Malaysia’s promising reforms undermined by its shadow economy

In recent years, Prime Minister Anwar Ibrahim’s government has taken vital reforms to stabilise Malaysia’s public finances and attract foreign investment. Central to this renewed push is Kuala Lumpur’s Madani Economy framework, which seeks to align social progress with sustainable development, good governance and fiscal responsibility while positioning Malaysia at the forefront of green growth in ASEAN.

Despite this commendable progress over a short timeframe, the scale of Malaysia's fiscal challenge remains significant. While Malaysia’s reforms are facilitating export recovery and increases in foreign direct investment (FDI), offering a degree of relief, its public finance situation remains complex, with the inevitable public spending rises to fuel the growth of the local economy not entirely compensated by tax collection growth.

In this endeavor, the country’s illicit trade remains a critical vulnerability, robbing the government of much-needed tax income and weakening Malaysia’s ability to invest in the very infrastructure and clean energy projects crucial to its long-term development. Consequently, escalating the government’s encouraging anti-smuggling crackdown is both a public health and an economic imperative.

Kuala Lumpur’s ambitious anti-tobacco crusade

Malaysia’s illicit tobacco trade remains among its major tax revenue leakages, with estimates suggesting annual excise tax losses in the billions of ringgit. Fortunately, the Malaysian government has long adopted a proactive approach to this scourge. After ratifying the World Health Organization Framework Convention on Tobacco Control (WHO FCTC) in 2005, Malaysia became the first and only ASEAN country to deploy a fully tobacco industry-independent traceability system to curb illicit cigarettes in 2015 – a vital move complemented by its twofold increase in cigarette excise taxes that same year.

In the ensuing years, Malaysia’s public authorities and tobacco control advocates have worked together to achieve major breakthroughs in developing the robust regulatory framework needed to tackle illicit tobacco – most notably including the adoption of the Control of Smoking Products for Public Health Act 2024. While still too large, the Malaysian government’s combination of independent track and trace and stronger cigarette taxes have helped to reduce the illicit tobacco trade – despite the tobacco industry’s insistence to the contrary.

Big Tobacco’s misinformation campaign

Willing to go to any lengths to dilute regulations that hit its profits, Big Tobacco continues to pose a menace to Malaysia’s public and fiscal health reforms. One of the most persistent strategies used by Big Tobacco to undermine effective tobacco control regulation is to exaggerate the size of the illicit market.

In 2019, for instance, Japan Tobacco International (JTI) claimed that illicit cigarettes made up around 60% of Malaysia’s total market – an assertion based on an industry-sponsored Oxford Economics study that has since been discredited by the Southeast Asia Tobacco Control Alliance (SEATCA) as a crude attempt to dissuade Asian governments from bolstering tobacco taxation.

The World Bank has also pushed back against Big Tobacco’s intentionally-misleading figures, pointing to data suggesting that the true scale of Malaysia’s illicit market is closer to half of the industry’s claim. Moreover, a 2022 independent study from the University of Putra Malaysia equally revised downward previous estimates of the illicit market’s size while concluding that the government’s 2015 excise tax increase led to only a modest rise in illicit market share, and importantly, no growth in the actual volume of illicit cigarettes.

This revised picture provided by independent analysis underscores the resilience of Malaysia’s track and trace system and exposes the industry's narrative as both misleading and self-serving.

Industry’s manipulation of track-and-trace

Yet, the tobacco industry’s interference has unfortunately not been contained to false claims, with research from the University of Bath’s Tobacco Control Research Group (TCRG) documenting how Big Tobacco has actively worked to subvert traceability efforts worldwide, constituting a gross violation of the WHO FCTC and its Protocol to Eliminate Illicit Trade in Tobacco Products (ITP Protocol).

In Malaysia, these tobacco industry tactics are now being replicated. Drawing on a self-serving, British American Tobacco (BAT)-funded study on Malaysia’s illicit market, Japan Tobacco International (JTI) Malaysia has raised concerns about the role of counterfeit tax stamps in the country’s illicit trade, notably questioning the integrity of the country’s “dual” traceability system, which combines digital features with physical security elements.

In an attempt to dislodge the existing system despite its years of progress, JTI Malaysia is advocating for a track and trace scheme modelled on the European Union (EU)’s system, which relies on fragmented oversight and tobacco industry-linked service providers. Notably, JTI omits any reference to the steadily-rising levels of illicit tobacco in Europe and the billions of euros lost annually across the EU since the system’s implementation, which incorporates technological components initially developed by Philip Morris International (PMI).

Crucially, the EU system's structure places it in clear conflict with the WHO’s ITP Protocol (ITP), which prohibits tobacco industry involvement due to its documented role in facilitating illicit trade to boost its profits.

Malaysia’s moment to double down

Given these structural flaws and the absence of true industry independence, respected civil society organisations such as the Global Alliance for Tobacco Control (GATC) have strongly advised other countries against replicating the EU system.

Looking ahead, the Malaysian government has a critical decision to make on tobacco traceability. Beyond doubling down on its existing tobacco control efforts, ratifying the ITP Protocol would significantly enhance Malaysia’s legal framework, strengthen regional cooperation and help insulate its policies from tobacco industry interference. In parallel, the continued enhancement of Malaysia’s anti-smuggling enforcement capacities will play a key role in cracking down on illicit tobacco.

These tobacco control decisions will have major repercussions for Kuala Lumpur as it seeks to boost public revenues needed for the nation’s sustainable economic transformation. If it stays the course, Malaysia can emerge not only as a greener economy, but as a more resilient and self-reliant one, equipped to maintain a strong leadership role within ASEAN in the years ahead.