards since the start of 2023 driven by growing index was in line with most regional markets, which expectations of the US Federal Reserve’s potential also registered declines in 2023 (Figure 37). Tighter future interest rate cuts. Domestically, the OPR has external financial conditions, driven by US interest rate remained unchanged at 3.0 percent since May 2023. 34 Top 3 sectors by loans outstanding which collectively make up 80 percent of total outstanding loans. 35 Source: BNM Government Securities Yield Statistics. 46 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook Corporate spreads narrowed in 2023, with the average the stock exchange (across all segments of Bursa spread between 10-year AAA corporate bonds against Malaysia), RM3.6 billion was raised through 32 initial the benchmark 10-year MGS declining to 45 bps as at public offerings (IPOs) in 2023, whereas RM5.8 billion end-2023, compared to 57 bps as at end-2022. was raised through secondary issuances by listed companies. Although there were fewer IPOs compared Capital raising in bond and sukuk markets to that of 2022 (35 IPOs), total funds raised was higher increased in 2023 compared to 2022, driven as compared to the RM3.5 billion raised in 2022. The largely by sovereign issuances. In the debt securities IPO pipeline in 2023 continued to be supported by mid market, a total of RM547.5 billion was raised in 2023, 26 and small-cap listings with the majority of IPOs listed on percent higher than the RM435.1 billion raised in 2022. the Access, Certainty, Efficiency (ACE) Market of Bursa This increase was mainly due to a surge in sovereign Malaysia, which is positioned for smaller and high- issuances which accounted for almost 80 percent of the growth entities.38 total, up from 65 percent the previous year. In contrast, corporate debt issuances moderated by 22.8 percent y/y Capital raising through alternative fundraising in 2023 to RM118.3 billion36, of which RM26.9 billion was platforms, such as equity crowdfunding (ECF) and raised through corporate bonds, while another RM91.4 peer-to-peer (P2P) financing platforms continued billion was raised through corporate sukuk.37 There was to expand. Total fundraising on these platforms, which also lower corporate debt refinancing demand in 2023, comprise both debt and equity financing, grew by with corporate bond and sukuk redemptions declining 28.2 percent y/y in 2023 to RM2.2 billion.39 The bulk to RM85.7 billion in 2023 (2022: RM122.1 billion). As a of the growth was derived from the P2P segment, result, net funds raised by the corporate sector in debt which accounted for over 90 percent of the funds markets was still higher in 2023 (RM32.6 billion) versus raised through alternative markets in Malaysia. Funds 2022 (RM31.3 billion). Despite a decline in the gross raised from P2P financing were used mostly to meet volume of corporate capital raising through bond and the working capital needs of MSMEs in sectors such as sukuk, debt markets remained the dominant source of wholesale and retail trade, as well as the repair of motor funds through public markets for the private sector. vehicles and motorcycles. In contrast, funds raised via ECF were utilized for business expansion, with ECF In equity markets, IPO fundraising remained robust, fundraising activities being dominated by firms in but a moderation in secondary issuances weighed professional, scientific and technical activities. down overall equity fundraising volumes. On FIGURE 37 The performance of Malaysia’s benchmark equity index was in line with most regional markets Annual change in stock indices, Percentage 28.2 24.2 20.3 13.7 6.2 3.8 3.4 -0.3 -1.8 -2.7 -15.2 US S&P 500 US Dow UK FTSE 100 Japan Nikkei 225 Singapore STI Indonesia JCI Thailand SET Philippines PCOMP Malaysia FBMKLCI Malaysia Market Cap Germany DAX Source: Bloomberg 36 Source: Securities Commission Malaysia Annual Report 2023. The Securities Commission noted that there was an exceptional surge in refinancing demand in 2022 amid the introduction of various relief programs aimed at assisting issuers and intermediaries in their post-pandemic recovery. 37 Source: Securities Commission Malaysia Bonds & Sukuk Market Statistics. 38 Source: Bursa Malaysia Financial Statement for Quarter and Year Ended 31 December 2023. 39 Source: Securities Commission Annual Report 2023. MALAYSIA ECONOMIC MONITOR | APRIL 2024 47 PART ONE - Recent Economic Developments and Outlook Foreign flows continued to be asymmetric between from inflows of RM4.4 billion in 2022. portfolio debt and equity, though they reversed the patterns observed in 2022. Specifically, there Foreign fund flow trends in Malaysia in 2023 were marked inflows into debt markets and outflows were comparable to some regional peers, which from equity markets in 2023, whereas the opposite also witnessed net outflows from equity and net pattern held in 2022. The Malaysian debt (bonds and inflows into debt markets (Figure 39). Among equity sukuk) market witnessed positive foreign portfolio net markets in ASEAN peers, the net outflow recorded inflows of RM25.8 billion in 2023 vis-à-vis a net outflow from Malaysia’s equities market was comparable to of RM9.8 billion in 2022 (Figure 38).40 Consequently, net outflows seen in the Philippines and Indonesia, but foreign holdings increased to 13.5 percent of the total markedly smaller compared to Thailand. Similarly, the outstanding amount as of December 2023, slightly net inflow into Malaysia’s bond market was comparable higher than the 13.2 percent in December 2022. These to the net inflows seen in bond markets in the Philippines foreign portfolio net inflows into the Malaysian debt and Indonesia, and significantly larger compared to the market helped offset net outflows from the equities net inflow in Thailand bond market. market which amounted to RM2.3 billion in 2023, down FIGURE 38 Foreign portfolio net inflows into Malaysian bond markets helped offset outflows from equities Foreign portfolio net fund ows, RM billion 40 33.6 30 25.8 19.9 18.3 20 10 4.4 0 -3.1 -2.3 -10 -11.1 -9.8 -20 -24.6 -30 2019 2020 2021 2022 2023 Equity Market Non-Resident Net In ows Bond Market Non-Resident Net In ows Source: Securities Commission Malaysia, Annual Reports (2019 – 2023) FIGURE 39 Foreign fund flow trends in Malaysia were comparable to trends in regional ASEAN-4 peers Foreign portfolio net fund ows, 2023, US$ billion 8 6 4 2 0 -2 -4 -6 Malaysia Philippines Indonesia Thailand Equity Market Non-Resident Net In ows Bond Market Non-Resident Net In ows Total Source: World Bank staff calculations based on Bloomberg data 40 Source: Bloomberg. 48 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook Federal government revenue collection is expected to decline in 2024 Federal government revenue is estimated to The share of petroleum-related revenue is estimated be higher in 2023 compared to 2022. Federal to decline in 2023 due to lower global crude oil prices. government revenue is estimated to be at 17.3 percent Petroleum-related revenue is estimated to decline to 4.2 of GDP in 2023 (2022: 16.4 percent). Tax revenue is percent of GDP in 2023 (2022: 4.6 percent), in line with estimated to increase to 12.6 percent of GDP (2022: lower global oil prices.41 Petroleum income tax (PITA) 11.7 percent) due to higher corporate and personal and dividends from Petronas registered 1.4 percent income tax collection. Higher corporate tax collection of GDP (2022: 1.3 percent) and 2.2 percent of GDP is partially attributed to the Prosperity Tax, where (2022: 2.8 percent), respectively, during the year. Lower companies with taxable income of more than RM 100 petroleum-related receipts in 2023 translate to a lower million were charged an additional 9 percentage points share of petroleum-related revenue at 24.1 percent of on the corporate tax rate. The estimated increase in total revenue (2022: 28.0 percent) (Figure 40). individual tax collection in 2023 is also partly due to the changes to the personal income tax rates for the higher Revenue collection is expected to decline in 2024 income brackets, which were adjusted upwards by 0.5 due to a continued decrease in petroleum-related to 2 percentage points for those earning between RM investment income (Figure 41). Federal government 100,000 and RM 1 million. Meanwhile, the proceeds revenue is projected to decline to 15.6 percent of from sales and services tax (SST) in 2023 increased GDP in 2024 (2023: 17.3 percent) mainly due to lower slightly to 1.9 percent of GDP (2022: 1.8 percent). The investment income under non-tax revenue collection. higher tax revenue was slightly offset by lower non-tax Specifically, the government anticipates lower dividends revenue, as proceeds from investment income, mainly from Petronas even though its assumption for global oil Petronas dividends, declined to 3.1 percent of GDP in prices is slightly higher for 2024 at US$ 85 per barrel 2023 (2022: 3.3 percent). (2023: US$ 82.5 per barrel). FIGURE 40 FIGURE 41 The share of petroleum-related revenue declined In 2024, the revenue collection is expected to in 2023 due to lower global oil prices decline mainly due to a continued decrease in petroleum-related investment income Share of revenue items, Percentage Total government revenue, Percentage of GDP 100 25 80 20 17.3 15.6 60 15 4.7 3.2 40 10 20 5 28 24 20 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023e 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023e 2024f 2024f Petroleum-related revenue Non-petroleum-related revenue Tax revenue Non-tax revenue Total revenue Source: World Bank staff calculations based on MOF data Source: World Bank staff calculations based on MOF data 41 Average Brent crude oil spot price in 2022 and 2023 is US$ 100.9/barrel and US$ 82.5/barrel, respectively. Source: US Energy Information Administration. MALAYSIA ECONOMIC MONITOR | APRIL 2024 49 PART ONE - Recent Economic Developments and Outlook The government estimates a modest decrease gain tax (CGT) of 10 percent on the net gain of the in tax revenue collection for 2024, following the disposal of unlisted shares for companies, as well as introduction of various tax measures outlined in the a higher service tax rate42 for selected services with a recent budget announcement. Tax revenue collection broader scope.43 While these measures show positive is expected to be at 12.3 percent of GDP in 2024 (2023: signs of the government’s efforts to enhance tax 12.6 percent). Several tax-related measures have been collection, they are still insufficient at addressing the implemented this year to broaden the tax. For instance, revenue inadequacy arising from growing tax gaps in from March 1, the government has imposed a capital Malaysia.44 Federal government subsidy spending is expected to decline in 2024 Total federal government expenditure is estimated For 2024, the government forecasts that to increase in 2023, with higher-than-budgeted subsidy spending will decline given the planned spending on subsidies and social assistance. implementation of targeted subsidies and efficiency Government spending is estimated to rise to 22.3 improvement in the delivery of social assistance percent of GDP in 2023 (2022: 20.3 percent), higher than programs through PADU. Subsidies and social the projected 20.4 percent in Budget 2023. The upward assistance spending are expected to decline to revision in spending of RM 22 billion (1.2 percent of GDP) 2.7 percent of GDP in 2024, mainly from lower fuel in operating expenditure against the budgeted amount subsidies. PADU could enable the government to was used mainly for subsidies and social assistance implement more targeted measures that can improve programs, supplies and services, and pensions. Overall spending efficiency. However, the government has yet spending for subsidies and social assistance increased to finalize the modality of targeted subsidies, such as slightly to 3.9 percent of GDP in 2023 compared to 2022 the eligibility threshold, the amount of fuel subsidies (3.8 percent), higher than the budgeted amount of 3.1 per person, and how the subsidy will be disbursed.45 percent of GDP given the delayed implementation of the PADU was closed for updating on March 31, 2024 with targeted subsidy mechanism. the number of registrations reaching 11.6 million.46 The share of rigid expenditures are projected to rise further in 2024 The federal government expects higher share of interest payments (Figure 42). In 2024, these structural rigid expenditures in 2024. Rigid spending, which expenditures are projected to increase further to 58.6 includes payments related to emoluments, pensions, percent of total operating expenditures. Of note, the and debt service charges, is estimated to increase to debt service ratio47 is projected to increase to 16.2 55.3 percent of total operating expenditures in 2023 percent of total federal government revenue in 2024 (2022: 54.8 percent), driven mainly by a higher share of (2023e: 14.7 percent), higher than the 15.0 percent 42 The Service Tax rate increased to 8 percent from 6 percent from 1 March 2024. However, the higher rate does not apply to essential services such as food and beverages and telecommunications. While the government projects revenue from SST to be at 1.8 percent of GDP in 2024 (2023e: 1.9 percent), there could be some additional collection of RM3.5 – RM4.0 billion (or up to 0.2 percent of GDP) from Service Tax rate increment. 43 The scope will be expanded to include logistics services, brokerage and underwriting services for non-financial services (for example, brokerage for ship and aircraft space, commodity and real estate), delivery services (except for delivery of food and beverage) and karaoke centers, with a threshold value of taxable services at RM500,000 for mandatory registration. 44 See World Bank (2023) “Raising the Tide, Lifting All Boats” Malaysia Economic Monitor (October), World Bank, Washington, DC. 45 For example, the subsidy could be disbursed as higher cash transfers or through subsidy cards issued to eligible households. 46 11.6 million adults over the age of 18, representing 52.6 percent of the total citizen population, have successfully registered and updated their profiles in the PADU system. This contributes to the 17.7 million profiles, or 58.7 percent of the total citizens, which also includes household members under 18 years of age. Source: Ministry of Economy, Malaysia (April 1, 2024) 47 The Federal Constitution mandates debt service charges to be paid before all other expenses. 50 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook administrative limit practiced by the government to timeline and the design of the defined contribution ensure prudent debt management (Figure 43). The scheme for newly hired civil servants. higher share of rigid expenditure continues to pose a challenge to long-term fiscal sustainability and crowd Spending on development activities is estimated out discretionary spending. at 5.3 per cent of GDP (2022: 4.0 per cent). The bulk of the spending is directed to the economic sector The proposed pension scheme for newly hired civil (59.6 percent of total development spending), mainly for servants could help to manage the increase in constructing new highways and roads and upgrading rigid expenditures in the future. The growing size airports, ports, and roads. Of note, the increase of civil service and the increasing aging population in development spending is also attributed to the have substantially increased current and future redemption of the US$ 3 billion 1MDB bond (about RM pension liabilities with significant long-term fiscal 13 billion or 13.5 percent of development expenditure) in implications. Without any reform in the pension system, March 2023 due to the materialization of the contingent its spending is estimated to grow to RM 120 billion in liability. For 2024, the government has allocated 4.6 2040 (compounded annual growth rate: 8.6 percent), percent of GDP to support the projects with potentially more than tripling the 2024 budgeted amount.48 Under high multiplier impact on the economy outlined under the current defined benefit scheme, a civil servant at the Twelfth Malaysia Plan, including the Pan Borneo retirement will receive an annuitized level of income Highway and Sarawak Sabah Link Road Phase 2. of up to 60 percent of their preretirement salaries. Implementing a defined contribution49 scheme for newly The government is projected to remain on its hired civil servants would enable better planning and fiscal consolidation path. The fiscal deficit for 2023 is management of the government’s pension liabilities in estimated to be at 5.0 percent of GDP (2022: -5.6 percent), the long term50 (See Box 3 on Reforming civil service in line with the Budget 2023 target. The fiscal deficit is pensions). The government has yet to announce the expected to decrease to 4.3 percent of GDP in 2024. FIGURE 42 FIGURE 43 The share of rigid spending increased in 2023 and Debt service ratio is expected to be above its is expected to rise further in 2024 administrative prudent limit in 2024 Rigid expenditures, Percentage of total operating expenditure Debt service charges, Percentage of total federal government revenue 70 17 16.2 16 60 58.6 54.8 55.3 Administrative limit 15% of total revenue 15 50 14.7 14 40 13 30 12 11 20 10 10 9 0 8 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023e 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023e 2024f 2024f Source: World Bank staff calculations based on MOF data Source: World Bank staff calculations based on MOF data Note: The decrease in the share of rigid spending in 2022 reflects the increase in overall operating expenditure, mainly from the implementation of blanket subsidies. 48 Source: The Star (24 January 2024), “Govt to foot some RM120bil in pension payments if new salary scheme not introduced, says Zahid ” 49 Under the defined contribution scheme, the pension payments upon the retirement of civil servants will depend on contributions and investment returns. 50 In the medium term, the government will pay additional employer contributions under the defined contribution scheme on top of the payments under the defined benefit scheme. In the long term, pension liabilities under the defined benefit scheme will start shrinking and improving fiscal sustainability. MALAYSIA ECONOMIC MONITOR | APRIL 2024 51 PART ONE - Recent Economic Developments and Outlook BOX 3 Reforming civil service pensions Pension schemes covering only civil servants are has been exacerbated by retirement ages that have common outside Eastern Europe and the former not been increased for decades despite a significant Soviet Union countries. They predate national schemes increase in the life expectancy of pensioners. The and can often be traced back to their colonial roots.51 Former resulting fiscal pressure has led to various attempts British colonies inherited defined benefit (DB) schemes that at reform. Among emerging economies, Hong Kong originated in 17th century England.52 While they vary slightly SAR, China (2001), India (2004), and Nigeria (2004) in terms of benefit formulas and retirement age (Figure were the first to replace their DB schemes with defined 44), they are generally financed from the central budget contribution (DC) schemes in which contributions from rather than from contributions or reserves. Malaysia is a both the government and employees are accumulated partial exception, having accumulated significant reserves in individual accounts and invested in order to generate in recent years in its public sector schemes through the future pensions. Botswana (2007), Maldives (2009), and Retirement Fund (KWAP). Kenya (2015) have each introduced DC schemes, and Indonesia is planning to follow the same path. Table As these pension schemes have matured, the 3 shows the different contribution rates and transition unfunded pension liabilities53 have grown. This trend arrangements for these new DC schemes.54 FIGURE 44 The accrual rates55 that determine a civil servant’s pension payment and the retirement age vary from country to country Accrual rate, Percentage Retirement age, Years 3.5 61 60 3.0 59 2.5 58 2.0 57 1.5 56 55 1.0 54 0.5 53 0 52 Hong Kong Myanmar India Nepal Malaysia Nigeria Pakistan Indonesia Kenya Bangladesh Sri Lanka Accrual rate (LHS) Retirement age (RHS) Source: Jain, Himanshi and Palacios, Robert (2021), “The challenge of civil service pension reform in Asia: Experiences around the region and a case study of Indonesia” (World Bank), “Kenya Social Protection and Jobs Public Expenditure Review ” World Bank (2023), Public Service Department, Malaysia. 51 Former colonial powers offered generous pensions to attract and retain expatriate staff. In an influential study, Lowell (1900) contended that “…all progressive nations have agreed that only on certain conditions can an efficient tropical colonial service be maintained. These conditions are security of tenure, large salaries, and liberal pensions.” 52 Raphael (1964). 53 Refers to the shortfall between the total amount of pensions that the government is obligated to pay to current and future pensioners and the actual amount of funds set aside to pay for those obligations. 54 Thailand introduced a DC component and reduced the DB component of its civil service pension scheme in 1997. It has produced reasonable investment returns but the bulk of pensions still come from the DB scheme. Singapore has always had a DC scheme that covers both private and public sector employees. However, investment returns do not reflect actual returns but are mandated to be low risk and low return. Combined with strong wage growth over several decades, the result is relative low replacement rates. 55 The accrual rate in a defined benefit pension scheme is the rate at which an employee accrues benefits in the pension plan based on their years of service. The accrual rate in Malaysia is 2.0% per year of service. For each year a civil servant works, they would add another 2.0% to their last earned salary to be paid out monthly at retirement, capped at 60%. For example, civil servants with 10 and 20 years of experience will be eligible for 20% and 40% of their last drawn monthly salary as pensions. 52 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook TABLE 3 Globally, civil service pension reforms involve movement towards a defined contribution system Contribution rate %56 Country Transition rules (employer/employee) Botswana New entrants 17.5/2.5 Hong Kong SAR, China New entrants 5/12.5 Kenya Civil servants aged 45 and under 15/7.5 India New entrants 10/10 increased to 12/10 Maldives All civil servants 7/7 Nigeria New entrants 7.5/7.5 The introduction of a DC scheme prevents further The international experience provides several lessons: accumulation of pension liabilities for those • A well-designed reform should ensure there are covered. However, most of the reforms applied only no large differences in outcomes between cohorts to new government employees, so that those already that could be perceived as unfair and arbitrary in the DB scheme continue to generate new liabilities • It is important to anticipate transition costs and for decades to come. Since the government now has create the fiscal space to finance them, including to pay pensioners from the old scheme, as well as its with parametric reforms contribution to the DC scheme, overall costs rise during • Parameters such as the contribution rate should the transition. The short-run increase in deficits hides the be chosen based on simulations using reasonable fact that the unfunded pension liability is shrinking since assumptions about wage growth and investment it does not show up in the fiscal accounts. Nonetheless, returns these savings can improve fiscal sustainability and • A well-thought-out investment policy is needed in increase national savings, especially in the context of order to achieve good returns an aging population. • Insurance against the risks of death or disability should be included in the scheme’s design. Parametric reforms can be implemented to generate short-run savings that help to cover transition India provides a cautionary tale in reforming civil costs. This involves changes to the existing system’s service pension systems. Twenty years after new civil parameters including the benefit formula, retirement servants were sent to the new DC scheme, several state age and the way that pensions are indexed. Reforms governments are proposing to return to the old DB include moving gradually away from a final salary- scheme. This is due in part to the fact that the cost of based formula to a lifetime earnings base57 and shifting the transition is starting to bite as the government pays to price rather than wage indexation. Both reforms contributions for most civil servants while continuing to improve the equity of the scheme while producing some bear the cost of pensioners from the old scheme. Also, savings. Gradually raising the retirement age has the investment returns have not outpaced wage growth as added advantage of increasing replacement rates from expected, leading to concerns about achieving target the DC scheme. Both kinds of reform—parametric and pension levels. In addition, provisions for the survivors systemic—should consider the overall compensation of workers who have died before reaching retirement package. Hong Kong SAR, China did this in 2001 but age have not been adequate because insurance was was an exception to the general pattern. not included in the scheme. 56 Malaysia has yet to announce the details on contribution rates under the defined contribution scheme. 57 For example, the reform in Vietnam in 1995 gradually moved civil service pensions from a final salary to a lifetime earnings base. MALAYSIA ECONOMIC MONITOR | APRIL 2024 53 54 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook Higher federal government debt level in 2023 Outstanding federal government debt increased in 2023. The total federal government debt stood at 64.3 percent of GDP in 2023 (2022: 60.3 percent), with The tabling and the statutory debt comprised of Malaysian Government Securities (MGS), Malaysian Government Investment enactment of the Issues (MGII), and Malaysian Islamic Treasury Bill (MITB) PFFRA underscores the recorded at 62.1 percent of GDP (2022: 57.6 percent) (Figure 45). In 2023, the government raised RM 226.6 government’s commitment billion (12.4 percent of GDP) of debt for deficit financing to improve transparency and debt refinancing. There was strong demand for these papers, especially for the MGS and MGII, and governance which received bid-to-cover ratios of more than two, reflecting strong demand from investors and a deep liquid domestic market. Given the higher interest rate government to publish public finance documents and environment in 2023, the weighted average cost of adhere to several fiscal rules. Of note, the mandatory borrowing increased from 4.2 percent in 2022 to 4.3 publication of tax expenditure statements is a key step percent as of December 2023, resulting in higher debt towards improving overall efficiency and effectiveness service charges. of the tax system. However, four aspects of the PFFRA could be strengthened, namely: (i) harmonizing The Public Finance and Fiscal Responsibility compliance periods for various rules; (ii) including Act (PFFRA) which was announced prior to the well-defined escape clauses; (iii) merging the rules on tabling of Budget 2024 last year introduced debt and financial guarantees into a single rule; and (iv) several fiscal rules. The tabling and enactment of the establishing an independent fiscal council to oversee PFFRA underscores the government’s commitment to compliance (see Box 4 on Understanding the Public improve transparency and governance. It requires the Finance and Fiscal Responsibility Act). FIGURE 45 Federal government statutory debt increased in 2023 Federal government statutory debt, Percentage of GDP 70 65 62.1 60 57.6 55 50 45 40 35 30 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: World Bank staff calculations, MOF and Haver Note: The data above reflects outstanding amounts for MGS, MGII, and MITB. These are the only debt instruments that are subject to the statutory limit of 65 percent of GDP under the Loan (Local) (Statutory Ceiling for Borrowing) and Government Funding (Statutory Ceiling of Moneys Received) Order 2022 [P.U. (A) 399/2022], effective January 1, 2023. MALAYSIA ECONOMIC MONITOR | APRIL 2024 55 PART ONE - Recent Economic Developments and Outlook BOX 4 Understanding the Public Finance and Fiscal Responsibility Act The enactment of the Public Finance and Fiscal to evaluate the effectiveness and efficiency of tax Responsibility Act (PFFRA) underscores the expenditure, especially if the tax burden is shifted government’s commitment to improve fiscal to other taxpayers.58 Policymakers can identify areas management. The act is designed to ensure the where tax expenditure may be inefficient or not aligned sustainability of public finances and preserve with current policy objectives and make changes to macroeconomic stability. Under the PFRRA, the improve the overall efficiency of the tax system. formulation of fiscal policy should be based on the principles of accountability, responsibility, transparency, The PFFRA includes fiscal rules that impose ceilings and intergenerational equity. In addition, the PFFRA is on the fiscal balance, debt, and guarantees, as well expected to enhance transparency as it institutionalizes as minimum levels of development expenditures. the publication of fiscal risks, mid-year expenditure The objectives of the rules on fiscal balance, debt, and reports, economic and fiscal outlook reports, and tax guarantees are to ensure the sustainability of public expenditure statements. finances in the medium to long term and to make fiscal policy more predictable, while the rule on development Of note, the mandatory publication of tax expenditure aims at protecting public investment expenditure statements is a key step towards needed to promote long-term economic growth. improving revenue management. The statement will The short-term operational guidance for fiscal policy capture the revenue foregone due to tax exemptions, is reflected in the fiscal balance and development deductions, credits, deferrals, preferential tax rates, expenditure rules, while the long-term guidance is loss carry-forward, and patent box regimes. This defined by the debt rule. publication would allow the public and government FIGURE 46 The salient features of the PFFRA Public Finance and Fiscal Responsibility Act (PFFRA) Fiscal policy objectives: Ensuring the sustainability of public nance, preserving macroeconomic stability, and safeguarding the well-being of the people based on the principles of accountability, responsibility, transparency, and intergenerational equity. Procedural Rules Numerical Rules Establishing the characteristics and interactions of agents in the Lasting constraints with de ned indicators of overall budgeting processes to improve transparency and accountability scal health for greater scal discipline Mandatory publications Fiscal Policy Committee Fiscal rules as % of GDP Fiscal adjustment plans and temporary escape clause 1. Economic outlook report Fiduciary duties include 1. Annual development 2. Fiscal outlook report responsibilities to oversee scal expenditure ≥ 3% If scal rules are not met, the 3. Mid-year expenditure report matters, debt, liabilities, and 2. Fiscal balance ≤ -3% government will lay out a scal 4. Fiscal risk statement ensure sound scal policy. A 3. Debt level ≤ 60% adjustment plan at the 5. Tax expenditure statement subcommittee can be formed to 4. Financial guarantee ≤ 25% parliament. The government provide technical support. may temporarily deviate from the targets amid sudden and unpredictable events. Source: World Bank Staff based on the Public Finance and Fiscal Responsibility Act 2023 Note: The elements shown above are key features of the act and are non-exhaustive. 58 Source: Department of Treasury, Australia 56 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook Overall, while the PFFRA provides a sound clauses provide flexibility and predictability by clearly framework for a sustainable, transparent, and specifying the set of events that trigger the operation predictable fiscal policy, some aspects can be of the clause, the permitted size of the deviation from strengthened. In particular, the compliance period set the fiscal targets, the duration of the suspension of in the PFRRA is different for the four rules: the fiscal the rules, and the trajectory to resume them. Similarly, rules on development expenditure and on financial automatic correction mechanisms that specify: (i) guarantees are to be complied with on an annual basis, the size of the deviation that triggers the correction while the rules on the fiscal balance and debt are to mechanism, (ii) the fiscal aggregates that will be used be complied with in the medium term (3-5 years). to correct the deviation, and (iii) the maximum time Given the interaction between the rules and the fact needed to return to compliance, are also expected to that the budget covers one fiscal year, and numerical make fiscal management more credible, predictable, values are calculated annually, requiring compliance and transparent. for all the rules on an annual basis will strengthen the predictability and transparency of the fiscal framework. Some improvements in the technical design of the fiscal rules could be explored. Merging the rules on debt and financial guarantees into a rule that limits the public and publicly guaranteed debt may reduce Under the PFRRA, incentives to undertake investments through other the formulation of mechanisms (for example, PPPs). The debt ceiling of 60 percent of GDP is higher than comparison countries fiscal policy should be (EMDE average: 45 percent). The numerical target based on the principles on financial guarantees could be revised downward, given that the aggregate limit for debt and guarantees of accountability, of 85 percent of GDP (60 percent debt + 25 percent responsibility, guarantees) may be excessive. In this regard, the limit of 60 percent of GDP could be applied to the debt transparency, and and publicly guaranteed debt, as well as to financial intergenerational equity guarantees. In terms of the institutional framework, the PFFRA could be strengthened through the establishment The PFFRA could include escape clauses to be of an independent fiscal council. While the PFFRA triggered by shocks and automatic correction currently mandates a Fiscal Policy Committee (FPC) mechanisms in case of deviations or non-compliance to advise the cabinet on fiscal policy matters, the with the fiscal rule targets. The PFFRA establishes FPC’s composition of cabinet members60 may limit the possibility of undertaking fiscal adjustment plans its independence. An independent fiscal council, in the event of non-compliance or the occurrence supported by a permanent technical secretariat that: of a sudden and unpredictable event that may pose (i) monitors compliance with fiscal rules, (ii) prepares significant risks to the economy and fiscal position. independent macroeconomic projections, and (iii) These plans are to be prepared by the government assesses the fiscal impact of government initiatives, and presented to the parliament.59 More predictable could strengthen the transparency and credibility of the and automatic adjustments can be provided by escape fiscal framework provided by the PFFRA. clauses and automatic correction mechanisms. To be resilient and credible, a rules-based fiscal framework must be sufficiently flexible while remaining simple and transparent. In this regard, well-defined escape 59 Fiscal adjustment plan due to non-compliance with the fiscal rules requires parliamentary approval, while a temporary deviation from the fiscal rules due to a sudden and unforeseeable event requires cabinet approval, which is subsequently presented to parliament. 60 FPC members consist of the prime minister as chairman, the deputy prime minister, the ministers charged with finance and economy, the chief secretary to the government, the secretary generals of the treasury and the Ministry of Economy, the central bank governor, and not more than two external fiscal experts appointed by the committee. MALAYSIA ECONOMIC MONITOR | APRIL 2024 57 PART ONE - Recent Economic Developments and Outlook Economic Outlook Global growth is expected to slow in 2024 Global growth is set to slow to 2.4 percent in 2024 The East Asia and Pacific (EAP) region is projected (2023: 2.6 percent), marking the third consecutive to grow by 4.5 percent in 2024 (2023: 5.1 percent), year of deceleration and the slowest half-decade mainly reflecting a further deceleration in economic of growth over the last 30 years (Figure 47). This activity in China (Figure 48). Growth in China is reflects softening labor markets, reduced savings expected to decline further to 4.5 percent in 2024 buffers and pent-up demand for services, as well as (2023: 5.2 percent) as the post-pandemic rebound the ongoing and lagged effects of monetary and fiscal wanes, while the prolonged weakness in the property policy tightening to rein in decades-high inflation. sector, elevated debt, and other longer-term structural Growth in advanced economies is projected to bottom factors weigh on domestic demand. The rest of the out at 1.2 percent in 2024 (2023: 1.5 percent) as region, which had suffered in 2023 from slowing global growth in the US moderates, while euro area growth growth and tightening financial conditions, is expected increases marginally as lower inflation raises real wages. to grow by 4.6 percent in 2024 (2023: 4.4 percent), Meanwhile, growth in EMDEs is projected to be broadly underpinned by solid domestic demand, amid modest unchanged at 3.9 percent for 2024 (2023: 4.0 percent). inflation and increased government spending in some Following exceptional weakness last year, global trade economies. In line with the likely recovery of global is projected to pick up to 2.3 percent in 2024 (2023: goods trade, regional trade growth is anticipated 0.2 percent). Goods trade is set to expand again, while to increase modestly in the near term, offsetting the the contribution of services to global trade growth is impact of the slowdown in China. projected to decline, aligning closer with the trade composition seen before the pandemic. FIGURE 47 FIGURE 48 Global growth is expected to slow to 2.4 percent Growth in EAP is expected to slow to 4.5 percent in 2024, marking the third consecutive year of in 2024, mainly reflecting slower growth in China deceleration GDP, y/y, Percentage GDP, y/y, Percentage 5 7 6 4 5 3 4 3 2 2 1 1 0 0 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f 2023e 2024f 2025f World Advanced Emerging Market and Developing EAP Developing EAP China Economies Developing Economies excl. China Latest Estimates (January 2024) Latest Estimates (April 2024) Previous Estimates (June 2023) Previous Estimates (January 2024) Source: World Bank Global Economic Prospects Source: World Bank East Asia Pacific Economic Update April 2024 58 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook Economic growth in Malaysia is projected to pick up in 2024 After experiencing weaker-than-expected growth global trade, and relatively elevated interest rates will outcomes in 2023, Malaysia’s economy is projected continue to weigh on investment intentions among to expand at a higher rate of 4.3 percent in 2024 firms in export-oriented and interest rate-sensitive (2023: 3.7 percent) (Figure 49). Domestic demand sectors. Capital spending by the government will will remain the main growth driver throughout the continue to be channeled towards upgrading public forecast period (Figure 50). Private consumption is infrastructure in the transportation, health, and expected to see a modest increase in growth to 5.2 education sectors. Meanwhile, investment activity by percent this year (2023: 4.7 percent), supported by public corporations will be supported by the ongoing continued improvements in labor market conditions strategic infrastructure projects such as the East Coast and wage growth, as well as household income support Rail Link (ECRL), MyDIGITAL 5G rollout, the Rapid from the government, including the Sumbangan Tunai Transit System (RTS) Link, and the Sabah-Sarawak Pan- Rahmah (STR) cash aid. Meanwhile, public consumption Borneo Highway. is forecasted to grow at a rate of 2.8 percent this year (2023: 3.9 percent). This is mainly attributed to annual Malaysia’s exports will benefit from a partial salary increments for civil servants, increased new hires recovery of global demand for goods, following for critical positions, particularly in health and education exceptional weakness last year. Following a sectors, as well as higher spending on supplies and contraction in 2023, Malaysia’s export growth is services. projected to grow modestly at 4.8 percent this year (2023: -7.9 percent), benefitting from a modest pickup Gross fixed capital formation (GFCF) is projected in global activity and base effects. Meanwhile, the to grow at a sustained pace of 5.1 percent in 2024 services trade will be supported by the continuing rise (2023: 5.5 percent), underpinned by ongoing and in international tourist arrivals from the surrounding new capital expenditures in the private and public region, including China. Malaysia’s imports are forecast sectors. Business investment will continue to be to expand at 5.3 percent this year (2023: -7.6 percent), supported by ongoing multiyear investments and the mirroring the projected recovery of goods exports realization of the recently approved investments in the given the high share of intermediate inputs in Malaysia’s manufacturing and services sectors. However, subdued imports, alongside continued consumer spending and global demand, persistent uncertainty surrounding sustained investment activity. FIGURE 49 FIGURE 50 Malaysia’s GDP growth is projected to pick up to ...driven by higher domestic spending and 4.3 percent in 2024... recovery in the external sector Real GDP, y/y, Percentage Real GDP, y/y, Percentage 8.7 8.7 8 8 6 4.3 5.8 3.7 6 4 4.8 4.4 4.4 4.3 2 4 3.7 3.3 0 2 -2 -4 0 -6 -8 -2 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f -4 Private Consumption Public Consumption -6 -5.5 GFCF Change in Inventory 2016 2017 2018 2019 2020 2021 2022 2023 2024f Net Exports Real GDP,y/y Source: World Bank staff projections based on DOSM data Source: World Bank staff projections based on DOSM data MALAYSIA ECONOMIC MONITOR | APRIL 2024 59 PART ONE - Recent Economic Developments and Outlook Headline consumer price inflation is expected to forecasts hinge on the assumption that the ceiling on remain moderate at around 2.5 percent this year retail fuel prices and price control measures on selected (2023: 2.5 percent), aided by moderating global food items will remain in place throughout the forecast commodity prices. Underlying inflation, as measured period. Any changes in government policies on fuel by core inflation, will also likely trend lower this year subsidies and price controls will alter the course of the amid stabilizing cost and demand conditions. These projections. TABLE 4 Malaysia’s GDP growth is expected to pick up in 2024 Real GDP Growth, y/y, Percentage Contribution to Real GDP Growth, y/y, Percentage point   2021 2022 2023 2024f     2021 2022 2023 2024f GDP 3.3 8.7 3.7 4.3     Domestic Demand Domestic Demand 3.8 9.3 4.5 4.6 3.6 8.7 4.3 4.4 (including stocks) (including stocks) Private Consumption 1.9 11.2 4.7 5.2 Private Consumption 1.1 6.6 2.8 3.1 Public Consumption 6.4 4.5 3.9 2.8 Public Consumption 0.9 0.6 0.5 0.4 Gross Fixed Capital Gross Fixed Capital -0.8 6.8 5.5 5.1 -0.2 1.4 1.1 1.0 Formation Formation External Demand External Demand Exports of Goods Exports of Goods 18.5 14.5 -7.9 4.8 11.4 10.3 -5.9 3.2 & Services & Services Imports of Goods Imports of Goods 21.2 15.9 -7.6 5.3   11.7 10.3 -5.3 3.3 & Services & Services Source: World Bank staff projections based on DOSM data Risks to Malaysia’s growth outlook remain tilted to the downside Malaysia will continue to face considerable The materialization of any of these risks could have downside risks stemming from the external considerable adverse spillovers to Malaysia through environment. Among the main downside risks to the its global trade and financial linkages.61 On the upside, global growth outlook are: (i) heightened geopolitical there is a possibility that economic activity in the US tensions including an escalation of the recent conflict and some major economies could be more resilient in the Middle East, (ii) financial stress related to than anticipated, as inflationary pressures wane and still-high real interest rates and elevated debt, (iii) monetary policy is eased, which would bolster global more persistent inflationary pressures, (iv) further growth. fragmentation of trade and investment networks, and (v) climate-related disasters. In the region, China’s growth Domestically, the key downside risks relate to could be weaker than projected if the weakness in the the uncertainty over the strength of household property sector, rising indebtedness, and depressed consumption. A temporary policy-induced upside sentiment weigh more heavily on private sector activity. shock to inflation, weaker real disposable income 61 Recent World Bank staff estimates suggests that a 1 percentage point decline in GDP growth of the G7 economies and China could lower Malaysia’s growth by 1 and 0.7 percentage point, respectively. (Malaysia Economic Monitor, February 2023) 60 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART ONE - Recent Economic Developments and Outlook growth, and lagged effects of the post-pandemic conditions, could also hurt growth. On the upside, monetary policy nominalization could weigh on the the continued resilience of private investment and strength of domestic demand by more than is currently stronger-than-assumed tourism-related activity point assumed. Supply-side disruptions to commodity to the risk that domestic activity may be stronger than production, possibly due to unfavorable weather anticipated. Successful fiscal reforms will require both good policy design and effective policy communication to secure broad-based support from the Rakyat Proactive communication of expenditure rationali- planning to ensure adequate, well-timed and well- zation initiatives, particularly in the context of sequenced tax policy and administration reforms. subsidy reform, is essential. The implementation of targeted subsidies can significantly improve expenditure efficiency and lead to much-needed fiscal savings in Malaysia. Early and clear communication The implementation of of the subsidy reform plan is key to managing public targeted subsidies can expectations. For example, the government can proactively communicate the targeted subsidy significantly improve mechanism, eligibility criteria, and the policy’s impact expenditure efficiency and on households of different income levels. Moreover, a firm commitment to redirect savings to social spending lead to much-needed fiscal and related mitigating measures, such as increased savings in Malaysia cash transfers to targeted households, can help to gain broader support for the reform. On this front, World Bank estimates show that redirecting the fuel subsidy Over the medium term, the government’s focus to budget into expanded and refocused social assistance improve the people’s standard of living, as well as could double poverty reduction while generating fiscal ensuring access to education, healthcare, and basic savings.62 infrastructure remains. The MADANI Economic framework elevates inclusive growth and equality While optimizing public spending can free of opportunities as key missions of the Malaysian up budgetary resources, enhancing revenue government. The country still faces some challenges mobilization remains vital to restore fiscal space to ensure that the proceeds of economic development and meet future fiscal needs. Malaysia’s ability to are distributed more evenly across different segments sustainably finance its long-term inclusive growth is of the population. In addition, findings from the Basic highly constrained by its relatively low tax capacity. Amenities Survey Report suggests that while Malaysians Despite recent tax reforms, projected revenue collection generally enjoy a high level of access to fundamental remains modest. Further revenue mobilization efforts needs, regional disparities exist. In particular, there are could focus on enhancing general consumption tax, gaps in access to healthcare and education—two of the broadening the bases of personal income tax and most crucial factors for a country’s long-term inclusive capital gains tax, streamlining corporate tax incentives, growth. Improvements could be made to enhance and strengthening tax administration. A forward- spending efficiency and the quality of service delivery looking MTRS will provide the government with greater in these two sectors (See Part 2, Bending Bamboo clarity on its structural fiscal trends and allow for better Shoots: Strengthening Foundational Skills). 62 See World Bank (2023) “Raising the Tide, Lifting All Boats” Malaysia Economic Monitor (October), World Bank, Washington, DC. (https://documents1.worldbank. org/curated/en/099100623063032359/pdf/P5008500d5060903a093a202e1acb060174.pdf) MALAYSIA ECONOMIC MONITOR | APRIL 2024 61 62 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO Bending Bamboo Shoots: Strengthening Foundational Skills MALAYSIA ECONOMIC MONITOR | APRIL 2024 63 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Bending Bamboo Shoots: Strengthening Foundational Skills Malaysia’s successful transition to a high- income economy depends upon strengthening foundational skills As Malaysia strives to become a high-income Malaysia has expanded early childhood education economy, the need for advanced and specialized and achieved near universal primary education skills will be crucial to maintain its economic with remarkable equity in resources and student competitiveness. Historically, Malaysia’s economic experiences. Nearly 90 percent of young children have growth has been driven by labor-intensive, low- access to early childhood education opportunities in cost manufacturing. However, its focus must shift to Malaysia, and the net enrollment rate at the primary innovation and technological progress to overcome level is close to 100 percent since 2013. Despite the middle-income trap and successfully transition these successes, many children, particularly from to a high-income economy. Advanced cognitive and disadvantaged backgrounds, struggle with learning specialized skills are essential for fostering a technology outcomes. The problem starts early, with a significant and innovation-driven economy. Malaysia has some portion of children lacking school readiness skills— distance to go here: the Malaysia Productivity and leading to challenges in reading, writing, and Investment Climate Survey 2020 shows that firms list mathematics throughout their schooling. By the age workforce skills as a key constraint to growth across the of 15, Malaysian students lag behind aspirational board in Malaysia. The survey also finds that Malaysian peers in reading, math, and science as measured by employers are increasingly demanding higher cognitive international assessments. This is of special concern and socio-emotional skills from their workforce. given Malaysia’s economic aspirations. To address these challenges, Malaysia has implemented various Sophisticated skills, whether cognitive, technical programs such as the Reading Aid Programme and the or socio-emotional, are built on strong foundational Primary School Literacy and Numeracy Program. The skills. To build strong foundational skills, countries must strategy to improve the teaching profession outlined in start early, beginning with early childhood education. the Malaysia Education Blueprint 2013-2025 aligns with Children’s brains develop more rapidly in early childhood global good practices, but these have not shown their than in any other period in life: neural connections are intended impact. being formed at the rate of one million connections per second—a rate never to be repeated again. Early Part 2 of this MEM, Bending Bamboo Shoots: childhood education (ECE) provides a critical window of Strengthening Foundational Skills, begins by outlining opportunity to influence the development of children’s the challenges Malaysia faces and identifying the brains through appropriate stimulation and nutrition. bottlenecks that the education system encounters Once children enter grade school, foundational skills, in improving learning outcomes. This section such as reading, writing, arithmetic and socio-emotional attempts to understand why overall learning outcomes skills, must be carefully honed. It is only then that in Malaysia are low relative to expectation, with low- students can benefit from opportunities for skilling in income students doing especially poorly. It looks at later life, and thereby providing the workforce with the early childhood education as well as the teaching that necessary cognitive, technical and socio-emotional takes place in schools, teachers’ preparedness, efforts skills to successfully drive Malaysia’s transition to a high- and morale, and the progress of teaching reforms. income economy. 64 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Reflecting this, the special thematic topic identifies and continue to benchmark them to international the steps that can be taken to improve foundational standards, while also measuring teacher performance skills and learning outcomes in Malaysia. This includes thoroughly. This will help the country track progress ensuring that all children benefit from high-quality and, if needed, correct course quickly. Importantly, preschool education and arrive in primary school given the fundamental role teachers play in student ready to learn. Given that poorer children are less learning, support for teachers could be strengthened likely to have school-readiness skills, improving access through effective teacher training programs, as well as to and the quality of early childhood education will policies that consider teachers’ experiences and needs, provide long-term benefits. At the same time, Malaysia thus ensuring effectiveness and sustainability. should rigorously measure student learning outcomes Malaysia has been successful in improving access to primary education with equitable allocation of resources Primary education is nearly universal in Malaysia a primary education (Figure 51). There is still a very and covers children from the ages of seven to 12. small number of boys not enrolled in schools while About 95 percent of children enrolled at the primary all girls of primary school age are enrolled. Table 5 level are in schools run by MOE, with the remainder in provides the most recent public data on the number private or religious schools under other government of schools run by MOE, as well as the number of agencies. Since 2013, the net enrollment rate at teachers and students at those schools. The majority the primary level has hovered above 99.5 percent, of teachers and students are in urban areas. underscoring that virtually all children benefit from FIGURE 51 Primary education is nearly universal in Malaysia Total net enrollment rates in Malaysia by gender at primary level, Percentage 100 98 96 94 92 90 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Female Male Source: UNESCO TABLE 5 Number of MOE primary schools, teachers and students by location Location Schools Teachers Students Urban 4,108 157,470 2,161,342 Rural 3,671 65,948 617,789 Source: Malaysia Educational Statistics 2023 MALAYSIA ECONOMIC MONITOR | APRIL 2024 65 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills The expansion of primary education in Malaysia has in terms of the availability of textbooks and toilets in been equitable in terms of inputs such as resources Malaysia. and teaching practices. In Malaysia, students in the poorest quintile (Q1) and richest quintile (Q5) have very There are multiple factors that underlie Malaysia’s similar experiences in terms of math practice, teacher success in universalizing primary education. First is effort and frequency of math and language lessons. the expansion of preschool education. This ensures As Figure 52 shows, Southeast Asia Primary Learning that learners are prepared and motivated when they join Methods (SEA-PLM) 2019 data suggest that the richest primary school. Since early childhood is the period in life and poorest students have the same experience in when the brain grows faster than it will ever again, inputs school, that is, there is no gap in terms of math practice, during this phase have a fundamental impact on later teacher absence/tardiness and frequency of lessons (see life outcomes (see Box 5 on the importance of nutrition Box 6 for details on SEA-PLM 2019). This stands in sharp and early stimulation).63 Malaysia has achieved significant contrast to the other ASEAN countries in the study— success in the last 10 years, increasing preschool Cambodia, Lao People’s Democratic Republic, Myanmar enrollment rates from 67 percent in 2009 to 89 percent and the Philippines—except Vietnam. There is, however, in 2022 for the age five and above cohort.64 Currently, a small difference between the richest and the poorest more than 16,700 government-established preschools FIGURE 52 Compared to other countries, the expansion of primary education in Malaysia has been equitable in terms of resources and student experience Gap between Q5 versus Q1 if statistically signi cant 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 Math practices Teacher Teacher Math lesson Lang. lesson Both textbooks Proper toilets absence tardiness every day every day Cambodia Lao PDR Myanmar Malaysia Philippines Vietnam Source: SEA-PLM 2019 (UNICEF and SEAMEO 2020a) TABLE 6 Currently, more than 16,700 government-established preschools operate in Malaysia Provider Schools Teachers Students MOE 6,294 9,276 214,043* KEMAS** 8,165 10,165 216,322 Other govt 2,796 7,241 73,571 Private 7,573 40,331 285,014 Source: Malaysia Educational Statistics 2023 *Available data indicates that 62 percent of students are enrolled in urban schools **KEMAS preschools are established by the Ministry of Rural Development to serve rural and suburban communities 63 Early childhood education in Malaysia is governed under a split system where childcare and preschools are overseen by two ministries and regulated by different acts. Preschools, covering children ages five and six years old, are under the purview of the Ministry of Education but are provided for by different government and private agencies. 64 Data from the Ministry of Education in email dated March 4, 2024. 66 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills FIGURE 53 School readiness is positively correlated with higher scores on the SEA-PLM test Achievement by child capabilities 320 315 310 305 300 295 290 285 280 10 tasks Less than 10 tasks Less than 10 tasks Less than or more 10 tasks or more 10 tasks or more 10 tasks Mathematics Reading Writing Malaysia SEA-PLM average Source: SEA-PLM 2019 (UNICEF and SEAMEO 2020a) and more than 9,100 privately established ones operate Education Blueprint 2013-2025 identifies strategic and in Malaysia (Table 6). 98 percent of students in Malaysia, operational shifts needed to meet the country’s growth attend preschool prior to entering primary school (SEA- vision, based on thousands of grassroots contributions. PLM 2019).65 Students who attend preschool in Malaysia Especially noteworthy are the Blueprint’s candid are more likely to have better school-readiness skills assessment of challenges, including within the Ministry; than those who do not (Figure 53).66 The Malaysian its clear vision and aspiration for the future with a focus government has been running programs and campaigns on building foundations and high performance; and the to increase parental awareness of early childhood design of a comprehensive transformation program education programs, which have helped increase including key changes to the Ministry. The Blueprint preschool enrollment rates. is bold in its coverage of politically sensitive issues, including an exit plan for the non-performing teachers Second, the education system has also been guided from the education system. by solid principles and a good strategy. The Malaysian 65 The SEA-PLM 2019 study for Malaysia covered 4479 students, 4415 parents, 3445 teachers and 160 head teachers. 66 The SEA-PLM study defines 10 school readiness skills: (1) recognize most of the letters of the alphabet; (2) read some words; (3) write letters of the alphabet; (4) write some words; (5) count by himself/herself upto 10; (5) recognize different shapes; (6) write the numbers from 1-10; (7) recognize colors; (8) recognize his/her name; (9) write his/her name; and (10) do simple addition. MALAYSIA ECONOMIC MONITOR | APRIL 2024 67 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills BOX 5 The importance of nutrition and early stimulation on skills acquisition: Summary of a recent ECE study Globally, malnutrition—which includes undernutrition, the Global Nutrition Target of reducing and maintaining hidden hunger, and obesity—significantly impedes childhood wasting to less than 5 percent (OECD and millions of children from reaching their full WHO 2020). Malaysian children are less healthy, developmental potential. Nutrients are essential for considering Malaysia’s relatively high GDP per capita. optimal brain function in early childhood, enabling children to interact with their environment and Malnutrition during early childhood adversely caregivers in ways that promote further cognitive and affects school performance and lifelong economic emotional development. In 2018, nearly 200 million opportunities, as well as presents health risks into children under age five were affected by stunting adulthood. Adequate nutrition is crucial for infant and or wasting, while over 340 million suffered from child cognitive development, with insufficient nutrition micronutrient deficiencies, and an additional 40 million significantly heightening the risk of impaired cognitive were overweight, highlighting the scale of the problem skills (Roberts et al. 2022). Deficiencies in micronutrients, (UNICEF 2019). such as iron, reduce a child’s ability to learn, and are linked to lower test scores (OECD and WHO 2020). Alarmingly in Malaysia, 14.1 percent of children Obese children also perform significantly worse in under age five are underweight, 21.8 percent suffer school, and are more likely to be bullied in (and be from stunting, 9.7 percent from wasting, and 5.6 absent from) schools. The association between obesity percent are overweight or obese, with the trend and poor academic performance remains significant worsening over the years (Table 7). Underweight even after taking other factors such as family income, and stunting among children is more prevalent in rural life satisfaction, and bullying into account (OECD 2019). areas than urban areas, among bumiputera Sarawakians than other ethnicities, and among the bottom 40 Beyond nutrition, early stimulation and learning— percent household income category (MOH 2020). In encompassing play, language exposure, emotional the absence of a severe food shortage, the national bonding, and problem-solving activities—are prevalence of wasting globally is generally below five crucial for the acquisition of cognitive, social, and percent. However, the prevalence of wasting is higher emotional skills. The interaction between nutrition and in Malaysia than this threshold. Peer countries like early stimulation is also pivotal; a well-nourished child Brunei and Singapore, on the other hand, have attained is more capable of engaging with their environment, TABLE 7 Nutritional status (children under the age of 5) trend in Malaysia Description 2011 2015 2019 Underweight (low weight-for-age) 11.6 12.4 14.1 Stunting (low height-for-age) 16.6 17.7 21.8 Wasting (low weight-for-height) 12.4 8.1 9.7 Overweight and obesity (high BMI-for-age) 6.5 7.6 5.6 Source: MOH 2011; MOH 2015; MOH 2020 (National Health and Morbidity Surveys 2011, 2015, and 2019) 68 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills thereby maximizing the benefits of stimulative PLM results are not surprising, given that a child’s brain experiences (Black et al. 2017). Furthermore, skills development peaks during middle childhood (Figure acquired throughout adolescence and into adulthood 54). Schools and preschools, where children spend a are built on foundational capacities established in early significant portion of their day, are strategic venues for childhood, underscoring the importance of paying implementing nutritional and learning interventions. attention to these early years. The results from SEA-PLM Most importantly, access to nutritional meals and 2019 highlight this relationship—across all domains, engaging learning experiences is especially beneficial Malaysian students who attended preschools perform for children from disadvantaged backgrounds who may better at Grade 5 than those who did not. The SEA- otherwise lack access to these resources at home. FIGURE 54 Change in brain development by age Pa rie tal an Pr Se d efr ns te or m on po tal Change in brain development im ra co ot la rte or ss x oc iat co io n rt co ex m pl ex Rise in Gonadal Hormones Regional peak and decline in synapses, neuromodulators, neurotrophins, cerebral blood ow and metabolism Myelination 0 6 12 2 4 6 8 10 12 14 16 18 20 22 Age in months Age in years Source: Lee et al. 2014 MALAYSIA ECONOMIC MONITOR | APRIL 2024 69 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Third, is the recognition of implementation challenges and creation of a delivery unit to focus on implementation. The Blueprint emphasizes the Education was prioritized need for meticulous implementation, which led to the creation of Malaysia’s Education Performance and in the Government’s Delivery Unit (PADU). A delivery unit for governments Transformation Program is a specialized team or organization established within a government or public sector agency to improve and highlighted as one the implementation of policies and achieve specific of five National Key outcomes or results. The unit typically operates within a finite timeline and focuses on implementing specific Results Areas initiatives or programs to achieve measurable results. Delivery units have been used in various countries around the world to improve the implementation and public resources on a per student basis (Figure 55). effectiveness of government policies and programs. Malaysia’s high-powered PADU, which operated from Finally, Malaysia has benefited from strong 2013 till 2023, was responsible for the execution of political support to improve education. Education Blueprint initiatives, monitoring progress, day-to- was prioritized in the Government’s Transformation day problem solving of implementation issues, and Program and highlighted as one of five National Key managing communication with stakeholders. Results Areas. Political support also made it possible for Malaysia to undertake interventions that are difficult Fourth, the education system has benefitted from in most countries, such as improving the selectivity of predictable, stable, and pro-poor public funding. The the teaching workforce by raising the bar for teacher public education budget increased from 2.5 percent of recruitment, as well as testing all English subject GDP at the beginning of the past decade to stabilize teachers on proficiency in English. These actions had around 3.2 percent since 2015. In the meantime, impact. Nearly all intakes of prospective teachers however, the number of students has declined. As at Teacher Education Institutes (IPG) are from the a consequence, the amount of public resources top 30 percent of Malaysian Certificate of Education per student has increased by 50 percent from 2011, (SPM) leavers. Additionally, because of the English reaching 18 percent of per capita GDP. Public spending proficiency assessments, the government was able to is distributed in a pro-poor manner at the primary identify a crucial challenge and subsequently, design level—states with lower per capita GDP receive more an upgrading program to improve teachers’ English proficiency. FIGURE 55 Public spending is pro-poor at the primary level Per student public spending on primary education and state’s absolute poverty level 10,000 9,000 Sarawak 8,000 Perak Sabah Perlis Kelantan Pahang Terengganu Kedah 7,000 Melaka Negeri Sembilan Pulau Pinang WP Labuan Johor 6,000 WP Kuala Lumpur 5,000 Selangor WP Putrajaya 4,000 0 5 10 15 20 25 Absolute poverty (%), 2019 Source: World Bank staff calculations based on Ministry of Education data 70 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Yet, learning levels are low in the aggregate and significantly worse for the lower-income group Too many children are not learning sufficiently capita (34 percent).68 The performance is worse among in Malaysia, given the country’s aspirations and the poorest children, where 61 percent do not achieve despite concerted efforts to improve learning. expected proficiency levels (see Table 8). In contrast, While the average child spends 12.5 years in school in in Vietnam only 18 percent (and 41 percent among the Malaysia by his/her 18th birthday, he or she learns the poorest children) are not proficient in the reading skills equivalent of only 8.9 years. In neighboring Singapore, expected by the end of Grade 5. the average child spends 13.9 years in school and learns the equivalent of 12.8 years. In Korea, the average child Writing too is an essential skill where many spends 13.6 years in school and learns the equivalent Malaysian students could do better. Being able to of 11.7 years. Such success is not limited to high- write well by the end of primary schooling is important income countries. In neighboring Vietnam, a lower- because it is a foundational skill for future learning and middle income country that spends a fraction of what an important tool to process and communicate ideas. Korea, Malaysia or Singapore spends on education, the In Malaysia, 69 percent of students in Grade 5 do not average child spends 12.9 years in school, and learns the demonstrate the writing competency expected at this equivalent of 10.7 years. In the following paragraphs, the stage compared to 47.5 percent of students in Vietnam. case of Vietnam is often cited to illustrate the gains that While 21 percent scored in the higher bands in Vietnam, can be made in building foundational skills in a relatively less than 5 percent do so in Malaysia. short period of time, based on careful prioritization and sound policy. Such prioritization and policies are well In mathematics, nearly 36 percent of children within Malaysia’s reach given the already high emphasis in Grade 5 do not have grade-appropriate placed on basic education, strong policy support and competencies. An understanding of basic mathematics past accomplishments. is important as it builds problem-solving skills and lays the foundation for future learning and educational While many children do well in Malaysia, a significant success. In Vietnam, only 8 percent of children did not number do not learn enough. The majority (58 percent) have these competencies. Importantly, in Malaysia, only of students in Malaysia become proficient readers 6 percent are in the top performance band (Band 9), when they finish Grade 5.67 However, the percentage of whereas in Vietnam 41.8 percent of students are in that those who are non-proficient (42 percent) at the end of band. Grade 5 is higher than in countries with similar GNI per TABLE 8 A larger percentage of children from the bottom two quintiles lack proficiency in reading, writing, and mathematics at the end of Grade 5 Q1 Q5 Q2 Q3 Q4 (poorest) (richest) MYS VNM MYS VNM MYS VNM MYS VNM MYS VNM Reading proficiency 61 41 50 17 39 12 30 9 17 4 Writing proficiency 84 72 76 55 72 46 65 37 53 29 Math proficiency 59 21 44 5 35 3 24 3 11 2 Source: SEA-PLM 2019 (UNICEF and SEAMEO 2020a, UNICEF and SEAMEO 2023) 67 In Malaysia, primary school ends at age 12 years while in Vietnam it ends at age 11 years. 68 Note that nearly 95 percent of Grade 5 children will have mastered the skills appropriate for lower primary (Grade 2/3). MALAYSIA ECONOMIC MONITOR | APRIL 2024 71 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Learning outcomes vary considerably between at least Level 2 proficiency in the mathematics test in the rich and the poor, despite the similarity in PISA 2022, significantly less than the OECD average of many school-level inputs. This difference is more 69 percent and Vietnam’s 72 percent.70 In reading, at pronounced between the richest and poorest quintiles. least 42 percent of students in Malaysia attained Level As Table 8 shows, a much larger percentage of children 2 or higher in reading (OECD average: 74 percent) from the poorest quintiles lack proficiency in reading, compared to 77 percent in Vietnam.71 At least 52 percent writing, and mathematics at the end of Grade 5. This is of students in Malaysia attained Level 2 or higher in a sharp contrast to Vietnam.69 science (OECD average: 76 percent).72 In contrast, some 79 percent of students in Vietnam attained this Since learning is cumulative, weak foundational level. Malaysia’s aspiration in the Education Blueprint skills jeopardize performance later on. By the time 2013-2025 was to place the country firmly in the top- a child in Malaysia is 15 years old, he/she is far behind third of PISA performers by 2025. Malaysia moved up in reading, science, and mathematics as measured by to middle-third in PISA 2018 but fell back to bottom- PISA, compared to Malaysia’s aspirational peers, such third in PISA 2022 (Figure 56). Indeed, while scores fell as Hong Kong SAR, China, Japan, and Singapore. This in most countries, likely due to the setbacks caused by child is also performing below his/her peer in Vietnam, COVID-19, it is important to note that they did not fall which spends a fraction of what Malaysia spends on in all countries, including neighboring Cambodia and education. In Malaysia, 41 percent of students attained Vietnam. FIGURE 56 Malaysia moved up to middle-third in PISA 2018 but fell back to bottom-third in PISA 2022 PISA score, Score points 525 Reading Mathematics Science 500 475 450 440 438 421 422 425 414 415 420 416 400 409 404 398 388 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2006 2008 2010 2012 2014 2016 2018 2020 2022 Mean performance Best- tting trend OECD Average (23 countries) Source: PISA 2022 (OECD 2023) 69 The regional and country report provide scores by quartile, but it may be more useful to look at percentage of children. 70 Level 2 proficiency in mathematics means that at a minimum these students can interpret and recognize, without direct instructions, how a simple situation can be represented mathematically (e.g. comparing the total distance across two alternative routes, or converting prices into a different currency). Over 85% of students in Singapore, Macao SAR, China, Japan, Hong Kong SAR, China, Taiwan, China, and Estonia (in descending order of that share) performed at this level or above. 71 Level 2 proficiency in language means students can identify the main idea in a text of moderate length, find information based on explicit, though sometimes complex criteria, and can reflect on the purpose and form of texts when explicitly directed to do so. 72 Level 2 proficiency in science means that at a minimum, these students can recognize the correct explanation for familiar scientific phenomena and can use such knowledge to identify, in simple cases, whether a conclusion is valid based on the data provided. 72 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills BOX 6 Skills measured by PISA and SEA-PLM and why they are relevant for Malaysia The Programme for International Student numeracy skills are the building blocks for an educated Assessment (PISA) and the Southeast Asia Primary workforce, essential for sustained economic growth. Learning Metrics (SEA-PLM) focus on critical skills Both PISA and SEA-PLM measure a range of foundational necessary for the 21 st century, offering crucial skills that people need in order to meet their goals and insights into the educational achievements and to fully engage in many areas of life—from education, challenges within Malaysia and the ASEAN region. to employment, and civic engagement. While basic PISA, administered to 15-year-olds, evaluates several skills acquired in school are perfected throughout life, core competencies: early acquisition of these skills has multiplier effects and • Reading literacy: Beyond decoding text, PISA lays the groundwork for more complex skill-building. assesses a student’s ability to comprehend, evaluate, and engage with written materials across Furthermore, PISA and SEA-PLM serve as various genres and purposes (OECD 2023). diagnostic tools, pinpointing where the education system can be strategically reinforced to reduce the • Mathematical literacy: Students must reason labor skills gap. The emphasis of both assessments on mathematically, formulate, employ, and interpret real-world applications, problem-solving, and critical mathematics to solve problems in real-world thinking skills offer insights on the readiness of students contexts (OECD 2023). for the workforce in the future. • Scientific literacy: This encompasses understanding scientific concepts, applying them in reasoning, Most importantly, understanding what students designing and evaluating scientific inquiries, and know and can do, as well as how these change interpreting data with a critical mindset (OECD over time and across contexts, is critical for 2023). understanding questions of equity in learning outcomes. PISA and SEA-PLM highlight disparities in Additionally, PISA also measures creative thinking, achievement within the educational system, which are defined as the ability to engage productively in the important data to ensure better targeting of policies generation, evaluation, and improvement of ideas that and resources. In the context of Malaysia, significant can result in original and effective solutions. PISA 2022 variations in student outcomes point to an important included a financial literacy assessment. equity issue that needs to be solved. For example, the SEA-PLM results revealed that while 58 percent of Tailored to the ASEAN context, SEA-PLM measures students in Grade 5 performed at the level expected at foundational skills in reading and mathematics the end of primary school, the remaining 42 percent are at the primary level. A reading example item from not yet at this level. In fact, 5 percent of students are at the assessment is included in Annex 1 to illustrate Band 2 and below, which means they struggle to read the level of reading literacy expected of a student in any more than single words and will find it difficult to Grade 5. Furthermore, SEA-PLM uniquely introduced complete primary school (UNICEF and SEAMEO, 2020). assessments in writing and global citizenship: • Writing literacy: Assesses a student’s capacity to Comparisons between SEA-PLM and PISA results construct meaning by generating a range of written also highlight that while Malaysian students texts to express oneself and communicate with perform better than the regional average in reading others (UNICEF and SEAMEO 2020). at Grade 5, they lag behind the OECD average and • Global citizenship: Measures attitudes, values, other countries in reading performance at age 15 and knowledge related to global issues, as well as (Figure 54). This may suggest that while Malaysia’s respect for human rights and diversity (UNICEF and primary education system provides an adequate SEAMEO 2020). foundation in literacy, there are missed opportunities or challenges in sustaining and building upon these gains These assessments are not just academic exercises; through secondary education. This underscores the they are crucial for Malaysia’s development. Like need for targeted interventions and sustained efforts many nations, Malaysia recognizes that its most to bridge the gap as students progress through their valuable resource is its people. Strong literacy and educational journey. MALAYSIA ECONOMIC MONITOR | APRIL 2024 73 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills What explains poor student learning levels? Early childhood education isn’t equipping children adequately with school-readiness skills The problem starts early—a significant portion school is magnified once the children are in school of children in Malaysia lack the school-readiness as Table 8 shows. skills that would position them for success when they join primary school. Two points are important While preschool enrollment has increased, several to note. First, while Malaysia has expanded early challenges hinder progress toward achieving childhood education, over a 10 th of young children universal access. Some of the barriers include limited still do not have access to it. Second, while most awareness about the benefits of preschool education, children entering primary school are off to a strong inadequate availability of preschools in areas of high need, start having attended early childhood centers and and affordability concerns (World Bank 2023). Despite performed well on school readiness indicators, the advantages, preschool education remains non- approximately 24 percent still lack school-readiness compulsory for entrance into Primary/Standard 1 of the skills (SEA-PLM 2019) (see Box 6 for an explanation of national education system. Even when parents recognize SEA-PLM 2019 and PISA 2022). Worryingly, students the benefits, the scarcity of nearby preschools, especially from the poorest quintile are far less likely to perform in remote or rural areas, presents a significant hurdle. The well on school readiness, with only 64 percent limited availability of public preschools leaves low-income meeting these standards, compared to students from parents with little option, since private providers may be the richest quintile, where nearly 89 percent meet too expensive. Furthermore, the reduced government these standards (Figure 57). The early differences fee assistance since 2022 compounds the affordability in school-readiness level before entering primary concern for lower-income families. FIGURE 57 Students from the poorest quintile are far less likely to perform well on school readiness Share of students lacking in school readiness, Percentage 40 35 30 25 20 15 10 5 0 Q1 (poorest) Q2 Q3 Q4 Q5 (richest) Source: SEA-PLM 2019 (UNICEF and SEAMEO 2020a) 74 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Quality-related challenges undermine efforts at A key concern pertains to the quality of preschool increasing access since the quality of preschools teachers. The Blueprint emphasizes the need for all ultimately determines school-readiness skills. preschool teachers to attain a minimum diploma in Measurement of quality-related indicators in preschool Early Childhood Care and Education (ECCE) by 2020. remains a challenge, which makes progress on This goal, however, remains unmet, with approximately outcomes difficult. Shortcomings in the implementation 50.6 percent of preschool teachers without a diploma of the National Preschool Quality Standard remain, in ECCE. Teacher quality is also the weakest dimension with inadequate mechanisms for quality assurance and as assessed through the National Preschool Quality improvement, and a lack of clear linkage to outcomes. Standard. The lack of professional qualifications While operators and teachers adhere to National contributes to this, exacerbated by limited opportunities Preschool Quality Standard requirements mandated by for teachers to participate in high-quality professional MOE, its effectiveness as a tool for quality assurance development workshops and courses. and improvement remains limited. Teacher preparedness, effort and morale in primary schools remain uneven Globally, teachers are the single-most important practice (including teaching methods and classroom school-based input contributing to student learning management) and motivated to perform. In Malaysia, gains. While a child’s family background remains the the majority of children are taught by teachers who most important predictor of learning outcomes73, the are well-qualified, with over 80 percent taught by most critical factor once children get to school is the teachers with qualifications at ISCED 6 (bachelors or quality of their teachers.74 Research shows that going equivalent) or higher. In many countries, however, from a low-performing teacher to a high-performing teacher qualifications are not correlated with better one increases student learning dramatically. In Vietnam, student performance because of the quality of those differences in teaching quality mean that over a three- qualifications. This makes it important to have credible year period, an average second-grade student can end measures of teacher content knowledge. There is limited up in either the top-third or the bottom-third of the data on teachers’ content knowledge in Malaysia, but class.75 what little exists, suggests room for improvement. For instance, a large number of English teachers may Malaysia’s teacher strategy outlined in the not have enough English language knowledge to be Education Blueprint 2013-2025 is consistent effective in classrooms. When tested in 2013, only 28 with global good practices (see Box 8 on Malaysia percent of English teachers were found to be proficient Education Blueprint). The teacher strategy outlined in in English. By 2020, this has improved to 53 percent, the Blueprint lays out the strategic and operational shifts which still leaves room for further improvement. needed to meet Malaysia’s growth vision. It focuses on enhancing quality, effectiveness and professionalism of The relatively low score in reading among students teachers. in Malaysia begs the question whether teachers teaching reading have received adequate pre- While teacher policies in Malaysia are sound, service and in-service training to do so. Most in practice, implementation may be weak with children in Malaysia are indeed taught by teachers many teachers in Malaysia lacking the content who have received either pre-service training or in- knowledge and skills needed to excel. To be effective, service training in reading, but only about 40 percent teachers need to be proficient in content knowledge, are taught by teachers who received both. As noted in 73 The SEA-PLM 2019 data for Malaysia show that gender, school location and socioeconomic status are consistent and significant predictors of performance in Malaysia. Together these factors explain 17 percent of the variation in test scores in mathematics and 11 percent of the variation in test scores in reading in Malaysia. 74 Béteille and Evans 2021; Bruns and Luque 2015 75 Carneiro et al. 2022 MALAYSIA ECONOMIC MONITOR | APRIL 2024 75 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills BOX 7 What do effective teachers do? Effective teachers share certain behaviors and knowledge, as well as a robust understanding of how practices (Table 9). In a study of East Asia’s well- students learn. Thus, they are able to provide concise performing education systems—Japan, Republic of and accurate explanations of the required content, Korea, Singapore, Vietnam, and four provinces in as well as modify teaching and learning based on China—a few things stand out. First, school systems circumstances. As COVID-19 has made clear, effective in these countries ensure teachers have the requisite teachers are also flexible, manage unpredictable content knowledge and pedagogical approaches. Next, situations well, and can use technology effectively to teachers in these systems have both in-depth content reach all students. TABLE 9 Practices of effective teachers Planning and Classroom Instruction Professional preparation environment responsibilities Demonstrating knowledge Creating an environment Communicating with Reflecting on teaching of content and pedagogy of respect and rapport students Demonstrating knowledge Establishing a culture for Using questioning and Maintaining accurate of students learning discussion techniques records Setting instructional Managing classroom Engaging students in Communicating with outcomes procedures learning families Demonstrating knowledge Managing student Using assessment in Participating in the of resources behavior instruction professional community Designing coherent Organizing physical space Demonstrating flexibility Growing and developing instruction and responsiveness professionally Designing student Using technology Using technology Showing professionalism assessments effectively effectively Source: Adapted from Danielson 2011. the Blueprint, teachers need subject-specific training reading instruction is systematic and helps gradually to be effective, which can take place before they move students from simple to more complex reading start (pre-service) or during (in-service) their teaching tasks and skills, so that they eventually gain mastery service—but ideally, both. Worryingly, however, nearly and can read to learn. Compared to Vietnam, a much 12 percent of students are taught by teachers with no smaller percentage of children in Malaysia have teachers training in reading instruction. who practice effective teaching methods for reading (Table 10), which includes practices such as regularly While teachers in Malaysia may be trained in a having them analyze the structure of texts, evaluate number of approaches, they may not be applying the mood and tone of texts, summarize what they have them effectively (Table 9). SEA-PLM 2019 surveyed read or had them reflect on how texts related to their teachers on their level of training to teach reading, own world. In Vietnam, in contrast, these practices are as well as on the instructional practices and learning regularly used. activities they used within their classrooms. Effective 76 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills BOX 8 Malaysia Education Blueprint 2013–2025: Teacher strategy The key components of the teacher strategy in the Blueprint were developed based on widespread consultation, and include: • Recruitment and selection: Establishing merit-based recruitment processes to attract high-quality candidates into the teaching profession. • Professional development: Implementing continuous professional development programs to upgrade teachers’ knowledge and skills, ensuring they are equipped to deliver high-quality education. • Career progression: Providing clear pathways for career progression based on performance, qualifications, and experience, thus incentivizing teachers to excel. • Performance management: Implementing robust performance evaluation systems to assess and support teachers in improving their effectiveness in the classroom. • Teacher standards: Establishing clear standards and expectations for teachers’ conduct, competency, and professionalism. • Leadership development: Offering leadership development opportunities to nurture and empower school leaders who can drive positive change and foster a culture of excellence within schools. • Recognition and rewards: Recognizing and rewarding outstanding teachers and school leaders for their contributions to education excellence. • Collaboration and networking: Encouraging collaboration and networking among teachers, schools, and educational institutions to facilitate sharing of best practices and professional growth. • Support systems: Providing comprehensive support systems to address the diverse needs of teachers, including mentoring, counseling, and well-being initiatives. • Stakeholder engagement: Engaging stakeholders, including teachers, parents, communities, and policymakers, in the design and implementation of teacher development initiatives to ensure relevance and effectiveness. TABLE 10 A much smaller percentage of children in Malaysia have teachers who regularly adopt effective reading instruction Reflect on how Identify the Summarize Analyze the Evaluate the texts relate to main ideas what has been structure and mood and tone the student’s within texts read form of texts of texts own world Malaysia 88.4 76.5 79.9 78.0 77.2 Vietnam 99.5 98.9 98.2 98.4 97.5 Source: SEA-PLM 2019 (UNICEF and SEAMEO 2020a, UNICEF and SEAMEO 2023) MALAYSIA ECONOMIC MONITOR | APRIL 2024 77 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills What about general pedagogical training? Most equips teachers to meet the needs of students who teachers have received sufficient pedagogical training learn at different paces or different ways in the same that is consistent with good practice. As Figure 58 classroom. Special needs education is targeted at shows, the vast majority of children in Malaysia are students with learning disabilities. Without training in taught by teachers whose pedagogical training differentiated instruction or special needs education, included classroom management, student assessment, such teachers are at a disadvantage when improving ICT skills, and general teaching methods. The figures the learning outcomes of children in their classrooms. are similar to Vietnam. This is important to remedy as teachers are often confronted with students at different levels of learning in the same classroom. Differentiated A noteworthy finding is the relatively high rate of instruction equips teacher absence reported by Grade 5 students in teachers to meet the Malaysia. Approximately 40 percent of Grade 5 students mentioned occasional or frequent teacher absences, needs of students who relative to under 10 percent in high-performing Vietnam learn at different paces (Figure 59).76 There is little evidence to explain what underlies these absences, given that Malaysia’s teachers or different ways in the are paid well, have undergone training covering key same classroom pedagogic areas, and feel generally well-prepared for their classes. Teachers’ overall attitude toward teaching is also positive, indeed the most positive among all However, teachers in Malaysia do not receive the countries that took the SEA-PLM 2019 survey—an adequate training in two areas: inclusive/special important achievement of the Malaysian education needs education and differentiated instruction system. Most children in Malaysia study in a class where (Figure 58). The majority of Grade 5 students have the teacher has a positive attitude (95.2 percent), high teachers who are not trained in inclusive or special morale (91 percent), and clear pride (95 percent). In needs education (71 percent) and differentiated contrast, the numbers for Vietnam are 79.5 percent, 79.2 instruction (57 percent). Differentiated instruction percent and 80.9 percent respectively. FIGURE 58 There are weaknesses in training, particularly in differentiated instruction and special needs education content Share of Grade 5 children by teacher’s pedagogical training content, Percentage 100 80 60 40 20 0 Classroom Student assessment ICT General teaching Inclusive education/ Differentiated management methods/pedagogy special needs instruction Malaysia Vietnam Source: SEA-PLM 2019 (UNICEF and SEAMEO 2020a, UNICEF and SEAMEO 2023) 76 Current available data is reported by students in SEA-PLM 2019, not from random unannounced visits. 78 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills FIGURE 59 Nearly 40 percent of Grade 5 students reported that their teachers are sometimes or often absent Share of Grade 5 students who report that their teachers are often or sometimes absent, Percentage 40 35 30 25 20 15 10 5 0 Malaysia Vietnam Often Sometimes Source: SEA-PLM 2019 (UNICEF and SEAMEO 2020a, UNICEF and SEAMEO 2023) FIGURE 60 Teachers in Malaysia spend less class time on actual teaching and learning than most other TALIS countries Average teachers’ working hours in Malaysia and TALIS participating countries, hours spent 60 All other tasks 50 Engaging in extracurricular activities Communication and co-operation with parents or guardians 40 General administrative work Participation in school management 30 Student counselling Marking/correcting of student work 20 Team work and dialogue with colleagues Individual planning or preparation of lessons 10 Teaching Total working hours 0 Malaysia Average Source: OECD 2019b Even when teachers are present in school, they (TALIS) (Figure 60). The Ministry of Education has spend a significant portion of their time on non- made efforts to alleviate teachers’ burdens. They have teaching activities relative to other countries. standardized and streamlined data collection processes, Teachers in Malaysia allocate a high percentage of as well as urged schools to reduce teachers’ workloads their working time (around 29 percent) to non-teaching in administrative committees. Continued exploration of duties, particularly administrative tasks and classroom methods to identify bottlenecks, streamline workflows, management. This is approximately 8 percentage points and increase efficiency is necessary to free up time for higher than the average reported by other countries in teachers to perform more impactful tasks such as lesson the OECD’s Teaching and Learning International Survey planning, mentoring, and professional development. MALAYSIA ECONOMIC MONITOR | APRIL 2024 79 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Teacher performance management is not being implemented as prescribed in policy The Blueprint lays out an ambitious and well- who had been specifically trained as English language designed set of reform initiatives to help teachers teachers, were tested; 65 percent of these teachers fell improve their performance, as well as manage short of the required minimum proficiency level (“C1” underperformance (Figure 61). The plan has four key on the Common European Framework of Reference for elements: (i) clear definition of underperformance; (ii) Languages, CEFR). This test was conducted following evaluation of teacher performance; (iii) coaching and the release of the Blueprint in 2011, in order to find out mentoring for teachers, with intensity determined by how many teachers needed training, how quickly the extent of underperformance; and (iv) redeployment to upskilling could be achieved, and at what cost.  other tasks in the event of continued underperformance. Malaysia currently utilizes a performance management In response, the Ministry of Education set up a system for teachers that includes classroom program called “Professional Upskilling for English observations, self-appraisal, and feedback mechanisms. Language Teachers” (ProELT) to provide training. This system identifies areas for improvement and The training was aimed at the 14,479 teachers who did can lead to targeted professional development plans not yet meet required minimum proficiency levels but for underperforming teachers. Support structures had some English language proficiency (level B1 or B2). like mentoring programs and coaching initiatives are The aim was to raise the level of language proficiency available to guide and equip underperforming teachers by one level (that is, from B1 to B2 or B2 to C1). To with the necessary skills to improve their practice. reach and support teachers, who are spread across the country and have busy teaching schedules, the ProELT What about practice? Measuring teacher combined face-to-face and virtual learning modules. performance purely through self-assessments may not Although teachers had to complete 240 hours of face- be adequate. In this regard, Malaysia took an important to-face interaction and another 240 hours of self-paced step by first testing all English language teachers on digital learning (online and/or offline), these could be their proficiency. It also provided them with training flexibly scheduled over a 12-month period. Moreover, in an effort to, ultimately, improve students’ mastery the resources and training materials were designed to of the English language.77 In 2012, all 24,075 teachers match the language proficiency level of the teachers.  FIGURE 61 The Malaysia Education Blueprint 2013-2025 has outlined a set of reform initiatives to manage teachers’ underperformance Proposed pathway for consistent underperformers What happens to underperforming Teacher returns to normal path teachers? Check Check Check Check point point point point Possible outcome – 1 2 3 4 improvement in performance Possible outcome – no improvement in performance Underperforming Evaluation: lowest level of Intensive teacher competencies – agged support • Unable to master (additional basic Continue to get coaching coaching and development guidance Redeployment competencies and Post- (principals and coaches) to other functions mentoring) support Professional • Student (e.g., admini- evaluation upskilling outcomes strative, discipline constantly management) decline/show no improvements Source: Ministry of Education 77 Malaysia also tests teachers teaching Bahasa Melayu. 80 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills The Ministry of Education’s English Language With teacher evaluations in Malaysia based on Teaching Centre (ELTC) with Universiti Kebangsaan self-assessments, the management of teacher Malaysia (UKM) conducted an impact study of this performance may be wanting, including targeting first cohort that showed participants of ProELT 78 support where needed. As noted above, Malaysia improving in three areas. First, teachers’ proficiency regularly evaluates teachers. However, staff employed improved. They used more extensive vocabulary, by the Ministry of Education perform very well in these lengthier sentences, and clearer language instructions. evaluations almost unanimously, with only 0.02 percent Second, their pedagogy improved, with more student- of staff scoring below 60 percent in the performance focused lessons allowing for student autonomy, varied evaluation (Figure 63). The high performance of strategies and approaches, and more self-reflection teachers in these evaluations is at odds with the rates as teachers become more aware of their teaching of teacher absence and student learning reported routines. Third, students also reduced their use of their previously. Furthermore, the fact that only about 0.6 first language in the classroom and were more willing to percent of teachers annually leave the profession participate in classroom activities. A second evaluation, ahead of retirement age, suggests the policy may not done by ELTC in 2015, showed that the students whose be meeting its objectives on exit (Figure 64). teachers had taken ProELT had a 4 percent improvement in achievement based on a pre- and post-test which FIGURE 63 contained reading comprehension and essay writing Ministry of Education staff performed very well in exercises administered over a three-month period. these evaluations almost unanimously Distribution of information on the Performance Evaluation of Education Despite the focused attention on testing teachers Service Officers in KPM Year 2010 – 2020, Percentage in English and helping them improve, change in 100 proficiency levels has been slow. This highlights 80 a key challenge in well-intentioned reforms in adult learning—expected changes do not materialize 60 as quickly as planned (Figure 62). One reason is that training programs often fail to account for the 40 unique characteristics of adult learning as discussed 20 subsequently. The MOE has now mandated that graduates from the Institute of Teacher Education (ITE) 0 and public universities are required to attain a minimum 2015 2016 2017 2018 2019 2020 CEFR C1 to be eligible for school placement, which will 1-49.99 50-59.99 60-79.99 80-89.99 90-100 help improve the overall teachers’ proficiency levels. Source: LNPT data from BPSM FIGURE 62 FIGURE 64 Expected changes in teaching reforms do not Only about 0.6 percent of teachers annually leave materialize as quickly as planned the profession ahead of retirement age, suggests the policy may not be meeting its objectives on exit English teachers achieving minimum proficiency (C1 band on CEFR), Percentage Primary teachers in 2016 and 2020, movements out of profession between 100 2016 and 2020, and movements between schools 90 250,000 80 200,000 70 60 150,000 53 50 100,000 40 34 28 Moved from one 30 50,000 school to another 20 New teachers 0 10 Left teaching 0 -50,000 2013 2017 2020 2016 2020 Source: Malaysia Education Blueprint Annual Reports (MOE 2020) Source: World Bank Staff calculations from EMIS data 78 From 2012-15, two cohorts of teachers, totaling approximately 14,000 took the ProELT course, with the cohorts being trained by native English speakers from the British Council. Subsequent cohorts were smaller—averaging 1,000-2,000 per year—and training was taken over by local providers with non-native English language speakers, with an independent panel to assess the quality of training. MALAYSIA ECONOMIC MONITOR | APRIL 2024 81 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills How can Malaysia do better? Malaysia is remarkable in its attention to challenges: improving learning levels in the aggregate improving education outcomes. As noted previously, and ensuring disadvantaged groups are not left behind. a combination of sound policy, financing and political As discussed in detail in this section, key actions to will have led to an education system driven by several address these challenges include (i) improving access elements of good practice. Following COVID-19, the and quality of preschool education; (ii) measuring government immediately took action to reverse learning learning outcomes of students and the performance of losses, again indicative of its proactivity (see Box 8). teachers against international benchmarks; (iii) focusing Yet, Malaysia’s learning outcomes remain low given its on evidence-based teacher continuous professional economic ambitions. In addition to the government’s development; and (iv) ensuring that all teacher policies ongoing efforts, Malaysia needs to double down in are clear, doable, and rewarding for teachers. certain areas for bigger impact. It faces two types of BOX 9 Key initiatives to improve learning outcomes post COVID-19 Malaysia has implemented several interventions Literacy and Numeracy Program (Program Literasi dan to address the issue of learning poverty, especially Numerasi Sekolah Rendah) is a comprehensive and in the mastery of basic skills such as literacy and holistic school-based teaching and learning program to numeracy. For instance, the Reading Aid Program support Year 2 and Year 3 students. The objective is (Program Bantu Membaca) is a program designed to to ensure that all Year 2 and Year 3 students can attain provide extra support and assistance to primary school at least the minimum proficiency level (Level 3) in the learners through a one-to-one approach. The program subjects of Bahasa Melayu, English, and mathematics. involves all students in primary schools, from Year 1 to Year 6, where the students are evaluated based Malaysia is also implementing a remedial education on their reading skills in Bahasa Melayu. Teachers are program—the Special Remedial Program (Program encouraged to use the Basic Literacy Module for Bahasa Pemulihan Khas)—specifically designed to provide Melayu (Modul Asas Literasi Bahasa Melayu) module as early intervention to primary school students supportive material to strengthen basic literacy skills facing difficulties in literacy and numeracy. The among students. The objectives of this module are students who have yet to master basic literacy and to enable students to: (i) master basic literacy skills in numeracy skills are placed in dedicated remedial Bahasa Melayu; and (ii) reinforce Bahasa Melayu literacy classes during specific subjects such as Bahasa Melayu skills for further learning. Initial data obtained in July or mathematics. The program is conducted by remedial 2022 showed that 148,284 primary school students specialist teachers in schools and focuses on addressing have some difficulties in reading. Three months after the the individual learning needs of students. Within four implementation of the intensive program, 28 percent of months of the program in 2023, 22 percent of students learners were able to read fluently. The Primary School were able to acquire the required skills. 82 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Start early and give all children a head start Despite the strides made in expanding and and financial incentives to include more unregistered enhancing preschool education, Malaysia should preschools as well as increase financial aid to parents so urgently address remaining challenges related they can afford such education.79 to access and quality. When children enter school having been to preschool, their schooling and learning A key next step to enhancing preschool education trajectory is much stronger than when they do not. quality requires ensuring all teachers meet the As shown earlier, school readiness is correlated minimum qualifications by 2025. This entails with better scores at the end of primary schooling better enforcement, accessible diploma programs, in Malaysia. Of special concern is that children from and staggered requirements to support operators. poorer income quintiles tend to do worse on school Additionally, improving the quality of teachers and readiness. The Malaysia Education Blueprint’s aim leaders requires accessible high-quality continuous of achieving universal preschool enrollment by 2020 professional development, enhanced coordination remains unrealized. To meet these goals, Malaysia will among stakeholders, and targeted support based on need to address access- related challenges to ensure teachers’ needs. To mitigate the impact of COVID-19 the remaining 10 percent of children without preschool on learning, the ministry’s Curriculum Implementation access are not left behind alongside quality-related Empowerment Program (KPM PerkasaKU) should be issues in the majority of preschools so that all children expanded to include preschool students, with a focus have a strong start. on tailored curricula and supplementary programs. To realize universal preschool enrollment, the Effective governance and financing are vital government should consider implementing at for implementing these measures and achieving least one year of free and compulsory preprimary Malaysia’s preschool education goals. The education for Malaysian children. Countries with such fragmented early childhood care and education system policies have demonstrated higher gross enrollment requires better coordination. This could take the shape ratios and better related indicators. Strategic of a formal coordinating agency or be achieved by implementation plans, including clear communication redefining the management of preschool education. of the government’s commitment to preschool Stakeholder cooperation is essential, as demonstrated education, are crucial for this endeavor. Importantly, by the collaborative development of recommendations. for the government to achieve universal preschool To address this, MOE has now set up a special task education by 2025—and target the 10 percent being force in January 2024 to strengthen coordination and left out—it should both simplify licensing processes governance. Introduce better and more frequent measurement of student learning and teacher performance Education systems that have successfully improved are discussed in regular meetings between teachers, learning outcomes of students began with principals, pedagogic coordinators, and the school rigorously measuring their learning outcomes. Take superintendence team throughout the school year. for instance the case of Sobral in Brazil—a relatively Simultaneously, teacher performance is regularly poor municipality with among the lowest student evaluated. learning levels in the country in the late 1990s—but now among the best-performing (see Box 10 on the case of Malaysia has made important steps in measuring Sobral). At the center of Sobral’s education reforms is student learning outcomes but must benchmark a set of clear learning targets and a system of regular these to international assessments. The School- external student assessments. These assessments Based Assessment (PBS), introduced in 2011 for 79 World Bank, 2023. Shaping First Steps: A Comprehensive Review of Preschool Education in Malaysia. MALAYSIA ECONOMIC MONITOR | APRIL 2024 83 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills BOX 10 The case of Sobral, Brazil: Addressing difficult political economy challenges 80 In Sobral—a relatively poor municipality with principals, and parents. They routinely met with all among the lowest student learning levels in the parties, explaining the benefits of education, as well country—the newly-elected mayor, Cid Gomes, as repeatedly emphasized the importance of teachers began a process of education reform in 1997. The in this process. They increased teacher salaries and reforms included making two difficult political rewarded well-performing teachers with financial decisions. First, he consolidated the school network, incentives. In 15 years, Sobral became the best- closing 40 percent of schools to allow a more efficient performing municipality in Brazil. use of resources for better infrastructure, school meals, and transport. Second, his government laid off 1,000 Despite facing resistance, the leadership teachers (one-third of the teacher workforce), who maintained a consistent approach of fostering failed the basic technical criteria for being a teacher. open dialogue, ensuring equal treatment, and Despite the reforms, in 2000, a diagnostic assessment promoting transparency throughout the reform revealed that 48 percent of second graders could not process. The mayor actively engaged with schools read. Instead of hiding the results, the mayor went on and parents to emphasize the significance of children’s radio stations to communicate the results to all citizens. education and the implementation of more balanced The message was clear: everybody needed to know classroom compositions. Although city councilors and about the learning crisis, and everybody needed to take former principals previously viewed schools through a responsibility. That year, Cid Gomes was reelected for a political lens, the Secretariat of Education welcomed second term as mayor, and he redoubled his efforts to them without bias, and included them when sharing improve education. He formed a new leadership team information about the benefits of the reforms. They did to define strategies to overcome the learning crisis. this with a focus on retaining skilled professionals within This team was headed by his brother, Ivo Gomes, as the the system. new Secretary of Education. At the center of Sobral’s education reform was a set of clear learning targets Efforts to minimize resistance to learning and a system of regular external student assessments. objectives included emphasizing the pivotal role These assessments were discussed in regular meetings of teachers in the learning journey and providing between teachers, principals, pedagogic coordinators technical assistance to schools to facilitate goal and the school superintendence team throughout the achievement. By transparently presenting indicators school year. A Teacher Career Plan was introduced and offering municipal support, the accountability in 2000. The new leadership team knew that making process was legitimized, and educators recognized that change would require the support of teachers, monitoring was distinct from inspection. 80 Afkar, R., Béteille, T., Breeding, M., Linden, T., Mattoo, A., Pfutze, T., Sondergaard, L. and Yarrow, N., 2023. Fixing the Foundation: Teachers and Basic Education in East Asia and Pacific. World Bank Publications. 84 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills primary schools and 2012 for secondary schools, is classroom settings. Improving the effectiveness of being strengthened. PBS is holistic in nature and in individual teachers starts with identifying their capacity line with the National Education Philosophy, assesses and effort.81 In Vietnam, for example, teachers take part intellectual, emotional, spiritual, physical, and social in regular internal and external evaluations that hold aspects. PBS comprises four components, namely: them accountable for teaching quality. Teachers are given the opportunity to improve, failing which they are • Central Assessment or Pentaksiran Pusat (PP), exited. In Malaysia, it would be especially important to which is conducted at the school level by teachers identify which teachers are faring well with differentiated using instruments prepared by the Examinations instruction and special needs instruction and which are Syndicate within a specified period; not, allowing for the latter to receive appropriate help or training. Without effective appraisal systems, incentives • Classroom Assessment or Pentaksiran Bilik for teachers to improve their capacity and practice or Darjah (PBD), which is a continuous assessment even to focus on student learning outcomes remain weak process in teaching and learning to obtain or non-existent. This appears to be the case for Malaysia. information about the development, progress, abilities, and mastery of students; Teacher evaluations in Malaysia would benefit from increased rigor and regularity. It is important to have • Physical, Sports, and Co-curricular Activity independent evaluations of teacher performance in Assessment or Pentaksiran Aktiviti Jasmani, addition to self-assessments. Robust procedures are at Sukan dan Kokurikulum (PAJSK), conducted the core of successful appraisal systems that improve to measure and assess the performance, student learning. There are three key elements: (i) involvement, and participation of students in Sufficient investment of time from principals, other physical, sports, and co-curricular activities, as evaluators, and teachers; (ii) evaluators with the well as physical fitness; and required expertise, in terms of both pedagogical knowledge and assessment techniques; and (iii) teacher • Psychometric Assessment or Pentaksiran acceptance of the system as fair and trustworthy so Psikometrik (PPsi), conducted to measure that they use the results of the assessment.82 Malaysia students’ innate and acquired abilities, interests, has been a trailblazer with its evaluation of English attitudes, and personality traits. Additionally, language teachers, and the subsequent use of the PPsi is used as a tool to identify traits that can be results to provide focused support for improved teacher developed through learning activities inside or performance. A similar Teachers’ Malay Language outside the classroom. Proficiency Test was used for Bahasa Melayu teachers. While Malaysia currently evaluates teachers, there is As Malaysia continues strengthening PBS, it is important limited evidence that the test instrument can distinguish that it continues to participate in international tests accurately between different levels of performance. of student learning, ensuring that it aligns local test This is because of the relatively low percentage of instruments and grading with international ones. teachers scoring under 60 percent (0.02 percent), as Ultimately, Malaysia needs to continue benchmarking well as limited evidence of underperforming teacher itself with competitor countries as it competes in a redeployment to non-teaching roles. While testing global world. content knowledge is crucial, ultimately teachers must transact this knowledge in classrooms everyday with Measuring student learning has to be in parallel students are different levels of learning. Malaysia would with measuring teacher performance, an important benefit from testing teachers on their pedagogic skills. step to identify areas where teachers need support Teach, an open-source classroom observation tool, to increase their effectiveness. Weak systems of helps identify areas of improvement in teaching skills, teacher assessment and appraisal mean that countries classroom management skills and socio-emotional cannot support their teachers to improve, nor create behavior. Finally, Malaysia’s teacher evaluation system a systematic process by which teachers who perform must link teacher performance with student learning. well are recognized and rewarded while those who While teacher effort is important, if it is not leading to consistently perform poorly can be taken out of improved student learning, then more is needed. 81 There are several robust and validated classroom observation tools that have been used on a large scale in developing countries. These tools can provide evidence that mentors and coaches can use to support teachers and that education systems can use to design large-scale training programs. The World Bank has developed such a tool that is publicly available. For more information, see https://www.worldbank.org/en/topic/education/brief/teach-helping-countries-track- and-improve-teaching-quality). 82 Schleicher, 2020 MALAYSIA ECONOMIC MONITOR | APRIL 2024 85 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Incentivize and support better teacher performance based on evidence Malaysia has innovative programs that provide As in Malaysia, teachers in EAP commonly face teachers with continuous professional development the challenge that in any given classroom, the opportunities. Since 2013, there have been children they are trying to teach have a wide opportunities for teachers to develop higher order range of achievement levels; given the low rates thinking skills and pedagogy. The Standard Instrument of proficiency as students complete primary, for the Evaluation of the Cultivation of Higher-Level many students will be behind the expected Thinking Skills in 2023 showed that 54 percent of levels of progression embedded in the national teachers are at the excellent level. Importantly, teachers curriculum. Moreover, teachers are often pushed are also trained to improve their psychological well- to complete the curriculum without regard to the being, with sessions on emotional management, self- actual progress of their students.84 By grouping control, and positive daily practices. students based on their learning levels rather than age or grade, teachers can tailor instruction As a next step, training of teachers must be guided to meet their needs effectively. While Malaysia by data and evidence on what improves student offers training in differentiated instruction, learning. Analysis of high-impact in-service teacher more teachers may need to be covered. Regular training programs from around the world indicates that training in differentiated instruction will not only effective programs have four key features: (i) a focus on help teachers with students lagging behind, but content knowledge, (ii) opportunities to practice what is also help all students improve. learned with colleagues, (iii) continued support through follow-up visits focused on training content, and (iv) 3. Educational Technology (EdTech): Digital career incentives through promotion or increased tools have become increasingly valuable for salary. Malaysia would do well to benchmark its training enhancing teaching and learning, especially approaches against global good practice (see Box 11 during the COVID-19 pandemic. These tools on effectiveness of the 4C approach). include platforms for remote coaching support, structured lesson planning, and computer- Teachers can also be supported in being more assisted learning. EdTech can aid in delivering effective with several different tools, such as: (i) structured lesson plans, tracking progress, and structured lessons plans, (ii) targeted instruction, updating content as needed. A recent impact (iii) educational technology (EdTech); and (iv) the evaluation of Kenya’s Tusomé program, which dual teacher model. included all these elements, found that student learning improved by 0.63 and 0.76 standard 1. Structured Lesson Plans: These plans range deviations across a range of Kiswahili reading from highly scripted lessons to more flexible tasks in Grades 1 and 2, respectively (Wilichowski guides. They provide a framework for teaching & Popova, 2021). However, evidence indicates that and can significantly improve learning outcomes, the effectiveness of these technologies primarily especially where teachers lack pedagogical skills relies on their integration by teachers to improve and subject knowledge. Evidence suggests that instructional practices. In Malaysia, such tools Malaysia still has a non-trivial number of teachers could supplement ongoing efforts in coaching, with content weaknesses who could benefit from differentiated instruction and structured lesson structured lesson plans. plans. 2. Differentiated Instruction: Also known as 4. Dual Teacher Model: This model involves expert targeted instruction or Teaching at the Right teachers providing content and demonstrating Level (TARL)83, this approach helps teachers effective pedagogy through pre-recorded or address the challenge of varying levels of livestreamed sessions. It extends the reach of student achievement within one classroom. high-quality teachers to environments where 83 Teaching at the Right Level (TARL), pioneered by Pratham, an NGO in India, is perhaps the most widely known and used version of Targeted Instruction in developing countries. 84 In many cases, also, the curriculum is too ambitious for the progress that the majority of students can be reasonably expected to make. 86 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills BOX 11 Evidence on the effectiveness of the 4C approach: Content, Colleagues, Continued, and Career Evidence from impact evaluations of teacher reading in the curriculum. It targeted Grade 4 teachers training programs in the region that combine in public schools in Tarlac province, and provided the four features outlined above, highlight their them with storybooks, a teacher’s manual, and effectiveness in raising student learning. For corresponding reading materials. The initial training instance, the Tonga “Come Let’s Read and Write” lasted two days, with a focus on practice with other (CLRW) program provided training focused on content, teachers emphasizing Socratic, progressive methods a new method to teach reading, follow-up in the form built around questions, discussions, and acting out of regular subject-focused coaching, plus instructional stories and playing. It also included three follow-up materials. After two years, average reading scores visits to teachers in their classrooms. Despite being improved by 0.19 standard deviations after one of relatively short duration—the main program was year and 0.33 standard deviations after two years of a read-a-thon over 31 days—the program improved intervention. This means that they were able to increase reading skills by 0.13 standard deviations (Abeberese, the proportion of Grade 2 students who could read Kumler, & Linden, 2011). A follow-up evaluation of from 18 to 29 percent (Figure 65). Effects for girls and the program, conducted three months later, found boys were similar. significant improvements in student learning outcomes, albeit somewhat smaller (0.06 standard deviations). This Even relatively short duration programs can yield highlights the importance of follow-up and continuity in significant results. The Sa Aklat Sisikat (SAS) program teacher support to ensure the full benefits of teacher in the Philippines sought to train teachers to incorporate training methods persist. FIGURE 65 Rigorous impact evaluation of in-service teacher training programs in the region shows such training can lead to better learning outcomes (a) In Tonga: The effect of CLRW program on average TEGRA reading (b) In the Philippines: The effect of SAS program on reading scores scores (standard deviations) (standard deviations) 0.40 0.38 0.20 0.35 0.34 0.33 0.16 0.30 0.13 0.25 0.12 0.21 0.20 0.19 0.18 0.08 0.15 0.06 0.10 0.04 0.05 0 0 All students Girls Boys Post-program 3-month follow-up assessment assessment 1 year exposure 2 years exposure All students Source: Macdonald, et al., 2018 Source: Abeberese, Kumler, & Linden, 2011 MALAYSIA ECONOMIC MONITOR | APRIL 2024 87 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills teacher capacity is lacking, leading to improved These strategies have shown promise in improving learning outcomes. Notably, this model has been education outcomes, particularly in contexts where successfully implemented in various middle- traditional teaching methods may be insufficient. income countries, including in Ghana (Johnston & Moreover, they highlight the importance of ongoing Christopher., 2017), India (Naik, Chitre, Bhalla, & teacher training and support to enhance educational Rajan, 2020), Pakistan (Beg, Lucas, Halim, & Saif, effectiveness. But they need financial investment in in- 2019), and Mexico (Borghesan & Vasey, 2021), service teacher training considerably exceeding current with significant impacts on student learning levels. Given that most teachers who will be in class in across different subject areas and grade levels. the next thirty years have already been recruited in This model is especially useful for students with Malaysia, the government would do well to consider teachers who are not adequately trained and are prioritizing investments in in-service teacher training to hence lagging behind. improve teacher performance. Teacher policies should be clear, doable, and rewarding for them to succeed Teacher policies that may have incorporated good high-impact letters that form words quickly. This way, practice on the surface are often ineffective because teachers could see immediate results from using lesson they do not consider how teachers experience the plans. Their students grew in confidence, saw more policies, and thus fail to influence what teachers visible progress, and ultimately improved their literacy. do. Ultimately, the success of any teacher policy relies This design feature made following lesson plans more on teachers making changes that improve the teaching- rewarding for both the teachers and the students. learning experience for students. For example, teachers must gauge existing student learning, interpret curricula The Malawi and Kenya examples illustrate how to understand requisite learning, and implement a plan the (seemingly) same evidence-based intervention to adjust their classroom teaching, among others. Yet, can yield strikingly different outcomes because of policymakers often do not listen to teachers or consider differences in the ways the teachers experience it. carefully what changes teachers will need to make The examples underscore that the success of teacher and how to make these changes stick over time. For policy relies on the extent to which the policy enables, instance, too often teacher professional development supports, and empowers teachers to adopt changes provides too little in-classroom teaching practice and that lead to improved teaching and learning. Thus, feedback. Curriculum reforms add material without for Malaysia’s policies to lead to improved teaching taking anything out, leaving teachers to cover more practices and ultimately to increased student learning, material in the same amount of time. policy design and implementation must be informed by a deep understanding of the factors that will facilitate— Even if teachers know how to apply a certain type or hinder—the target changes. This is where insights of practice in the classroom, teachers need to be from behavioral science can help, as the examples motivated to shift—and sustain these shifts in— above illustrate. In Malaysia’s case, the country may their teaching practices. This is the “why” barrier benefit from reviewing the type of training provided that is, “Why should I enact these changes in the to teachers for professional development and prioritize classroom?”. Consider the use of lesson plans: teachers the quality of such training. will not adopt the regular use of lesson plans at all if they are not convinced that the new strategies will help The success of these policies hinges on teachers improve their teaching and improve student learning. making changes that enhance the teaching-learning This is the case especially in contexts where policy experience for students. Teachers play a crucial role in shifts and new programs are introduced frequently. assessing student learning, interpreting curricula, and As Box 12 suggests, the Tusome program addressed adapting their teaching methods accordingly. However, this barrier to change by sequencing lesson plans so policymakers frequently overlook teachers’ perspectives that students were taught words and letters in order and fail to consider the practical challenges they face. of impact (instead of alphabetically), so that they learn For instance, teacher professional development often 88 MALAYSIA ECONOMIC MONITOR | APRIL 2024 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills BOX 12 Why did two school systems have dramatically different outcomes despite similar policies? 85 Behavioral insights can play a key role in improving contrasts with teachers guides in similar interventions the outcomes of policy. To illustrate this phenomenon in Uganda and Ethiopia that required teachers to flip on a policy level, consider two apparently similar teacher back and forth between pages to figure out what they interventions: Kenya’s Tusome program and Malawi’s needed to do. This was a critical design flaw that caused Early Grade Reading Activity (EGRA). Both initiatives teachers to skip about 38 percent and 15 percent of aimed to enhance student learning through structured classroom activities, in the two countries respectively, pedagogical materials, comprehensive teacher training, when teaching an early-grade reading lesson. Kenya’s and student assessments. Despite sharing these core Tusome guides prioritized clarity, with each lesson components, Tusome yielded significant improvements plan confined to one page, while Malawi EGRA’s plans in student learning, with gains of 0.63 and 0.76 standard were consistently longer, requiring teachers to navigate deviations across various Kiswahili reading tasks in multiple pages during lessons. Moreover, the Tusome Grades 1 and 2, respectively. In contrast, Malawi’s EGRA guides were designed for usability, featuring relevant showed no notable impact. Despite their apparent images from the student book, whereas the EGRA similarity on paper, what explains the starkly different guides lacked such user-friendly elements, requiring outcomes between these programs? teachers to frequently switch between the guide and other materials during lessons. The EGRA’s Grade 1 If teachers find that the lesson plans are hard to lesson plans in Chichewa contained an average of 16 follow and are unclear about what they need to do, activities per class, compared to Tusome’s Kiswahili they are likely to choose to do things differently, or plans, which had only seven activities. Additionally, not use lesson plans at all. This is the “How” barrier the Tusome program included more intensive hands- that is, “How do I implement these changes in on training on the use of teachers guides, as well as class?” To address this barrier, Kenya’s Tusome program continuous daily classroom support for implementation designed and formatted lesson plans in a clear and easy of the lesson plans. In this way, the Tusome program way for teachers to read, understand, and utilize. This addressed the “How” barrier. 85 World Bank. 2023. Making Teacher Policy Work. World Bank. Washington DC. lacks sufficient in-classroom practice and feedback. teachers are less likely to follow them. Even if teachers Curriculum reforms often add new material without understand how to implement new practices, they removing existing content, burdening teachers with need motivation and support to sustain these changes more material to cover in the same amount of time. in their teaching. Overcoming these “how” and “why” To improve early-grade reading outcomes, teachers barriers is essential for successful policy implementation require clear expectations and effective lesson plans. and long-term improvement in teaching practices and If lesson plans are unclear or difficult to implement, student outcomes. MALAYSIA ECONOMIC MONITOR | APRIL 2024 89 PART TWO - Bending Bamboo Shoots: Strengthening Foundational Skills Summary of key recommendations Start early and give all children a headstart. investment of time and knowledge, and linkage to Malaysia has made noteworthy progress in expanding student learning for appraisals to be useful. preschool education, but there is room to reach the last mile. Malaysia will need to improve the accessibility, Support and incentivize improvement in teacher equity, and quality of preschool education. On performance. There are two parts to this: access, this includes ensuring free and compulsory preschool education, conducting mapping exercises 1. Ensuring policy draws upon global evidence to identify enrollment gaps, and providing financial aid on what improves student learning: Effective to parents and operators. On quality, improvements teacher training programs emphasize content in teacher qualifications, professional development, knowledge, practice with colleagues, follow- quality assurance systems, and curriculum delivery up support, and career incentives. Mentoring, are fundamental. Effective governance, financing, and coaching, structured lesson plans, targeted stakeholder cooperation are essential enablers for instruction, educational technology, and the dual achieving preschool education goals. teacher model are potential tools for supporting teachers. Introduce better and more frequent measurement of student learning and teacher performance. 2. Ensuring teachers know what to do, how to First, Malaysia needs to rigorously measure student do it, and why they should do it: To improve learning outcomes and continue to benchmark them to the success of teacher policies, it is crucial to international standards. The School-Based Assessment integrate teachers’ experiences into their design or Pentaksiran Berasaskan Sekolah (PBS) for lower and implementation. The success of these policies secondary students has been implemented for more hinges on teachers making changes that enhance than a decade, but its effectiveness in measuring the teaching-learning experience for students. learning outcomes should be regularly evaluated and Policymakers frequently disregard teachers’ strengthened. As Malaysia continues to improve on perspectives and fail to consider the practical PBS, it must also continue to participate in international challenges they face. For instance, teacher tests of student learning—in order to align local test professional development often lacks sufficient instruments and grading with international ones. Next, in-classroom practice and feedback. Addressing improving teacher effectiveness starts with identifying the what, how and why barriers through policy their capacity, followed by strengthening the teacher that is clear, doable, and rewarding is key to appraisal system. To ensure appraisals are useful, effective implementation; teachers need to know significant reforms and reorientation are needed— what is expected, how they can change, and why specifically, to ensure there are robust procedures, they should. 90 MALAYSIA ECONOMIC MONITOR | APRIL 2024 MALAYSIA ECONOMIC MONITOR | APRIL 2024 91 References Abeberese, Ama Baafra, Todd J. Kumler, and Leigh L. 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Washington, DC: The World Bank. 94 MALAYSIA ECONOMIC MONITOR | APRIL 2024 Annex Annex 1. Reading stimulus and an example Band 6 and above item in SEA-PLM The Hole “I can see something shiny at the bottom’, said Kit. ‘Maybe it’s a gold coin.” “Don’t be silly,” said Sara, peering into the hole. Her young brother was always seeing things, creating objects out of nothing. “Maybe it’s a sword,” continued Kit. “Maybe a king buried a gold sword in the ground many years ago, and then forgot about it.” “Maybe it’s dirt, covered in dirt, covered in more dirt’, said Sara. “It’s just a hole, probably made by a wild animal.” “You are wrong!’ exclaimed Kit. “No animal could make a hole as big as this!” “Well, if you are so sure this is not an animal’s hole, perhaps you should climb into it.” Kit began to turn pale. “Erm… No. I cannot go in the hole… because… I have a sore foot!” Sara smiled; it had nothing to do with Kit’s foot. A big hole could mean a big animal. “I have an idea,’ she said, picking up a stone that lay beside her. “I will drop this into the hole. If we hear a clink, there is treasure. If we hear a thud, there is dirt. If we hear a yelp, there is an animal.” Sara dropped the stone and they heard nothing for a moment. Then they heard a splash. QUESTION: Why doesn’t Kit want to climb into the hole? a. Because he has a sore foot b. Because he is scared c. Because he doesn’t know how to climb d. Because he knows there is an animal in the hole Of Malaysian students who sat SEA-PLM 2019: • 58% would be likely to answer this item correctly (that is, those who are at Band 6 and above); • The remaining 42% would be unlikely to answer this item correctly. 2. Reading example item Band 4 QUESTION: Sara says, “I have an idea”. What is her idea? a. To push her brother into the hole b. To go into the hole to explore c. To throw a coin into the hole d. To drop a stone into the hole Of Malaysian students who sat SEA-PLM 2019: • 12% would be unlikely to answer this item correctly (that is, those who are at Band 3 or below); • Many of the 12% at Band 4 would be likely to answer correctly; and • The remaining 76% (those in Bands 5 and above) would almost certainly be able to answer this item correctly. MALAYSIA ECONOMIC MONITOR | APRIL 2024 95 Annex 3. Example Label item, Band 2 and below Which word? a. Car b. Shoe c. Wheel d. Cat There were 5% of students in Malaysia at Band 2 and below. The four items in Band 2 and below are all “label” items, which require students to select one word that matches a picture of a familiar object. Source for the above figures and analysis: SEA-PLM 2019 (Malaysia National Report) 96 MALAYSIA ECONOMIC MONITOR | APRIL 2024 CONNECT WITH US wbg.org/Malaysia @WorldBankMalaysia @WB_AsiaPacific http://bit.ly/WB_blogsMY