Rebuilding Malaysia's economy through Budget 2022

Rebuilding Malaysia's economy through Budget 2022
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KUALA LUMPUR (Oct 23): The country has been suffering from the Covid-19 pandemic for almost two years now, which saw the economy ravaged as people and industries were put under lockdowns for extended periods, setting back Malaysia’s economy for a few years.

According to the World Bank, Malaysia’s gross national income (GNI) per capita, based on the current US dollar, was at US$10,580 in 2020, which was lower than it was in 2018, when the country’s GNI per capita reached US$10,650. Malaysia’s highest GNI per capita was in 2019 when it was at US$11,230.

As the country emerges from the pandemic and the economy has been gradually reopened, Budget 2022 will be focused on the three major themes of recovery, resilience, and reform. It will be the foundation to rebuilding Malaysia’s economy after almost two years of economic and health crises.

Budget 2022, which will be tabled by Finance Minister Tengku Datuk Seri Zafrul Aziz in Parliament next Friday, is expected to include slightly bigger allocations for development expenditures (DE), as well as more direct assistance for the people and industries to spur economic recovery.

Industries such as tourism, hotel and accommodation, and aviation, for example, have been impacted by the international border closure and reduced demand for travel and tours. Budget 2022 is expected to provide support and promote greater domestic tourism activities.

Budget 2022 is expected to be mildly expansionary, as the government will have to balance the need for spurring economic recovery with projecting fiscal discipline. In July, Tengku Zafrul said Malaysia’s fiscal deficit will increase to as high as 7% of gross domestic product (GDP) this year.

This is going to be higher than the 6% estimated in Budget 2021, as the government had to increase spending on Covid-19 containment and management measures this year. The government wants to increase funds allocated for responses to Covid-19 to RM110 billion, from RM65 billion.

To do this, Malaysia will have to increase its statutory limit on debt ceilings to 65% of GDP, from the 60% level that has already been passed by the Parliament in 2020. However, this plan has not been presented to the Parliament for approval yet.

Meanwhile, the government’s debt levels have been increasing steadily. According to Bank Negara Malaysia’s data, the government’s total liabilities stood at RM958.4 billion as of the second quarter of the year, with RM34 billion being short-term.

Since the second quarter of 2020 (2Q20), the government’s short-term debts have been increasing rapidly, from RM6 billion in 1Q20. The short-term debts have been increasing by almost 500% between 1Q20 and 2Q21.

Meanwhile, medium- and long-term debts have been increasing by 13% during this period, from RM823.8 billion in 1Q20 to RM958.4 billion in 2Q21. This shows that the government had relied more on short-term facilities to fund its various programmes and responsibilities during this period.

While the need to spend more to revive the economy and assist the people and businesses is apparent, the government has committed to reducing its fiscal deficits to between 3% and 3.5% by 2025, as outlined in the 12th Malaysia Plan.

This could mean that the government will have to raise more revenue to offset the increasing spending, in the form of new taxations or increasing the rates of the current tax regimes. This, however, is expected to be done gradually, considering the hardships faced by the people and businesses.

On the back of all these, analysts and economists do not expect the government to introduce major changes in tax rates, but it will focus more on other measures to raise revenue such as optimizing the tax incentives in investment apart from reducing leakages. 

At the same time, the government will also introduce Fiscal Responsibility Act, as part of the continuous effort to relook and revamp the overall fiscal management. This includes strengthening the government’s fiscal revenue generation, minimizing leakages and low-impact fiscal spending and a more prudent government debt management.

For Budget 2022, the government is expected to allocate a total sum of RM348.3 billion, which is 10.6% higher than the revised RM314.8 billion in 2021. 

The increase is underpinned by an expected RM83 billion spending on DE, which is much higher than the RM68.2 billion in 2021, to drive socio-economic recovery activities and the nation’s development agenda. 

Which sectors and companies will benefit from the government's allocation and policies in Budget 2022? 

Get the full story in the Oct 25 issue of The Edge Malaysia.

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