While growth rates remained satisfactory in 2017 after a peak in 2014, a long list of other issues contributed to mounting public dissatisfaction with the former Barisan Nasional government. These included the festering 1Malaysia Development Berhad corruption scandal, the rising cost of living, high household and public debts, and Barisan Nasional’s perceived sell-out to China. Above all, many disillusioned Malaysians felt that they were not able to participate in the country’s growth.
The new government, headed by Prime Minister Mahathir Mohamad, faces the onerous task of instituting more inclusive economic growth. In response to this mandate, Pakatan Harapan has started by reversing some policies and repackaging others.
Some of the new government’s actions are premised on alleviating the country’s huge debt burden. In late May 2018, Finance Minister Lim Guan Eng deviated from international guidelines in fiscal reporting by redefining national debt to include federal government debt, contingent liabilities and lease payments for public-private projects. Using this accounting approach, Malaysia was found to have debts in excess of RM1 trillion (US$240 billion). It is debateable whether the redefinition was necessary and if it indeed gives a more accurate picture of the country’s economic position.
One of the first moves that Mahathir made was to reverse Barisan Nasional’s commitments to some big-ticket infrastructure items. Two projects were cancelled: the RM55 billion (US$13 billion) East Coast Rail Link and the RM9 billion (US$2 billion) Multi-Product Pipeline and Trans-Sabah Gas Pipeline. The former was to be undertaken by the China Communications and Construction Company and the latter by the China Petroleum Pipeline Bureau. Construction of a high speed rail connecting Kuala Lumpur and Singapore has also been put on hold until 2020.
The pullback was a bold but necessary move given the high costs that Malaysia would have otherwise been saddled with.
Another abrupt policy intervention was the retraction of the goods and services tax (GST) — an action that Pakatan Harapan had promised in its election manifesto — and its replacement with the sales and service tax.
The GST was thought to be the cause of the high cost of living, but this may not be accurate. The poor implementation of the GST, rather than the tax itself, alongside insufficient action against anti-competitive behaviour during the previous regime may have led to the the price increases.
The removal of the GST left the Ministry of Finance grappling with another problem: how to deal with the shortfall in government revenue, estimated at RM20 billion (US$4.8 billion).
Insufficient tax revenue was a source of speculation prior to the announcement of the Budget 2019. With high public debt and constrained tax revenue, there were concerns that the government would go on a tax collection rampage and that taxes on inheritance and capital gains would be introduced.
Budget 2019 turned out to be a sensible one, for the most part.
No doubt, the new government must raise enough government revenue. At the same time it must take into account a weakening external environment, the need to boost domestic consumption and public expectations. This mix demanded a flexible budget, one that is at least mildly expansionary while maintaining a clear-eyed view of approaching headwinds.
The Ministry of Finance executed a budget that suited the bill. It did not want an austere budget that would bring the economy to a grinding slowdown, especially given the gloomy external environment that is expected to emerge in 2019. So the government went for a budget with a deficit of 3.7 per cent of gross domestic product. It also retained the scheme of cash grants for the underprivileged with some modifications.
There had to be sufficient support to boost domestic demand. Budget 2019 delivered that. Viewed from the private sector perspective, it was a satisfactory budget since it provided some incentives for the small and medium enterprise sector.
It seems keeping government expenditure trim and encouraging domestic demand will be the foci for the coming year. One can also expect steps to encourage domestic investment.
Steps to tap from new sources of growth will slowly unfold, perhaps later in 2019. It is likely that Bank Negara Malaysia will keep the interest rate at present levels since there is a need to encourage investment and because official inflation figures do not show any reason to worry.
As the novelty of the new government fades, public expectations will increase. And that pressure might be what is needed to get the government to start thinking harder about how to put the country on a growth trajectory.
Shankaran Nambiar is a Senior Research Fellow at the Malaysian Institute of Economic Research. He is currently working on a book, Malaysia: At the Edge of Transformation.
This article is part of an EAF special feature series on 2018 in review and the year ahead.
A version of this article originally appeared here in The Sun Daily.