How the unity government deals with the poor state of Malaysia’s economy, especially the factors that directly affect people and their families, will bear heavy influence upon whether the rakyat views this government as a success heading into the next round of elections.
Anwar Ibrahim’s government has four ministers responsible for different aspects of the economy. Upon forming a Cabinet, he instructed government agencies to come up with comprehensive plans to tackle rising living costs. Nothing came.
Then he established a special advisory board to help him in managing the nation’s finances, but it, too, is yet to make any recommendations.
Malaysia’s premier think tanks are silent. Economy minister Rafizi Ramli called on longtime former minister Mustafa Mohamed for his expertise. Anwar has even given Jakim, the Islamic development department, a role in consulting on economic policy.
Rafizi has said a Madani Economic Narrative would be launched in August to focus on creating a sustainable high-value economy – but it’s not plans the country needs, it’s action.
Here are some key areas that need to be addressed immediately if the government is to have any hope of rescuing the nation’s finances.
Mounting public debt
Malaysia has public debt amounting to RM1.08 trillion, or 60.4% of GDP. This never-before-seen debt level is only compounded by the unprecedented RM94.6 billion budget deficit planned for 2023.
The 2023 budget was built upon optimistic assumptions, estimating annual economic growth of 4% that now seems unlikely.
The current budget was more “status quo” than reformist. It adds to national debt without necessarily providing the stimulus one would expect.
If the government’s spending has not been targeted correctly, the increase in national debt could impose negative effects upon the economy. This will depend heavily upon how the RM99 billion allocated for development is actually spent and how much leakage occurs.
RM45.94 billion in debt servicing costs
Although tax receipts are expected to be the highest ever, the projected RM174.56 billion in revenue falls well short of the RM385.44 billion in planned expenditure even when combined with other forms of government earnings.
And of this spending, roughly 40% will fund Malaysia’s civil service, which has been criticised for being bloated.
Spending must be drastically cut and additional sources of revenue – such as Goods and Services Tax – need to be introduced. Remaining spending must also be rationalised to determine how much is actually required for different agencies to operate efficiently.
Rampant government subsidies
Subsidies on things like food, cooking oil and electricity cost Malaysia RM66.3 billion in 2022, and even the government has admitted that subsidies are supporting people who don’t need assistance. Former finance minister Tengku Zafrul Aziz revealed last year that fuel subsidies had saved the top 20% of earners RM8 billion while the bottom 40% saved just RM6 billion.
While these subsidies are supposed to help low-income consumers survive, they simultaneously distort markets and can lead to shortages if not implemented correctly, with poorer groups bearing the brunt of these knock-on effects.
It may be better to reduce or, better yet, eliminate subsidies and redirect these funds towards creating a better income support system for those who really need economic assistance.
The ringgit’s fall, the rise of interest rates
The ringgit has been battered by rising global interest rates that have firmed up the US dollar against most other currencies. This year, the ringgit has been one of the region’s worst performing currencies having fallen around 5% against the greenback, almost reaching levels not seen since the Asian financial crisis.
This slide was likely a major factor in Bank Negara Malaysia (BNM) raising interest rates last month. The falling ringgit is possibly the largest contributor to inflation, which may force BNM to consider another rise in the interest rate this year despite the financial pain it could cause Malaysian households.
It’s essential that BNM takes stock of the current economic climate and determine whether the US Treasury’s pause on interest rate increases will be enough to bolster the ringgit and avoid future hikes on our shores.
High youth unemployment
Youth unemployment stands at 11.76% according to the World Bank, which the ISEAS-Yusof Ishak Institute attributes to structural problems like education quality, a skills mismatch and the proliferation of low-quality jobs the youth are hesitant to take up.
A radical approach is required to create potential opportunities for this cohort.
Trade jobs must be professionalised, so youths can formally train to operate as independent businesses. This will bring craft and skill back into the economy at a base level, adding value to their labour.
There has long been a disconnect in the kind of graduates being produced and the jobs available for them. As such, the number of universities and colleges in the country needs to be reduced and replaced with relevant vocational centres like TVET facilities.
Widening income inequality and poverty
According to the World Bank, Malaysia’s Gini coefficient, which measures income distribution, has indicated worsening inequality having fallen from 48.6 in 1984 to 41.2 in 2018. This widening of the income gap is unhealthy in an aspiring developing nation and must be addressed.
The World Bank’s latest estimates state that as of July 2020, 5.6% of Malaysian households are living in absolute poverty, a figure which amounts to around 1.9 million people. If not acted upon immediately the government risks watching income disparities spiral further, which risks making the issue even harder to mitigate down the line.
The views expressed are those of the writer and do not necessarily reflect those of FMT.