Singapore continued to face significant trade restrictions despite promises of a common market in return for a large proportion of its tax revenues, and retaliated by withholding loans to Sabah and Sarawak.

[6] Tunku's chief consideration was the need to maintain the racial balance in the Federation, UMNO's position in the Alliance Party, and Malay political dominance.

[6] This fear became increasingly real to Tunku after 29 April 1961 when Ong Eng Guan of the left-wing United Peoples' Party trounced the PAP candidate at the Hong Lim by-election.

At a meeting of Commonwealth Prime Ministers, he mentioned to Lord Perth of the Colonial Office that he was open to a merger if a 'Grand Design' including not just Singapore but also British Borneo could be offered as some sort of package deal.

[6] Not only would it greatly benefit the territory, resources and population under his control, but the combination of indigenous Bornean peoples and Peninsular Malays (collectively termed Bumiputera) would counterbalance the increased numbers of Singaporean Chinese.

However, it was postponed by Tunku Abdul Rahman to 16 September 1963, to accommodate a United Nations mission to North Borneo and Sarawak to ensure that they really wanted a merger, which was prompted by Indonesian objections to the formation of Malaysia.

[6] On 16 September 1963, coincidentally Lee's fortieth birthday, he once again stood in front of a crowd at the Padang and this time proclaimed Singapore as part of Malaysia.

The PAP administration believed that a merger would also provide the locals an opportunity to find jobs in Malaya and thus alleviate the chronic unemployment problem in Singapore.

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".

[14] This was refused by Singapore's Finance Minister, Goh Keng Swee, who accused Kuala Lumpur of imposing tariffs on Singapore-made products.

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.

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.

You know it's a people connected by geography, economics, and ties of kinship…"[21] While it has previously been taken as historical common knowledge that Singapore had been supposedly expelled unilaterally from the Federation by the central government in Kuala Lumpur, there had been an open secret regarding the existence of classified documents from a quote "Albatross File" (taken from a 1980s interview where Goh referred to merger with Malaysia as an "Albatross around [their] necks"), revealed that as early as July 1964, negotiations had begun between the PAP and the Alliance.

[22] In a handwritten letter, Lee Kuan Yew formally authorised Goh Keng Swee to negotiate with Alliance leadership in order to negotiate and plan the eventual exit of Singapore from the Federation, and over the next year, the two parties coordinated to arrange matters such that when the Tunku announced Singapore's expulsion and the PAP were "forced" to establish an independent government, it would be presented as a "fait accompli" that could not be jeopardised by popular uproar or opposition, which was still in favour of merger.

[23] Having already reaped the political benefits of Operation Coldstore, the crippling of the Singaporean Left, the detention of key Barisan Sosialis leaders like Lim Chin Siong, Lee and Goh both believed that this move would afford Singapore with the "best of both worlds", both isolated from the communal turmoil which they believed would inevitably engulf Malaysia while retaining the economic benefits of access to the Malaysian markets.

The documents of this Albatross File was announced to be made declassified and public entirely in 2023; portions of it were previously given limited access in an exhibition by the National Museum of Singapore in 2015.

Abdul Razak Hussein, Deputy Prime Minister of Malaysia, in his address to the University of Malaya Graduates Society at the Arts Lecture Theatre in Pantai Valley, Kuala Lumpur on 1 September 1965, denied the allegations and explained that the decision was made and announced in secrecy due to the Indonesia–Malaysia Confrontation.