Malaysia needs to take bold economic action

Malaysia's economy is projected to grow at 3.3 percent in the third quarter of 2023, again proving its resilience. While this was a reasonable rate, given the sluggish global environment, it was slightly higher than 2.9 percent. Marked for the second quarter of 2023.

Malaysia's focus goes beyond the pace of its growth. While Prime Minister Anwar Ibrahim's administration has tried to continue the alliance, there has been confusion on the economic front. Amidst this discontent, there are occasional murmurs of attempts to remove the current government.

Since assuming office in late 2022, Anwar has steered the national economic dialogue away from concerns about inflation, exchange rate, fiscal space, subsidy rationalization, tax revenue sources and identifying drivers of growth.

Malaysia's inflation spikes due to war in Ukraine This affected the prices of fertilizer, fodder and agricultural produce. Prices of food imports, meat, poultry and eggs also rose, leading to inflationary pressures.

In 2023, inflation moderated but high price levels did not return to those experienced before the COVID-19 pandemic. Malaysia has a high food import bill. The Malaysian Trade Statistics Survey 2023 revealed that in 2022, food imports were worth 75.6 billion ringgit. Food security remains an issue.

Inflation picked up at the end of the year. The Consumer Price Index stood at 129.9 points in January 2023 and 130.9 points in October and November 2023. Headline and core inflation eased to 2 and 2.5 percent respectively in the third quarter.

Malaysia's financial situation in 2023 was at the center of the debate. Large government debts, rising operating costs, inadequate tax revenue and a continuing burden of subsidies persist.

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The total debt and liabilities of the central government at the end of 2022 will be RM1.45 trillion or 80.9 percent of GDP, an unpalatable amount. Government spending is spiraling upward, although payments for salaries and pensions remain more challenging. This calls for drastic measures, including a willingness to bite the bullet or the peace of mind to hand over the problem to the next government.

The government is confused about raising tax revenue. The campaign against Goods and Services Tax (GST) won in 2018. Instead of fixing the flaws in the system, the government has opted for an adequate replacement.

If tax revenue is an issue, so are subsidies. While subsidy rationalization is identified as an action item, the government is delaying because it realizes that it needs to be cautious. There are reasons for this. The top 20 percent of the population may not be eligible to benefit from petrol subsidies, but they may regret not being able to take advantage of them. While the government knows that subsidy rationalization is essential, finding the right mechanisms to implement it may be a bigger challenge.

The government recently launched a Central Database Center or Padu. Badu is a centralized socioeconomic database containing detailed information about individuals – including demographics, health, education and household income – for efficient delivery of targeted grants.

Still, the government has not completely failed to rationalize the subsidy. Electricity subsidies reduced in 2023. The government also announced that diesel subsidy will be implemented in a phased manner in 2024. While remaining silent on petrol subsidy, price controls on chicken were removed and controls on eggs remained. Expect some action on fuel subsidy this year. As they account for 2.9 percent of GDP, removing subsidies on fuel would ease fiscal constraints.

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Tax revenue, especially indirect tax revenue, is the root of the problem. The government's reluctance to reintroduce GST is often interpreted as a political problem. The government is not denying the benefits of GST, which was previously under-implemented.

The government has also shied away from testing alternative tax systems. It is advisable for the Finance Ministry to compare and analyze possible solutions and engage in public discussions accordingly. In any case, there is no doubt that the indirect tax revenue needs to be increased.

The Malaysian ringgit fell to RM4.70 against the US dollar in December 2023. While the decline in domestic currencies was felt in many countries around the world, the ringgit performed particularly poorly. This drew criticism from some quarters.

The government announced its policy agenda through the mid-term review of the 12th Malaysia Plan, the New Industrial Master Plan 2030, the National Energy Transition Roadmap and the Madani Economic Framework. These plans lay out a roadmap for Malaysia's growth, where digitization, climate change and environmental, social and governance are emphasized, creating new drivers of growth. Rightly, the emphasis is on good governance and corruption-free economy.

There are many challenges on the economic front. 2024 may be kinder than 2023, though not without some obstacles. Anti-corruption efforts will be met with resistance, and despite the coalition's two-thirds majority in parliament, one can expect continued attempts at disruption. Clearly outlined priorities and policy commitment count throughout 2024. The government should motivate itself to choose the road less taken. It takes courage and determination.

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Sankaran Nambiar is Head of Research and Senior Research Fellow at the Malaysian Institute of Economic Research.

This article is part one EAF Special Feature Series 2023 and next year under review.

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