Malaysia’s fiscal transfer system requires stronger legal foundations, clearer allocation mechanisms and improved transparency to ensure predictable funding for state governments, according to a new policy paper by the Institute for Democracy and Economic Affairs (IDEAS).
The report titled “The Governance of Fiscal Transfers in Malaysia: Is it rule-based, predictable, and transparent?” was launched during the IDEAS Fiscal Responsibility Summit 2026, organised with the support of the European Union Delegation to Malaysia.
The report, authored by IDEAS Senior Fellow Sri Murniati Yusuf, examined whether Malaysia’s fiscal transfer framework operates based on clear rules, provides predictable funding to state governments and meets transparency standards.
It found that Malaysia’s fiscal transfer system is not fully rules-based, highly unpredictable for state governments and only partially transparent.
While some transfers are supported by constitutional provisions, the report highlighted that several others lack clear legal foundations, publicly available guidelines or transparent allocation formulas.
The study also found instances where transfers were not disbursed according to their stated formulas, creating uncertainty over consistency and fairness in the distribution of funds.
“Fiscal transfers play a critical role in supporting state governments and ensuring the delivery of public services. However, the effectiveness of these transfers depends not only on the amount allocated, but also on whether they are governed by clear rules, predictable arrangements and transparent reporting mechanisms,” Sri Murniati said.
According to the report, variations in annual transfer allocations and differences between projected and actual disbursements have made it challenging for state governments to plan expenditure and manage finances effectively.
The report further noted that the presentation of transfer allocations across multiple federal and state budget documents makes it difficult to determine the full extent of federal support provided to states.
This fragmentation limits public scrutiny, accountability and transparency in intergovernmental fiscal relations.
To strengthen Malaysia’s fiscal transfer governance, IDEAS recommended that all transfers be anchored clearly in constitutional or statutory provisions, supported by publicly available guidelines and governed by well-defined eligibility criteria and transparent calculation formulas.
The report also proposed establishing a dedicated technical secretariat or committee under the National Finance Council (NFC) to support continuous engagement between federal and state governments, improve implementation and address administrative challenges.
Another recommendation was to harmonise the reporting and disclosure of transfer data across federal and state budget documents to enhance comparability and public understanding of fiscal flows.
Deputy Minister of Finance Liew Ching Tong, who delivered the keynote address at the summit, highlighted the importance of responsible fiscal governance in supporting long-term development and strengthening Malaysia’s economic resilience.
European Union Ambassador to Malaysia HE Rafael Daerr said stronger fiscal governance and transparent public institutions are essential foundations for sustainable growth.
“The European Union is pleased to support this study and contribute to the debate on how to strengthen fiscal governance, ensure transparency and effective public institutions,” he said.
IDEAS said improving the governance of fiscal transfers would help build greater trust between federal and state governments while ensuring public resources are managed more effectively.
