Malaysia

Key development challenges

Malaysia is an upper middle-income country that occupies parts of the Malay Peninsula and the island of Borneo. Its $373 billion GDP accounts for 11.1% of the regional GDP of Southeast Asia. With a population of more than 33 million, Malaysia’s GDP per capita of $11,109 is the third-highest in the region.

Since Malaysia became independent in 1957, its economy has achieved remarkable growth and a reduction in extreme poverty. It is expected that Malaysia will transition to a high-income economy between 2024 and 2028. According to the United Nations’ Human Development Index, Malaysia is ranked 62nd out of 191 countries. Malaysia is one of the most open economies in the world with a trade-to-GDP ratio averaging more than 130% since 2010. Such openness to trade and investment has been integral to job creation and income growth, with approximately 40% of jobs linked to export activities.

Despite this progress, Malaysia faces several development challenges. Income inequality is high relative to other East Asian countries, with 8.4% of the population living below the national poverty line. Corruption also remains a challenge, with Malaysia ranking 61st out of 180 countries in Transparency International’s 2022 Corruption Perceptions Index.

Overview of development finance trends

Over the 2015–21 period, more than 4,300 projects were implemented by 49 development partners in Malaysia, amounting to more than $6.6 billion in official development finance (ODF) disbursements — including grants, loans, and other forms of assistance. In real terms, flows to Malaysia increased by 69% between 2015 and 2021. The expansion was the result of an increase in both grants, which surged by 67% over the period, and loans, partly from China, which grew by 69%.

However, ODF to Malaysia remained modest compared to other recipient countries in the region, ranking eighth (out of nine) by average annual disbursements. With an average of $940 million per year disbursed in the country between 2015 and 2021, ODF in Malaysia only accounted for 3% of total regional development finance spent.

Over the period analysed, the role and significance of ODF spent relative to GDP was marginal, starting at 0.2% of GDP in 2015 and increasing slightly to 0.35% in 2021. This result can be explained by Malaysia’s upper middle-income status and large economy but also significant project implementation difficulties.

Main development partners

The majority of Malaysia’s ODF was provided by China (75%), which averaged more than $708 million in annual disbursements between 2015 and 2021. South Korea was Malaysia’s second-largest development partner, with $870 million in financing disbursed over the period.

Development finance was mostly for large infrastructure projects in transport and energy, which were almost exclusively financed through non-concessional loans.

Malaysia is now a top recipient of China’s Belt and Road Initiative (BRI). Malaysia’s largest project by disbursements, the East Coast Rail Link Mal001, is a 665-kilometre rail network connecting the east coast states with the west coast of Peninusular Malaysia. Construction began in 2017 and the project is financed by the Export–Import Bank of China. It is worth $12 billion in non-concessional loans, of which $2.2 billion had been disbursed by the end of 2021.

Korea also provided a considerable amount (13%) of development finance, even surpassing China’s contributions in 2015 at $427 million (in constant 2021 US$). In recent years, however, South Korea’s share has declined, providing an average of $42 million per year between 2019 and 2021. In terms of projects, the Export–Import Bank of Korea provided several non-concessional loans between 2015 and 2018 within the industry, mining, and construction sectors, which totalled $476 million. Within the energy sector, it provided $188 million in non-concessional loans during this period.

Japan’s relatively small contributions of ODF to Malaysia were provided through grants or concessional loans. These projects spanned multiple sectors. The largest project, the Pahang-Selangor Raw Water Transfer Project 2005003041 - JICAMXIX-1, was funded via a concessional loan from the Japan International Cooperation Agency (JICA) that aimed to provide a stable water supply to Kuala Lumpur and its surrounding area. A total of $271 million was disbursed between 2015 and 2019.

Overall, only 12% of development support provided to Malaysia was concessional (ODA), lower than the regional average (47%).

In terms of implementing agencies, the China Communications Construction Company Ltd and Malaysia Rail Link Sdn Bhd (MRLSB) were the largest recipients of development flows by total disbursments. This was largely due to the scale of the aforementioned East Coast Rail Link project Mal001. The MC22 Group Corporation were also a major implementing channel of development flows, exclusively from China.

Sectors

The distribution of ODF in Malaysia by sector was very different to the rest of the region. Notably, the government and civil society sector (1%) received proportionally much less than the regional average (19%). Conversely, the transport and storage sector (34%), as well as industry, mining, and construction (25%), featured prominently, surpassing the regional average. The energy sector also accounted for a reasonable proportion of Malaysia’s ODF (22%), though was broadly consistent with the regional average (18%).

Within the transport and storage sector, rail transport accounted for virtually all disbursements. China’s East Coast Rail Link project Mal001 was the largest project in the sector. In industry, mining, and construction, the basic metal industry represented 65% of the sector, with the Kuantan Industrial Park Integrated Steel Project (Mal015, Mal016), implemented by China’s MC22 Group Corporation, being the most significant ($954 million non-concessional loan).

Despite total ODF to Malaysia increasing, this trend was exclusively for infrastructure projects. Investments in human development were small and fell by 37% over the period analysed.

Climate

The Southeast Asia Aid Map uses an adapted version of the Organisation for Economic Co-operation and Development’s (OECD’s) climate marking system to sort projects into three distinct categories: principal, where climate change mitigation or adaptation is explicitly stated as fundamental to the project; significant, where climate change mitigation or adaptation is explicitly stated but not fundamental; and not climate-related, where climate change is not targeted in any significant way.

The level of climate development finance in Malaysia is modest. Despite an overall increase in ODF of 69% between 2015 and 2021, this was mostly for non-climate-related projects. It is difficult to determine if climate-related finance is falling as a proportion of the overall ODF disbursed, given that climate development finance oscillates depending on the disbursement of a few large projects that have mostly been focused on the energy sector.

For Malaysia, few ODF projects were considered “principal” in climate focus over the period. In fact, 66% of all principal climate disbursements were delivered in 2015 alone. The largest of these was a solar energy project (Mal018; Mal019) from the Export–Import Bank of China to publicly held JinkoSolar, amounting to $70 million in non-concessional loans.

Most climate-related projects were funded through loans (90%) rather than grants (10%), and the largest development partner by far was China, accounting for 80% of all climate development finance. Following behind, South Korea provided 10%.

On average, total climate development finance was $171 million per year between 2015 and 2021, which accounted for 18% of total ODF over this period.

Malaysia as an ODF provider

Over the period examined, Malaysia contributed $690,000 to lower middle-income countries in Southeast Asia. Malaysia disbursed an average of $64,000 per year as a member of the ASEAN Coordinating Centre for Humanitarian Assistance (e.g. MY-AHA-2021). Further, in the “spirit of ASEAN solidarity”, Malaysia provided $200,000 in humanitarian aid in 2018 to the government of Laos to aid victims following the collapse of the Xepian-Xe Namnoy dam (Inter-SEA031, Inter-SEA036).

Despite being an upper middle-income country and having the fifth-highest GDP in the region, Malaysia only provided 0.13% of total regional ODF. This positions Malaysia as the seventh-most significant provider (out of 11 Southeast Asian countries) in terms of development finance delivered to its neighbours. Indeed, Vietnam, Cambodia, and Timor-Leste were more generous, despite their lower middle-income status and smaller economies.