In 1965, facing escalating tensions and to prevent further conflict, Malaysia's Prime Minister Tunku Abdul Rahman proposed the expulsion of Singapore from Malaysia. This recommendation was subsequently approved by the Malaysian Parliament on 9 August 1965, with a unanimous vote in favor of Singapore's separation. On the same day, an emotional Lee Kuan Yew, Singapore's Prime Minister, announced the city-state's newfound independence. Contrary to the popular belief that Singapore was unilaterally expelled, recent documents reveal that discussions between the People's Action Party (PAP) of Singapore and Malaysia's Alliance had been ongoing since July 1964. Lee Kuan Yew and Goh Keng Swee, a senior PAP leader, orchestrated the separation in a manner that presented it as an irrevocable decision to the public, aiming to benefit both politically and economically.^[16]

Following the separation, Singapore underwent constitutional amendments which transitioned the city-state into the Republic of Singapore. Yusof Ishak, previously the Yang di-Pertuan Negara or vice-regal representative, was inaugurated as the first President of Singapore. While the Malaya and British Borneo dollar continued as the legal currency for a brief period, discussions about a shared currency between Singapore and Malaysia were held before the eventual introduction of the Singapore dollar in 1967.^[17] In Malaysia, the parliamentary seats previously held by Singapore were reallocated to Malaya, which altered the balance of power and influence held by the states of Sabah and Sarawak.

The decision to separate Singapore from Malaysia was met with strong reactions, particularly from leaders in Sabah and Sarawak. These leaders expressed feelings of betrayal and frustration for not being consulted during the separation process.Chief Minister of Sabah, Fuad Stephens, expressed profound grief in a letter to Lee Kuan Yew, while leaders like Ong Kee Hui of the Sarawak United Peoples' Party questioned the very rationale for Malaysia's existence post-separation. Despite these concerns, Malaysian Deputy Prime Minister Abdul Razak Hussein defended the decision, attributing the secrecy and urgency of the move to the ongoing Indonesia–Malaysia Confrontation.^[18]