Past prudence has allowed fiscal policy to react boldly. A series of relief packages amounting to more than 35% of GDP has rescued the most affected firms and workers, thus shoring up confidence. Financial support has been well targeted and its implementation has been swift thanks to an established distribution system. An emergency job-retention scheme has mitigated the rise of unemployment. A swift vaccination campaign should help avoid new waves of infections, but new outbreaks caused by virus mutations remain possible. Fiscal policy support should therefore not be withdrawn until the situation is fully under control and the recovery is well established, while public debt needs to be reduced under a medium-term fiscal consolidation strategy after the pandemic with further efforts to enhance revenue.

Monetary policy response was prompt and still has ample policy space. Headline inflation is rebounding after a large dive in 2020 caused by the decline in oil prices. Nevertheless, core inflation is forecast to be stable, and monetary policy should be very accommodative amid the prevailing downside risks.

Massive moratorium programmes have alleviated financial distress of affected households and businesses. The policies have been effective, as micro-, small- and medium-sized enterprises account for a significant part of the economy. The rise of non-performing loans has been contained, and financial supervisors consider that capital buffers are sufficient. Nevertheless, the protracted pandemic will force more closures of businesses in severely affected sectors, such as tourism and retail.

The pandemic has revealed the weakness of social protection in Malaysia. The crisis hit hard the most vulnerable in the labour market, notably women, young people, and lower-skilled workers. Women were particularly exposed because many of them are self-employed (Figure 1), and operate in sectors that have not yet recovered, such as tourism and retail affected by tighter restrictions on business activity. The numerous self-employed workers are not well covered by social protection, despite recent government efforts to expand the coverage to them, which puts them at risk of poverty.

Due to the rapid rise of online services, the number of platform workers has increased sharply in Malaysia. Most platform workers, who are generally self-employed, are in a precarious position. The government has expanded the coverage of their social protection, but more could be done.

The economic recovery risks triggering a rebound of carbon emissions and other environmental damages. Since the adoption of the Paris Agreement, Malaysia has made steady progress in reducing its carbon emissions intensity, but its absolute volume has increased (Figure 2). Introducing a carbon tax could help transform the economy to a less carbon-dependent one. After increasing the use of coal, the government now intends to raise the share of electricity produced by renewables to 31% at the latest by 2025. Despite a small size in area, Malaysia is endowed with one of world’s richest forest biodiversity. The government is stepping up its efforts to conserve Malaysia’s invaluable forest, which needs to be implemented urgently.

Steering a recovery to a sustained path needs invigorating business activity. Over the past years, reforms were progressively implemented to improve the business climate. The National Policy on Development and Implementation of Regulations has improved the regulatory frameworks, streamlining procedures for business activity. The establishment of competition authorities has levelled the playing field and secured competitive markets in a range of sectors, which should be further strengthened.

Nevertheless, regulations and procedures are still restrictive compared with OECD countries (Figure 3). The government can further reduce these restrictions in a range of sectors, such as retail trade. Private firms still face significant administrative burdens, especially new start-ups. Improving insolvency schemes further would also help restore business dynamism. The lack of collaboration between different government bodies is still impairing business dynamism, and regulatory processes could be more transparent. Malaysia has made notable progress in enhancing public integrity and the fight against corruption, including money laundering, and reform momentum should be kept up.

A number of SMEs, especially micro-sized firms, do not use computers and the Internet. Most SMEs do not make their transactions through e-commerce, which has been a big hurdle during the periods of confinement. As a number of firms have just started to use digital tools, the adoption of an ambitious Malaysia Digital Economy Blueprint (Blueprint) in the middle of the pandemic was timely.

Digitalisation boosts business productivity, particularly in SMEs, even with small steps such as the use of personal computers (Figure 4). Along with the Blueprint, SMEs, particularly micro-sized firms are in need of further support to their digitalisation, and SME workers could benefit from opportunities to upgrade their digital skills. Further reforms in the fixed broadband market can help provide higher quality and more affordable services to both businesses and consumers. Together with further trade liberalisation, particularly in the services sector, these efforts will help SMEs expand their business across international borders.

The pandemic forced many workers in Malaysia to telework from home on a regular basis. The experience of teleworking did not bring about negative feelings among most workers according to a study conducted for this report. Nevertheless, not many firms anticipate regular teleworking after the pandemic compared with other countries, where most firms that experienced mandatory teleworking regulations now look forward to continuing regular teleworking practices. After the pandemic has subsided, some amount of teleworking will remain a new normal across the globe, as it has proved productive, if appropriately organised.

The government can help provide an enabling environment for businesses and workers to pursue teleworking. In Malaysia, the lack of ICT infrastructure is perceived as a major obstacle (Figure 5), hence digital investment could play an important role. Implementing the Blueprint as planned is crucial for infrastructure development.