Diop cautioned that rigid operating expenditures — namely emoluments, retirement charges, and debt service payments — have grown markedly over time and are expected to take up two-thirds of federal government revenue next year, increasing fiscal rigidity and crowding out discretionary spending.
KUALA LUMPUR (Dec 21): Limited fiscal space remains a key challenge for Malaysia in view of the rigid operating expenditures that are expected to take up two-thirds of federal government revenue next year, while the federal revenue is forecasted to continue in declining trends.
World Bank country director for Brunei, Malaysia, Philippines and Thailand Dr Ndiamé Diop said the pandemic has further constrained Malaysia’s already limited fiscal space.
“Government revenue is expected to decline while rigid expenditures remain high.
"Therefore, the government should accelerate efforts to rebuild fiscal buffers by collecting more and spending better,” he said this in his welcome remarks for the launch of the latest Malaysia Economic Monitor titled “Staying Afloat” by World Bank Malaysia on Tuesday (Dec 21).
Diop cautioned that rigid operating expenditures — namely emoluments, retirement charges, and debt service payments — have grown markedly over time and are expected to take up two-thirds of federal government revenue next year, increasing fiscal rigidity and crowding out discretionary spending.
Meanwhile, Malaysia’s federal government revenue is projected to decrease to 14.3% of gross domestic product (GDP) in 2022, compared to 14.6% in 2021.
Although the government announced a new set of tax measures, including a one-off windfall tax, tax on sugar-sweetened beverages as well as the removal of tax exemptions on foreign income, the impact is expected to remain small.
“In the short term, improving the targeting of social spending and at the same time phasing out generalised and regressive subsidies, such as fuel subsidies, will help raise the efficiency of government spending.
"Targeted social spending should remain a short-term priority due to the high degree of uncertainty over the health and economic outlook moving into 2022," said Diop.
Meanwhile, Diop commended the Fiscal Responsibility Act (FRA) to be introduced next year by the government as it could pave the way for medium-term fiscal consolidation should the Act be properly designed and implemented.
Malaysia’s economy rebound on track, but tilted to downside risks
While World Bank Malaysia projected a rebound in Malaysia’s economic growth to 3.3% in 2021 and 5.8% in 2022, before settling back to 4.5% in 2023, the growth remains clouded by several downside risks, including new Covid-19 outbreaks and weaker-than-expected global and regional growth.
In 2020, Malaysia’s economy was marred by a pandemic as it contracted 5.6%, its worst performance since 1998.
World Bank Malaysia said a resurgence in Covid-19 infections and the emergence of the Omicron variant could dampen both global and domestic economic recovery.
In addition, rising vulnerability among affected households and firms could also pose headwinds to growth. Defaults will likely rise once debt repayment moratoria and other regulatory forbearance measures expire.
It pointed out that the ongoing disruptions to global value chains could also have a negative impact on Malaysia’s trade and manufacturing activities in the near term.
“The cooling down of China’s economy or a resumption in US-China trade tensions could affect Malaysia’s external demand, including through lower demand for Malaysia’s commodity-based exports,” it added.
On top of that, World Bank Malaysia said a more rapid than expected monetary tightening could have negative spillovers in domestic financial markets given Malaysia’s deep integration with international financial markets.
“Monetary normalisation in advanced economies, particularly in the US, may result in decreased investor appetite for emerging market assets, a reversal in portfolio flows and heightened financial market volatility.
“Investor sentiment could also shift rapidly with increased uncertainty regarding the outlook for the pandemic or policy developments,” it added.
Nevertheless, World Bank Malaysia said there are also upside risks to the growth outlook, predicated on the successful management of the pandemic and minimal disruptions to the re-opening of the economy.
It said this could lead to a faster-than-expected recovery in consumer demand and greater investor confidence, consequently resulting in a more robust recovery in domestic economic activity in 2022.
It added that growth could also benefit from increased technology adoption during the pandemic, contributing to higher productivity growth rates.