Malaysia in the pink of health

Publication: NST

Date of publication: Jan 19, 2013

Section heading: Business Times

Page number: 006

Byline / Author: By Sulaiman Mahbob

I often read the Economist magazine and browse the table on Economic and Financial indicators in its last few pages. There are several key indicators of the economic health of nations worth noting, such as growth in gross domestic product, inflation, industrial production, unemployment, balance of payments, and budget balance.

In the most recent publication, the table showed that 36 out of 43 countries registered budget deficits, with Venezuela showing the largest deficit to the tune of 14.7 per cent of its GDP and Colombia showing the least at 0.1 per cent. In all, about 85 per cent of the listed countries showed negative budgetary position.

Excepting Switzerland, whose data was "not available", only seven nations recorded budget surplus with, expectedly, Norway showing a large surplus of 13.4 per cent of GDP, and Saudi Arabia registering 12.6 per cent. Greece and Spain registered deficits of seven per cent and 7.4 per cent, respectively. India recorded a deficit of six per cent while China, despite its large trade surplus, showed a deficit of more than two per cent.

Developed countries such as the United States, Japan, and Britain, also registered budget deficits to the order of seven per cent, 9.7 per cent, and 7.9 per cent.

In a lighter vein, one may think that the soul of Lord Keynes would not be able to rest in peace in view of the intractability of this budgetary issue, despite the many efforts to contain it.

Observing this scenario, Malaysia's corresponding number in the order of about 4.7 per cent appears tolerable. The government aims to see it continuosly reduced in the medium term. The bulk of the deficit is caused by our high subsidies for energy and social services. Yet, many think that the country is going down the Greek way.

To be sure, budgetary balance is but one measure of a nation's economic health; albeit an important one, of course, as it has few implications. There are several others, and one needs to look at some of these together before making conclusion on a nation's state of the economy. In this regard, Malaysia's GDP numbers, and statistics on unemployment, consumer price index and current account balance indicate that we are nowhere going Greek.

The same table gives unemployment for Greece and Spain in the region of 26 per cent, each. About 50 per cent of youths in Spain are unemployed, according to other sources. The US and the eurozone record unemployment levels of 7.7 per cent and 11.7 per cent, respectively. In comparison, Malaysia's unemployment is about three per cent, a level considered full employment.

In fact, our current account of the Balance of Payments indicating the nation's earning has been in surplus for over one hundred months, making Malaysia a resource-surplus nation. This surplus, however, rests largely with the private sector, which explains our high liquidity and low interest rate environment. This surplus makes up the nation's earning in its transactions with the world. It can finance over nine months of retained imports, much higher than the recommended minimum of about three months. This figure, in addition to our strong financial system, says that Malaysia, as a nation, cannot go the Greek way that easily as some would like us to believe.

At this juncture one needs to be appraised of the causes of our fiscal deficit. First is the difficulty in raising tax revenue, as taxes are unpopular. Second, it is also difficult to reduce operating expenditures (OE) as about 40 per cent of OE is made up of "locked-in" expenditures (salaries, debt payments, charged expenses, grants, and also subsidies). Third is the high level of development expenditure, some of which can be privatised.

This is not to say that we should easily tolerate the deficit. We should aim for a more sustainable level, such as below three per cent in the medium term and attain a surplus in five to 10 years. What worries us is the level of public sector debt, which is now about 54 per cent of GDP, and contingent liability, too. The government's idea of raising revenue by implementing the Goods and Services Tax (GST) has been stalled for quite some time. The private sector should be ready easily given the need for it to be more transparent in its accounting. GST will definitely beef up government revenue.

On the other hand, some public sector allocations can be done away with.

Loans for purchases of vehicles and houses for government staff can be passed on to the banking system. The banking system can accommodate such demand. In addition, some development projects can be undertaken through genuine public-private partnership (PPP) arrangements involving private sector financing and risk-sharing between government and the private sector operators. We have to move fast towards more genuine PPP initiatives to allow for greater private sector involvement. We may need a master plan for PPP to guide future action as we did for privatisation.

The government can also save public money through open bidding system for public procurements and projects, even including privatisation and PPP projects.

However, one often cited concern often cited is the need to enhance the efficiency and effectiveness of public expenditures. Let us also revisit this matter and give it a fresh commitment, in addition to a continuing rigorous examination of our fiscal management and planning.

Tan Sri Dr Sulaiman Mahbob is the chairman of Malaysian Institute of Economic Research (MIER)