Follow-up on IMF’s report card with an overhaul of the 12th Malaysia Plan
Ramesh Chander, Murray Hunter and Lim Teck Ghee
At the conclusion of the Article IV consultations between a mission from the International Monetary Fund and the Malaysian government, IMF issued the customary public information document (PID). A reading of the PID conveys the following messages:
• The Malaysian economy is expected to grow 4.5%, more modestly than 2022. This will be driven by external factors.
• The risks to growth will also come from external factors such as a worldwide slowdown in economic activity. This could be spurred by a tightening of monetary policy by major central banks.
• However, growth is uneven, with agriculture, construction and mining lagging behind pre-pandemic levels.
• Inflation expectations will remain around 3.3% during 2023. Continued subsidies should keep inflationary pressures in check.
• Malaysia needs to focus on debt reduction through major fiscal consolidation, and the development of a sustainable medium- to long-term revenue reform.
• Income redistribution to lower-income families through transfers to alleviate poverty and bolster domestic consumer confidence is necessary.
• Monetary policy requires tightening to support the ringgit and keep inflation grounded. Interest rate adjustments must take into account the well-being of households and corporations, in order to maintain growth, and prevent any stalling of the economy.
• The 12th Malaysia Plan (12MP) and Budget 2023 should be rolled out to enhance broad-based productivity drivers — promoting inclusive growth, addressing climate change, promoting the digital economy, enhancing good governance and implementing anti-corruption measures.
On the surface, the IMF has given the “thumbs-up” to 12MP and Budget 2023. So, the major question is whether 12MP and Budget 2023 provide the actions and reforms really needed.
The PID acknowledges the postulated estimated growth rate for the current year of 4.5% is clearly an optimistic estimate. It does not appear to take into account global developments that will impact Malaysia, given the open nature of our economy. The recent bank failures and a reduction in the planned growth in China (Malaysia’s largest trading partner) augur badly for the country with strong headwinds. Moreover, there is a certain inconsistency in the presentation: as no or slow growth is expected in a large number of sectors. Thus, pump-priming measures, tourism and other services will optimistically be the main sectors recording growth in the local economy.
While the PID appears to emphasise needed reform measures, the mission steers clear of making specific recommendations concerning what is needed to jump-start the economy. Thus, the text offers little help. It relies on the implementation of policies and strategies co-opted from 12MP and Budget 2023. There is a passing mention of a need for expanding the tax base but no details are provided.
Going back to the 12MP launch by former prime minister Datuk Seri Ismail Sabri in 2021, the document outlined 14 game-changing approaches to transform Malaysia, where the implementation will be overseen by transformational leadership, promising the whole nation will be mobilised to achieve 12MP objectives — a prosperous and high-income and sustainable low-carbon economy that is globally competitive.
However, the reality of the plan was far from what was espoused. Very little focus was given to rehabilitating the devastation of the economy from the Movement Control Orders during the Covid-19 pandemic.
With nearly two years in, there is no safety net. Income relief has been approached through subsidies, handouts and Menu Rahmah. The 12MP selected very specific industry winners, such as the aerospace industry, a policy that led to dismal failures in multimedia and biotechnology.
The reality is that 12MP took the template off past five-year plans. There is not much of it that addresses the aspirations mentioned by the IMF. With a mid-term review due this year, the plan must be overhauled to meet IMF suggestions.
The 12MP not only reinforced existing government-linked companies but planned to create more to oversee sections of the economy. This is where transformational reform is required, to focus on real private enterprises that have equality of opportunity, equal access to resources and a level playing field. This must be done with minimum regulation.
Transformation of leadership cannot occur through a bloated civil service. It needs to be efficient, with inclusiveness and merit injected into the institution.
Back in 1995, Malaysia and South Korea were equal in productivity indices. However, in 2021, Malaysia was nearly US$30,000 behind South Korea. There can be no one approach to improving Malaysia’s productivity. Digitisation, the circular economy, Industry 4.0, all have their place. This is especially the case in the micro, small and medium enterprise sector, which employs 40% of the country’s workforce, where most enterprises suffer with liquidity issues and cannot even dream of adopting Information and communication technologies solutions and Industry 4.0. Innovative solutions to improve liquidity are required before one can look at improving productivity.
Sometimes economists and policymakers forget about the diversity of Malaysia’s economy. Malaysia’s informal sector is large. Thus, the nation must be seen as having a two-tier economy. There has been too little focus upon the informal sector, where a very large segment of lower- and middle-income households are still dependent. This has been forgotten about.
A critical and independent analysis will influence the drivers we use. For instance, Malaysia embarked upon university building as the prime means of capacity building, where the informal sector required technical and vocational education training. The damage to the nation’s economy has been considerable and continues.
One can only hope that the IMF will present tangible plans to support real reforms to correct what is wrong with the Malaysian economy in the fuller report that it will be preparing. Above all, the government will need to implement a whole range of reforms dealing with fiscal programmes, labour market, safety net, competitiveness and so on. There is a clear urgency for the adoption of bold reform measures lest the country slides into a situation similar as the one engulfing Sri Lanka and other failed economies.
Datuk Ramesh Chander is a former chief statistician of Malaysia and a senior statistical adviser at the World Bank in Washington, DC. Murray Hunter is an independent researcher and former professor at the Prince of Songkla University and Universiti Malaysia Perlis. Lim Teck Ghee is a former senior official with the United Nations and World Bank.
This article first appeared in Forum, The Edge Malaysia Weekly, on April 3, 2023 - April 09, 2023.
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