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Budget 2025: ‘Minimum wage increase, EPF contribution for foreign workers will threaten survival of SMEs in Malaysia’

The Small and Medium Enterprises (SME) Association of Malaysia expresses serious concerns regarding the proposed minimum wage increase and mandatory Employee Provident Fund (EPF) contributions for foreign workers announced in Budget 2025.

While the government’s focus on improving worker welfare is commendable, these measures could impose unsustainable financial burdens on Malaysia’s SMEs, particularly when many are still recovering from the pandemic.

We cannot ignore that these proposed changes, if implemented without support mechanisms, may threaten the survival of countless small and medium-sized enterprises.

SMEs, which make up over 97 per cent of Malaysia’s business landscape and employ millions, operate on much tighter margins than larger corporations. Their ability to absorb additional costs is minimal, and many are already struggling with rising costs in raw materials, energy, logistics, and financing.

Available data shows SMEs currently employ about 7.95 million workers, both local and foreign.

Key concerns include:

Increased operational costs hampering recovery efforts

Many SMEs are still reeling from the economic fallout of the Covid-19 pandemic. Recovery has been slow, and just as businesses are beginning to rebuild, wage hikes and EPF contributions for foreign workers could derail their efforts. The sharp rise in operational costs could push struggling SMEs into insolvency, leading to business closures and job losses.

Negative impact on employment and hiring

Though wage increases aim to benefit workers, SMEs may be forced to freeze hiring or reduce their workforce to cope with higher salaries and EPF contributions. In the long term, this will harm employment rates and workers’ career prospects, especially for young job seekers and fresh graduates.

SMEs’ limited ability to pass on costs

Unlike large businesses, SMEs often lack the pricing power to pass on additional costs to customers. In an already competitive market, raising prices to cover new expenses could alienate customers, shrinking profit margins and further threatening business viability.

Stunted innovation and expansion

SMEs drive innovation in Malaysia’s economy, but the proposed increases will limit their ability to invest in research, development, and digital transformation. Many are already holding off expansion plans due to cash flow constraints. These new burdens will delay growth initiatives crucial to long-term sustainability and global competitiveness.

Inequitable impact on different sectors

Not all sectors will be equally affected by these changes. Labour-intensive industries such as manufacturing, retail, and services will bear the brunt, while capital-intensive sectors will fare better. For industries with razor-thin margins, this could mean reduced hours for workers or a shift towards automation, ultimately displacing jobs.

Inadequate financial support for SMEs

While some provisions in Budget 2025 aim to assist businesses, the support specifically allocated to SMEs is insufficient to mitigate the significant impact of these policy changes. We urgently call for more robust measures, such as tax breaks, subsidies, and wage support programmes, to ease the transition and help SMEs absorb these additional costs.

As such, we strongly urge the government to adopt a more balanced and thoughtful approach to these proposals. We recommend:

Phased implementation

Introduce a gradual increase in wages and EPF contributions over an extended period, giving SMEs time to adapt.

Targeted support programmes

Allocate additional funds to provide relief to SMEs, particularly in labour-intensive sectors, to help them comply with the new regulations without sacrificing financial viability.

Incentives for workforce upskilling

Introduce government-sponsored programmes that incentivise SMEs to invest in employee training and upskilling, allowing them to offset wage increases with improved productivity.

Engage with SMEs

Establish regular dialogues between SME representatives and policymakers to ensure future policies reflect the realities on the ground and the unique challenges smaller businesses face.

As president of the SME Association of Malaysia, I implore the government to act quickly to address these concerns. The proposed wage increase and mandatory EPF contributions for foreign workers, if implemented without additional support, risk inflicting long-term damage on the SME sector, which is critical to the overall health of Malaysia’s economy.

SMEs are the heart of job creation, innovation, and community resilience. We stand ready to work with the government to find solutions that balance worker welfare and business survival. Let us ensure that any reforms help SMEs thrive, rather than push them towards collapse.

Chin Chee Seong is the president of the Small and Medium Enterprises (SME) Association of Malaysia.

The views expressed here are the personal opinion of the writer’s and do not necessarily represent that of Twentytwo13.