WILL Budget 2018 address the economic concerns raised by the World Bank (WB)?
The WB is normally cautious, polite and diplomatic in its reports on national economies and one has to read between the lines to get the messages it wants to convey to governments and their people.
In its “East Asia and Pacific Economic Update of Oct 3, 2017”, the WB presented a summary titled “Balancing Act”. So what are the WB’s main messages to Malaysia?
1. The Malaysian economy has done well, with a growth of 5.2% this year, and a slower growth of 5% and 4.8% in 2019! Hence, Malaysia is weakening, unless the budget does more to strengthen it.
The slowdown is due to risks posed on our open economy as we are vulnerable to external demand. This means our exports could decline and imports could rise, narrowing our balance of payments’ current account surplus. Our exchange rate could then decline further and our cost of living could rise. But the WB characteristically does not specify the details.
2. The WB notes that private consumption (what the rakyat spend on food, transport, shelter, etc.) is large and has “expanded firmly”. It is estimated at 6.6% in 2017 and 6.5% in 2018. However, total investment is expected to increase at a slower pace of 6.1% this year and only 3.2% next year.
We have to remember that higher consumption can lead to less productive expenditure. And lower capital investment can lead to less infrastructure and lower capacity to generate production and income in future.
What can or will the budget do about this structural problem? Again, the WB has identified the problem but not the solution.
3. Inflation rose to 4.1% in the first half of 2017. This is high and is likely to rise further with the relatively weak ringgit. At the same time, prices of food rose by a high of 4.2% for the 12-month period ending July 2017. This is causing much hardship especially among low-income earners. Will Budget 2018 adopt the necessary measures to reduce food prices?
My proposal is to liberalise the rules and regulations and reduce any protectionist policies and the wide-scale corruption and expenditure wastage that both suppress and restrict the supply of basic goods and services. If this liberalisation is not done soon, the rakyat will suffer even more from rising prices.
4. House prices have risen faster than our income growth, according to the WB. This makes housing more unaffordable to the lower income groups. The WB rightly points out that higher house prices raise the cost of living but it does not suggest any solution to the problem.
I would say the solution is for the Government to build and also provide more incentives to the private sector to expand the supply of affordable houses more rapidly. However, the mass production of more affordable houses through the purposeful adoption of the Industrial Building System (IBS) has not moved faster. The IBS should now be implemented with a stronger political will. And if there are powerful vested interests against the use of IBS, they should be strongly opposed by the Government.
I hope the budget will provide the necessary push for the IBS.
5. The WB clearly states that “the Malaysian economy continues to face uncertainties mainly from the external environment” but it has completely ignored the more serious threats from within our country which we can control. These are extremism, racialism and religious bigotry. Indeed, they are debilitating negative forces that can undermine national and international confidence in our country. And yet the WB politely keeps silent although it is aware from global experience that domestic and foreign investment can be adversely affected by these negative internal forces, which are also push factors for the rising brain drain.
Will Budget 2018 deal with these structural problems or sweep them nicely under the carpet?
6. The WB surprisingly and glibly proposes reducing exemptions on the Goods and Services Tax (GST)! Does it not realise that the low income groups are already experiencing considerable pain from rising prices? How could it also suggest “addressing the rise of civil servants’ salaries and pensions” to contain the budget operating expenditures? It could have proposed raising productivity in the civil service by promoting more competition, incentives and meritocracy instead.
Will Budget 2018 address these thorny issues or leave them to fester?
7. The WB does mention in passing the need to accelerate “structural reforms to improve both private sector productivity and public sector efficiency” to sustain our current growth momentum in the medium term. I agree entirely, but it does not say how.
By being overly polite, the WB is missing the whole purpose of its mission in Malaysia. It has to be more direct and pointed in its remarks, however brief they may be. This is essential so that the WB will not lose its high reputation. The WB has to better serve Malaysia and other developing countries.
More importantly, we hope that the coming Budget 2018 will address the soft state and the future of our economy amidst domestic and global uncertainty!
But we can face our challenges if we show stronger leadership and a collective national will to succeed further!
TAN SRI RAMON NAVARATNAM
Asli Centre of Public Policy Studies