Focus on fiscal consolidation, World Bank tells Malaysian government

October 4, 2018 | By | Reply More

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KUALA LUMPUR: Malaysia, whose economic growth is expected to ease to 4.9% in 2018, should work on its fiscal consolidation now rather than supporting growth amid the less favourable external environment with global trade facing headwinds.

“In Malaysia’s case, the implication for policy is that in the current context where the global economy is growing less quickly, where some of the risks are becoming more significant, perhaps this is not the time to try to prop up growth in the short term, but a time to consolidate on the fiscal side to ensure that fiscal buffers are built up in case the shocks are larger than anticipated.

“Having a somewhat slower growth rate in the short term might be a worthwhile trade-off in favour of greater stability going forward,” World Bank chief economist for the East Asia and Pacific region Sudhir Shetty said during a media briefing today via video conference on the East Asia and Pacific Economic Update, the World Bank’s semi-annual review of the region’s developing economies. 

As a highly open economy, he said, Malaysia will continue to face
substantial risks relating to uncertainty in the external environment.

Heightened financial market volatility triggered by shifting monetary policy expectations in advanced economies could spread across emerging economies, including Malaysia.

Another key risk relates to the escalation in protectionist tendencies and trade tensions in some major economies that could have an adverse impact on Malaysia, given its high level of integration with global markets.

“On the domestic front, the challenge is seeing some short-term consolidation on the expenditure pathway but we will see a medium term pay-off in terms of bringing down the overall aggregate levels of Malaysia’s debt and a chance now to undertake deep structural reforms that will raise the potential growth and quality of economic growth in the future,” said World Bank lead economist for Malaysia, Richard Record.

The report said Malaysia’s change from goods and services tax back to sales and service tax and the adjustment to the fuel pricing mechanism, in the absence of adequate compensatory measures, would constrain the fiscal policy space, and place greater reliance on less stable direct taxation and oil-related revenue. Addressing the stock of public-sector debt will require careful trade-offs, including expenditure consolidation and a review of new sources of revenue.

Malaysia is expected to see slower economic growth from 2018 to 2020, easing to 4.9% in 2018 from 5.9% in 2017, as export growth slows and public investment falls following the cancellation of major infrastructure projects.

Malaysia’s economy is projected to expand at 4.7% in 2019 and 4.6% in 2020.

“As a country gets closer to high income status, incremental growth is harder. The rate is lower this year compared to last year but 4.9% is still a strong performance. It’s potentially higher than 2016 and probably still towards the top end of Malaysia’s potential growth rate,” Record said.

To mitigate the challenges on the external front, he said, flexible exchange rates help, and Malaysia is doing well with substantial reserves that boost confidence, as well as having careful and prevential regulation of banks.

He added that Malaysia should also have a diversified economy, with exports across diverse markets and product types, and the fact that Malaysia has different sources of growth will help.

Record said the country’s budget announcement is always important but more so for Budget 2019.

“It’d be an important opportunity to set the tone, for not just the next fiscal year, but beyond, in terms of the government’s fiscal policies and directions, how the government will balance the twin challenges of fiscal consolidation, growth and debt and it’d be an important chance to send signals to investors and the private sector about the growth opportunity that Malaysia has,” said Record.

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