Singapore in Malaysia

Singapore-specific provisions included:

• Singapore would retain control on education and labour. Defence, external affairs and internal security would come under the jurisdiction of the federal government [14]
• Singapore would have only 15 seats in the federal parliament instead of 25 seats (as was entitled by the size of its electorate) in return for this increased autonomy [14]
• Singapore would pay 40% of its total revenue to the federal government. It would disburse a $150 million loan to the Borneo territories, of which two-thirds would be interest-free for five years. A common market would be implemented over twelve years.[15][16]
• Singapore citizens would become Malaysian citizens while retaining Singapore citizenship, but they could only vote in Singapore.[17]

The Singapore and federal governments had disagreements on the economic front. As part of the Malaysia Agreement, Singapore agreed to contribute 40% of its total revenue to the federal government and provide largely interest-free loans to Sabah and Sarawak, in exchange for establishment of a common market. However in July 1965, Malaysian Finance Minister Tan Siew Sin proposed raising the contribution to 60% and hinted 'that unless Singapore agrees to pay more, the common market would be slow in coming about'.[16] This was refused by Singapore's Finance Minister, Goh Keng Swee, who accused Kuala Lumpur of imposing tariffs on Singapore-made products. Both sides also disagreed over the issuance of the loan, but agreed to refer this issue to the World Bank for arbitration.

The Federal Government of Malaysia, dominated by the United Malays National Organisation (UMNO), was concerned that as long as Singapore remained in the Federation, the bumiputera policy of affirmative action for Malays and the indigenous population would be undermined and therefore run counter to its agenda of addressing economic disparities between racial groups. One of the major concerns was that the PAP continued to ignore these disparities in their repeated pledges for a "Malaysian Malaysia" – the equal treatment of all races in Malaysia by the government which should serve Malaysian citizens without any regard for the economic conditions of any particular race. Another contributing factor was fear that the economic dominance of Singapore's port would inevitably shift political power away from Kuala Lumpur in time, should Singapore remain in the Federation.

Racial tensions increased dramatically within a year. They were fuelled by the Barisan Sosialis's tactics of stirring up communal sentiment as the pro-Communist party seeking to use means to survive against the crackdown by both the government of Singapore and the Federal Government. In particular, despite the Malaysian government conceding citizenship to the many Chinese immigrants after independence, in Singapore the Chinese disdained the Federal policies of affirmative action, which granted special privileges to the Malays guaranteed under Article 153 of the Constitution of Malaysia. These included financial and economic benefits that were preferentially given to Malays and the recognition of Islam as the sole official religion, although non-Muslims maintained freedom of worship. Malays and Muslims in Singapore were being increasingly incited by the Federal Government's accusations that the PAP was mistreating the Malays.

Numerous racial riots resulted, and curfews were frequently imposed to restore order. These were collectively termed the 1964 race riots, the largest and deadliest of which occurred on 21 July 1964. The immediate antecedent event was a speech by Syed Jaafar Albar, backed by Federation Deputy Prime Minister Abdul Razak Hussein, at the New Star Cinema in Pasir Panjang on 12 July 1964, where he accused Lee Kuan Yew of being an oppressor and alleged that the fate of the Malays was even worse than it was during the Japanese occupation.[8] He declared to an excited audience of several thousand Malays that 'if there is unity, no force in this world can trample us down… Not one Lee Kuan Yew, a thousand Lee Kuan Yew… we finish them off…' The crowd responded enthusiastically with cries to arrest Lee and Othman Wok, and crush and kill them.[8] Events escalated over the following week, culminating in an article in the Utusan Melayu on 20 July 1964 titled 'Challenge to all Malays to all Malays – UMNO Youths; Lee Kuan Yew Condemned; Teacher forced student to smell pork – Protest'.[8][18] The day after on 21 Jul 1964, Racial riots broke out during the celebratory procession of Prophet Mohammad's birthday near Kallang Gasworks, resulting in 4 deaths and 178 injured at the end of that first day, and 23 deaths and 454 injuries by the time the riot was quelled.[19] More riots had broke out in September 1964. The prices for food skyrocketed when the transportation system was disrupted during the unrest, causing further hardship.

The external political situation was also tense at the time, with Indonesia actively against the establishment of the Federation of Malaysia. President Sukarno of Indonesia declared a state of Konfrontasi (Confrontation) against Malaysia, and initiated military and other actions against the new nation, including the bombing of MacDonald House in Singapore in March 1965 by Indonesian commandos which killed three people.[20] Indonesia also conducted seditious activities to provoke the Malays against the Chinese.[21]

On 7 August 1965, Prime Minister Tunku Abdul Rahman, seeing no alternative to avoid further bloodshed, advised the Parliament of Malaysia that it should vote to expel Singapore from Malaysia.[7] Despite last-ditch attempts by PAP leaders, including Lee Kuan Yew, to keep Singapore as a state in the union, the Parliament on 9 August 1965 voted 126–0 in favour of the expulsion of Singapore, with Members of Parliament from Singapore not present. On that day, a tearful Lee announced that Singapore was a sovereign, independent nation and assumed the role of Prime Minister of the new nation. His speech included these words: "I mean for me it is a moment of anguish because all my life… you see the whole of my adult life… I have believed in merger and the unity of these two territories. You know it's a people connected by geography, economics, and ties of kinship…"[22]

Under constitutional amendments passed in December that year, the new state became the Republic of Singapore, with the vice-regal representative or Yang di-Pertuan Negara, Yusof Ishak, becoming the first President, and the Legislative Assembly becoming the Parliament of Singapore. These changes were made retroactive to the date of Singapore's separation from Malaysia. The Malaya and British Borneo dollar remained legal tender until the introduction of the Singapore dollar in 1967. Before the currency split, there were discussions about a common currency between the Malaysian and Singaporean governments.[23]