SARAWAK businesses could face rising operating costs and weaker competitiveness if Foreign Worker Transformation Approach (FWTA) renewal fees increase sharply without a broader transition strategy.
Universiti Malaysia Sarawak (UNIMAS) Faculty of Economics and Business senior lecturer Dr Dzul Hadzwan Husaini said foreign workers had become a critical component of production across labour-intensive sectors, including construction, plantations, manufacturing, logistics, food services and downstream industries.
“In economies like Malaysia, including Sarawak, foreign workers are not merely supplementary labour.
“They have become an important production input that supports operational continuity, cost efficiency, and business expansion,” he told Sarawak Tribune.
Dzul said the issue should be viewed through the lens of labour market mismatch rather than labour shortages alone.
“Many businesses continue to face difficulties recruiting locals for lower-skilled, physically demanding or less attractive jobs despite existing vacancies.”
At the same time, he said Malaysia had gradually expanded social safety net mechanisms and income support programmes. While these were important for welfare protection, he said they might also reduce the urgency among some groups to participate in certain low-wage sectors.
“As a result, firms continue relying on migrant labour to sustain production,” he said.
Dzul said his research comparing Malaysia and Singapore found migrant workers had become deeply embedded in both economies, particularly in supporting output growth and production capacity.
“Any increase in renewal fees will therefore directly affect the cost structure of businesses, especially SMEs with thin margins and limited flexibility to absorb sudden increases in labour-related costs.”
He described the proposed increase as both an immediate financial burden and part of a broader policy shift towards tighter foreign worker governance.
“In the short term, businesses will experience it as a direct cost shock.
“Labour costs are part of firms’ operating expenditure, and when renewal fees increase abruptly, companies face immediate pressure on cash flow, profitability, and pricing decisions,” he said.
This would be particularly challenging for firms that could not quickly automate operations or replace labour.
However, Dzul said the policy also reflected a broader structural transition taking place in many economies.
“Across many economies, governments are increasingly trying to reduce excessive dependence on low-cost migrant labour while encouraging productivity upgrading, automation, skills development and more regulated labour inflows.”
He pointed to Singapore as a regional example, noting that the republic had long relied on foreign worker levies, dependency ceilings and sector-specific quotas to manage labour composition while encouraging businesses to move gradually towards higherproductivity activities.
“The key challenge for Malaysia was whether the fee increase would be accompanied by a broader transition strategy.
“If the policy only raises costs without improving labour governance, productivity support, or workforce planning, then firms may perceive it merely as an additional financial burden rather than meaningful reform,” he said.
Dzul said higher labourrelated costs could weaken the competitiveness of Sarawak businesses, given the state’s unique demographic and economic characteristics.
“Sarawak has a relatively small population base compared to Peninsular Malaysia, while its economic activities are spread across a large territory.”
This, he said, created a tighter labour supply environment, particularly for physically demanding, lower-skilled and labour-intensive industries.
“In many cases, businesses are not choosing foreign workers simply because they are cheaper, but because there are insufficient local workers willing or available to fill these positions consistently.
“Therefore, when renewal fees increase, firms face a direct rise in operating costs without necessarily having realistic short-term alternatives in the domestic labour market,” he said.
He added that businesses in Sarawak already operated under higher structural costs than many regions.
“Transportation, logistics, interdistrict connectivity and distancerelated expenses were naturally higher due to the state’s geography and settlement patterns.
“When additional labourrelated costs were introduced, the cumulative pressure on businesses became more significant.”
Dzul said export-oriented industries and businesses linked to wider supply chains would be especially sensitive to rising labourrelated costs.
“These firms often could not freely increase prices because they competed against producers from other countries or regions where labour costs might remain lower.
“If production costs rise while productivity remains unchanged, Sarawak firms may gradually lose price competitiveness,” he said.
He stressed that competitiveness was determined not simply by wage levels, but by productivity-adjusted labour costs.
“If businesses were paying significantly more for labour-related expenses without corresponding gains in productivity, automation, efficiency or workforce upgrading, the cost burden would eventually reduce competitiveness.”
He also cautioned that labour policies should account for Sarawak’s structural differences from more densely populated regions.
“A sudden reduction in foreign labour dependence is much harder to achieve in a state with lower population density and limited labour reserves.
“Therefore, labour policy for Sarawak should realistically balance economic upgrading objectives with the state’s actual demographic and labour supply constraints,” he said.
Dzul said businesses would have limited ability to transfer higher labour costs to consumers.
“Large firms with stronger branding, market dominance or limited competition might be able to transfer part of the higher cost to consumers through higher prices.”
However, many SMEs operated in highly competitive markets where consumers were already sensitive to rising living costs.
“As a result, businesses often face a difficult trade-off.
“If they raise prices too aggressively, they risk losing customers. If they absorb the costs internally, their profit margins shrink,” he said.
Many firms, he added, would likely adopt a mixed strategy by partially increasing prices while reducing costs elsewhere.
He also warned of wider macroeconomic implications.
“There was also a broader macroeconomic concern, as higher labour costs could eventually create inflationary pressure, especially in labour-intensive services such as food, hospitality, maintenance and construction-related activities.
“However, the current weak consumer purchasing environment limited how much businesses could realistically pass on to buyers.”
Dzul said a phased and sectorsensitive implementation would be more practical than a uniform approach.
“Different sectors have different labour dependency levels, productivity structures and adjustment capacities.”
For example, he said construction and plantation industries could not reduce reliance on foreign workers overnight because the local labour supply response remained limited.
“Other higher-value sectors might adapt more easily through automation or restructuring.
“A gradual implementation allows firms time to adjust production models, improve technology adoption, redesign workflows, or strengthen workforce planning without causing sudden operational disruptions,” he said.
According to Dzul, a phased rollout would not dilute the policy objective.
“In fact, it may strengthen policy effectiveness because firms are more likely to cooperate and adapt gradually rather than react defensively to sudden cost shocks.
“Economic policy works best when it balances reform objectives with adjustment realities.
“Excessively abrupt policy shifts could unintentionally create labour shortages, supply disruptions or inflationary pressures that would affect consumers and economic growth.”
Looking ahead to the second proposed increase on Jan 1, 2027, Dzul said policymakers should carefully evaluate several economic considerations.
First, he said authorities should assess actual labour dependency levels across industries rather than relying on broad assumptions.
“Some industries genuinely faced persistent labour shortages due to a structural mismatch between available jobs and local workforce preferences.”
Second, policymakers should evaluate potential inflationary effects if labour-related costs rose too quickly across multiple sectors.
Third, he said the government should examine whether businesses, particularly SMEs, had realistic pathways to adjust.
“Productivity upgrading cannot happen immediately.
“Automation requires capital investment, technical capability, and transition time,” he said.
Without adequate support such as tax incentives, automation grants, workforce training and access to financing, many firms could struggle to adapt.
“Policymakers should also distinguish between excessive dependence and necessary dependence on foreign labour.”
In many economies, he said migrant workers remained essential for sustaining sectors that locals were unwilling or unable to fill under current market conditions.
“The objective should therefore be gradual economic upgrading rather than sudden labour displacement,” he said.
Dzul added that policy communication and regulatory certainty would be critical to ensuring a smooth transition.
“Businesses need regulatory predictability to plan investments, hiring and production decisions.
“A clear long-term labour policy roadmap would reduce uncertainty and help firms prepare more effectively for future transitions,” he said.
