Author: Shankaran Nambiar, Malaysian Institute of Economic Research
Things were rough for the Malaysian economy the past year. The government’s response to the COVID-19 crisis was made within a narrow fiscal space, though Kuala Lumpur did make valiant efforts to minimise the impact of the pandemic, which saw high infections, deaths and a public health system under severe pressure.
The government came out with a series of initiatives to provide support for a broad range of segments in the economy. These measures — termed Penjana, Prihatin, Permai and Permekasa+ — amounted to some US$90 billion (RM380 billion) in spending.
The main targets for these measures were micro, small and medium sized enterprises, the informal sector and those in the bottom 40 per cent of household income. The government’s relief packages were about 43.5 per cent of GDP as of November 2021.
The government was subject to reproval for not having done as much as some advanced economies. The criticisms were not entirely justifiable, especially comparisons with countries like the United Kingdom. While furloughed UK employees were paid up to 70 per cent of their wages, nothing similar was paid in Malaysia — a country without a strong bent in favour of welfare schemes or social safety nets. This proved to be an indiscretion for which it had to bear the consequences.
Two important documents will weigh in on the government’s policy direction in handling the economic recovery program this year. The first is the 12th Malaysia Plan, a document outlining the direction the country will take over the next five years. The plan is meant to map Malaysia’s post-COVID-19 economic recovery — a rebound that sustainability and digitalisation are expected to power. The second is the 2022 Malaysian Budget, a document suitably geared towards addressing the needs of the most disadvantaged, those affected by the pandemic and reviving the economy.
The budget extends assistance to disadvantaged sections of the economy, as poorer households and single parents receive one-off payments. These measures are meant to shore up the lives of the most affected and ensure that consumption is not excessively dented. The budget also takes into consideration the needs of the private sector by extending tax deferment to micro, small and medium enterprises and giving tax deductions to firms for renovation. A voluntary carbon credit market will be launched alongside a US$2.4 billion (RM10 billion) sustainability bond to fund environmentally friendly projects.
But Malaysia’s largest budget in many years has come under criticism for introducing a one-off 33 per cent prosperity tax on firms with chargeable incomes exceeding US$23.9 million (RM100 million). Although this ‘one-off’ tax promises to addresses redistributional issues and help ensure fiscal sustainability, it might drive bigger companies to other destinations.
Kuala Lumpur has similarly been criticised for giving the education sector, rather than the health sector, the largest allocation of public funds. It is widely felt that the health sector should have received the highest priority after the COVID-19 pandemic revealed critical gaps in the system.
To sustain government expenditure — a necessary move in view of the hugely expansionary budget — the Malaysian government increased the statutory debt ceiling of the federal government from 60 per cent to 65 per cent of GDP. Despite these measures, economic challenges like rising inflation have not abated.
The Consumer Price Index increased by 2.9 per cent in October 2021, due to rising fuel prices and the withdrawal of electricity bill discounts that had extended into the earlier months of 2021. The price of vegetables went up considerably due to poor weather and increased transport costs. Supply constraints and production shortages, induced by global conditions, have also contributed to inflationary tendencies.
The recent floods that destroyed property and left many homeless and without belongings in parts of the country created yet another problem for the government. There are demands that those affected by the floods be allowed to withdraw their savings from the Employment Provident Fund, a national retirement savings scheme. Others claim that affected people have inadequate funds to rebuild their lives without running down their savings, creating another policy dilemma.
Still, the last months of 2021 have been productive from the viewpoint of Malaysian trade. In November 2021, total trade increased by almost 35 per cent on-year. Although imports grew faster than exports, a larger trade surplus was recorded compared to November 2020.
The prospects for foreign direct investment (FDI) are also promising. Approved FDI in the first half of 2021 surged an impressive 223 per cent year-on-year. Despite approvals not always translating into realised FDI, the figures do indicate a return of confidence in Malaysia as a favoured destination for investment. 2022 is likely to prove to be a more productive year for Malaysia than the last.
The growth forecast for 2022 is expected to be at about 5.5 per cent — a marginally happier rate than 2021, which may be closer to 4 per cent. It is hoped that this marks the beginning of Malaysia’s gradual economic recovery.
Dr Shankaran Nambiar is a senior research fellow at the Malaysian Institute of Economic Research.
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