With the Malaysian economy expanding 5.6% in the first quarter of 2023, Putrajaya is being lured into a bubble of complacency.
Bank Negara Malaysia (BNM) had unexpectedly raised the overnight policy rate (OPR) by 25bps to 3% in line with strengthening economic performance as indicated by the data.
However, gross exports declined for the first time in two years, clocking a 17.4% drop year-on-year in April.
Dark storm clouds may be looming over the horizon, with lower commodity prices and poor global growth prospects for the rest of the year.
The trade surplus declined from RM26.7 billion in March to RM12.9 billion in April, the lowest in a year.
While BNM has forecast a 4% to 5% economic growth this year, its recent decision to raise the OPR could restrict liquidity.
It appears that BNM raised interest rates without looking further beyond the economic data. Malaysia will continue to feel the spillover effects of the supply chain disruptions resulting from the Russia-Ukraine war.
The stock market remains sluggish, the cost of living, especially in the food sector, is still rising and bankruptcies remain high despite legislative moves to keep the numbers down.
Most importantly, Malaysia’s middle class is getting poorer, struggling to pay for food and rent and to repay debt. Most households depleted their savings during the Covid-19 lockdowns and have yet to recover.
The poverty rate continues to rise. However, as the World Bank has pointed out, data on this indicator requires a major update. Many international forecasting and reporting agencies are in the process of modifying their forecasts for Malaysia.
Malaysia could slip into some form of hybrid-stagflation. The country faces an economic downturn on both the external and domestic fronts, with a renewed bout of inflation and erosion of household incomes.
Malaysia has four ministries responsible for economic matters – the finance, economy, investment, trade and industry as well as domestic trade and cost of living ministries.
Senior ministers run them, with ex-politicians and senior people in banking and finance acting as economic advisors and consultants. Mostly, these are people who think along establishment lines.
BNM’s decision on the OPR, which has deepened hardship for most households and SMEs, exposes the limitations in the establishment’s thinking.
Yet, economic solutions and policies needed to steer Malaysia out of the present storm must be wise, novel and “out of the box”.
The concern is whether the current crop of advisors and consultants can deliver the necessary solutions without hurting Malaysians even more.
Budget 2023 has forecast a 5.5% deficit, making it an expansionary budget and raising government debt-to-GDP ratio to 73.3% this year. This is high when compared with other countries.
At 18.5%, debt repayment is the second highest item in the budget.
Shortfalls in income collection and economic growth as well as leakages will increase this deficit. The money supply is still growing, but many countries have put the brakes on it to curb inflationary pressure. This is partly the result of an expansionary budget and growing public debt.
Public sector spending must be curtailed, and public institutions made more efficient and productive. Government-linked companies must be scrutinised for their efficiency, productivity, profits, and benefits to the people. Those which do not meet these criteria should be immediately shut down or sold off on the open market.
The civil service has been bloated by successive administrations using this institution to absorb employment. Many institutions conduct ineffective activities that have no public benefit. Ministers and advisors not taking salaries or working pro-bono is just virtue signalling.
Moving forward, the whole public sector must be subjected to zero-based budgeting.
The government must free up the economy from regulation and monopolies that benefit only selected groups. Malaysia must embrace a free-market system to improve productivity. Crony capitalism, the largest form of corruption in the country, must be broken up.
The government must walk the talk on a minimum safety net for Malaysians. This was the policy of both Pakatan Harapan and Umno before the election. The government must come good on this promise at a time when Malaysians need it.
Go back to the farm
Malaysia must make a “great leap forward” in food production. Sixty per cent of food consumed is imported and many are subject to import tax. Trade in items such as rice is monopolised by Bernas.
Food production should be the highest priority for this government.
The federal government must work with state governments, which control land, to develop schemes that promote food production by entrepreneurs and SMEs.
New innovative and streamlined schemes must be developed to create viable farms and businesses.
Agricultural institutes should be enhanced to dramatically increase short-term vocational farming programmes.
BNM must reset the OPR back to 2.75% to minimise damage to households and small businesses.
The government could look at having a supplementary budget to introduce the programmes needed to cope with the coming storm clouds.
The views expressed are those of the writer and do not necessarily reflect those of FMT.