World Bank moots medium-term plans for Malaysia's fiscal deficit to recover from shocks

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KUALA LUMPUR (Jan 29): Putrajaya should look into creating medium-term plans for its fiscal deficit as one-off measures to cut down costs in times of shock, such as the plunge in global oil prices, are not sustainable, World Bank's senior country economist for Malaysia Dr Frederico Gil Sander said.

He said that Putrajaya’s tendency to plan its deficit targets on an annual basis made it ill-prepared to handle shocks such as the drop in global oil prices, forcing it to resort to “ad hoc” measures.

“I don’t think we should focus on the path of (reducing fiscal deficit) year to year so much. What one should be more concerned is, what are the medium-term plans,” Gil Sander told a forum in Universiti Malaya on Tuesday.

“The government announced a lot of one-off things, like cutting the National Service; doing things that are very much ad hoc.

“So if these oil prices remain low for 2016, which is a likely scenario, and certainly something the government would want to prepare for, it’s less clear that we can do these one-off measures again in 2016.”

He suggested that Putrajaya give its ministries medium-term budgets and make it clear that resources were limited due to the low oil prices.

He added that the government should be aware that it would have to restrain its expenditure not for this year alone, but for the next few years.

“So I think moving towards medium-term thinking and medium-term path for the deficit is still lacking on the fiscal policy front.

“Because when you’re hit by a shock like this, it’s much easier to explain to the market what your plan is to recover from it, if you have a medium-term plan,” said Gil Sander.

He added that the revised deficit target of 3.2% instead of 3.0% was not a big deal, as long as the government showed it was continuing on the path of fiscal consolidation.

Gil Sander mooted the introduction of congestion taxes and reviewing the goods and services tax (GST) exemptions or zero-rated goods to ensure long-term stabilisation of the fiscal account.

He pointed out that if the government had not decided to implement GST this year, its accounts would be in worse shape as its dependency on oil for revenue would have been higher.

“With a higher dependency (on oil) this would have been worse and more difficult for the government to consolidate its fiscal accounts or maintain a level of expenditure that is compatible with what the government needs.

“So it’s a good thing the GST is there to offset these declines (in oil prices),” he said.

Weighing in on the debate over the government’s current accounts, Gil Sander said focusing on whether it was in debt or surplus was not as important as asking what the imports were used for.

He said as long as the imports were used for productive investments, such as the MRT, Malaysia should not be so concerned with the fact that the current account might be narrowing.

He also said the depreciation of the ringgit was “not a bad thing” as it would make Malaysia’s exports more competitive, and this would balance the current account.

“The fact that the ringgit has been allowed to depreciate, that there has been a lot of movement, flexibility in the exchange rate, that’s healthy, that sends the right signal that Malaysian exports are becoming more competitive.

“So that will have a natural tendency to balance out the current account, by reducing incentives to import and increasing incentives to export,” he said.

Gil Sander added there was no need for the government to consider a second revision of the budget, and that the World Bank’s projected Gross Domestic Product (GDP) growth for Malaysia this year remained at 4.7%.

He said this was because they had already taken into account the plunging oil prices when making their forecast last December, while lower oil prices and a weaker ringgit would mean the prospect of improved exports in the second half of the year.

However, the opposition had hit out at Putrajaya’s budget revision for not tackling the weakening ringgit and not containing any revision of the RM7 billion allocated as the Prime Minister's Department's discretionary budget.

PKR secretary-general Rafizi Ramli said Prime Minister Datuk Seri Najib Razak also failed to address concerns over the country's financial stability as a result of his high debts.

Malaysia has one of Asia's highest debt-to-GDP ratio at 52.8%, a shade below the self-imposed limit of 55%, while its household debt is at 86.8% of the GDP, which is ranked as second highest in Asia.

Economists had warned that the country was vulnerable to external shocks as foreign investors held 47% of government bonds.

Meanwhile, DAP claimed that Najib got his figures wrong in the budget as there was a difference of RM2 billion in the development expenditure.

Serdang MP Dr Ong Kian Ming also said Najib was off the mark when he talked of oil prices during the budget revision.

On January 20, Najib had announced a slew of budget cuts amounting to RM5.5 billion as part of Putrajaya’s “proactive measures” to align itself with plunging global oil prices and revised world economic growth projections.

The cuts would come from the Budget 2015’s operational expenditures that were initially set at RM223.4 billion, while the RM48.5 billion for development would remain untouched, Najib had said in his speech.

Also, the fiscal deficit target of 3% of the GDP for the year has been revised to 3.2%.