Recent Economic Performance & Prospects

In the formulation of the Budget for 2011, the Prime Minister made the claim that the Malaysian economy had recovered from the global economic recession.

In an act of self congratulation, he attributed this to the proactive measures taken by the Government through the RM 67 billion stimulus package. He however failed to acknowledge that other countries in the region had performed equally well or even exceeded Malaysian performance.

The statistics he cited refer to the short term and are soothing. However, he made no mention of the challenging issues that will determine the medium term performance of the nation’s economy.

He appears to be suffering from a bout of amnesia about the need to address the issue of subsidies and to achieve fiscal balance.

He appears to have chosen to sweep under the carpet the entire issue of needed fiscal and structural reforms which were highlighted by the International Monetary Fund during the 2010 annual Article IV consultations.

The consultations had stressed the need to take steps to support the recovery and the priorities for structural reforms over the medium term. On the issue of Fiscal Policy, the Fund argued that “budgetary gains would prove transitory, however, if the broader agenda of fiscal reforms remains unfinished.”

The IMF report touched on the various steps announced by the Government – the 1Malaysia program, the Government Transformation Program, the Economic Transformation Program built on the New Economic Model, (NEM) and the Tenth Malaysia Plan, (10MP).

It is most significant that the IMF was blunt in stating its assessment. It stated: “Development policies have been dressed in rhetoric before but the sense of urgency seems higher now than in the past.” This is a rather remarkable and blunt statement and points to a question about the credibility of the Government.

The Prime Minister projected optimism about growth prospects in the year ahead based on the recovery in the global economy coupled with private investment and consumption expanding by 10.2% and 6.3% respectively.

These assumptions are highly speculative when account is taken of the continuing fears about a double-dip in the global economy.

The Prime Minister has chosen to ignore the IMF’s assessments. The Fund in its report is pessimistic about a pronounced recovery in the year ahead in private investment, given still unused capacity. The Fund had noted that capital expenditure of public enterprises is expected to pick up.

Thus, the prognosis is for government induced investment rather than the private sector providing the impetus for growth. These trends are indicative of the fact that public investment is likely to be the dominant factor as in the past.

It is significant that the Prime Minister did not deal with the issue of declining FDI flows and how he proposes to reverse these trends.

Looking ahead, the IMF report mades the following comment: “The outlook for the medium term depends on the scope and speed of the government’s own economic transformation program”.

Further comments in the report suggest that the Fund does not have much confidence in full and speedy implementation of reform measures. This interpretation is supported by the fact that the Fund sees the external imbalance reflecting impediments to investment and high precautionary savings, which current policies address only partially.

The ostrich-like approach adopted by the Government in reacting to these issues in the formulation of the Budget for 2011 is further magnified by the fact that no attempt has been made to acknowledge the critical issues the economy faces, inter alia : continued weaknesses in FDI flows, significant capital flight, loss of human capital and policy paralysis brought about by the demands of reactionary vested interest groups opposed to reforms.

In his speech, the Prime Minister stated: “To attain developed nation status, we cannot remain complacent. We must change our mindset. Business is not as usual. Success demands drastic changes, not incremental. It requires a quantum leap. The choice before us is clear. Change is not an option but an imperative. We must change or risk being left behind.”

These are fine words. There can be no disagreement with this statement. However, the speech offers no evidence of this rhetoric being transformed (to use a rather fashionable term that has entered the Government’s lexicon) into actionable programs.

The Prime Minister, for instance, has gone totally silent on the issue of subsidies and the broadening of the tax base and gaining control over unsustainable budget deficits.

Indeed, new subsidies and numerous handouts have been incorporated into the Budget. The Government has yet again ignored the opportunity to seriously address the need for measures that would result in economies that would result from improved procurement as well as cuts in discretionary spending and transfers.

In a speech of 34 pages there is not a single reference to these issues. It is appropriate to ask: Why this deafening silence? How is this consistent with the Prime Minister’s rhetoric about not being caught in the business-as-usual syndrome?

The report made the following pointed criticisms of Government fiscal policies:

• “Fiscal risks in Malaysia have grown over the years. Policy has been pro-cyclical in good times, setting the stage for unprecedented deficits when budget support was necessary during the crisis. Increased dependence on oil revenue further undermines the public finances.”

• “Consolidation is needed to reconstitute room for maneuver and forestall market concerns”.

• “Budgetary gains will prove transitory, however, if the broader agenda of fiscal reforms remains unfinished.”

• “Savings can be achieved by rationalizing subsidies and tax structures. Political realities suggest that subsidy reform needs to be gradual but sustained. The sooner it starts the better. The broad approach under consideration—centered on periodic reductions of key subsidies with compensatory cash transfers to the most vulnerable groups—seems broadly appropriate, provided that reform fatigue does not set in.”

It is legitimate to ask the Prime Minister how and when he proposes to deal with these issues.

Next : Part 3 – The Pivotal Role of the Private Sector