Malaysia Cuts Development Spending, Growth Aim Through 2020 In Economic Roadmap

© Nikkei Markets

KUALA LUMPUR (Oct 18) — Malaysia will cut development expenditure by 15% under a revised five-year plan and won’t meet a previous aim of balancing the budget by 2020 even as the government steps up fiscal consolidation efforts amid slower economic growth.

The government now plans to spend up to 220 billion ringgit, or about $53 billion, under the so-called 11th Malaysia Plan that ends in 2020, according to the Ministry of Economic Affairs’ report.

The economy is expected to expand 4.5%-5.5% between 2016 and 2020, lower than the 5.0%-6.0% growth target when the plan was unveiled in 2015.

Average public investment will contract 0.6% through 2020 although the government pledged to maintain ‘high-impact’ projects to boost economic growth, the report said. Robust domestic demand and resilient exports will continue to power growth in the third-largest Southeast Asian economy.

“Swift implementation of these difficult and crucial reforms is likely to have short-term impact on growth but the trade-off is necessary to maintain the economy on a sustainable growth path,” the report said.

Since sweeping to power in a shock May 9 election outcome, the new government has scrapped several costly infrastructure projects and put others on review as Prime Minister Mahathir Mohamad seeks to mend Malaysia’s finances amid mounting government debt.

The government has scrapped the unpopular goods-and-services tax that netted some $10 billion in revenue last year and re-introduced a single-tier sales and services tax. By 2020, fiscal deficit will remain at 3.0% of gross domestic product instead of a balanced budget as previously projected, the report said.

“The government is confident its fiscal position could recover at the end of 2020 with improvement in governance and increased revenue,” Mahathir told lawmakers in a nearly-two hour speech highlighting the mid-term review of the 11th Malaysia Plan.

Among others, the 93-year-old premier said the government will improve its procurement processes that will include enforcing open tendering to bring in more transparency.

The government will also review implementation of ‘unsustainable’ projects and scrap projects with “low priority,” Mahathir said. A special task force will be established to review roles of sprawling state-run agencies and government-owned companies, he added.

Economists said the revised targets are achievable although execution remains a key concern even as the government is backed by popular expectations for political and economic reforms.

“The plan is good, but the execution is equally critical,” Lee Heng Guie, executive director of think-tank Socio-Economic Research Center. “You can give a very good macro policy management, but without supported by good institutional reform, we may not see the desired result.”

To plug the fiscal gap, the government said it will undertake a “comprehensive review” of investment policies including incentives and lift indirect taxes and other non-tax revenue.

Still, Malaysia expects to achieve high-income status by 2024 when annual per capita income reaches $12,056, longer than the 2020 initial target set by the previous administration.

“The government will balance economic growth objectives and fiscal consolidation initiatives to ensure continuous and inclusive development without impairing growth prospects,” Minister of Economic Affairs Azmin Ali said in the report.

– By Jason Ng and Gan Pei Ling
– Edited By Abhrajit Gangopadhyay

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