Posted on 23 October 2013 - 05:40am
Ee Ann Nee
KUALA LUMPUR (Oct 23, 2013): The Malaysian Institute of Economic Research (MIER) has warned of the possibility of a twin deficit if Malaysia does not intensify its work to strengthen the resilience of the economy through structural adjustment programmes and institutional reforms.
"The possibility of a twin deficit is there if we don't undertake structural reforms. It doesn't mean we're (currently) not doing structural reforms at all, but the amount and the speed are still not enough. A lot more reforms have got to be done," the think tank's executive director Dr Zakariah Abdul Rashid (pix) told a media briefing to reveal findings of its Malaysian Economic Outlook report for the third quarter of 2013 here yesterday.
A twin deficit in economics occurs when a nation has both a current account deficit and a fiscal deficit.
In its report, MIER said the twin deficit problem is clearly on the horizon, especially with shrinking current account surplus of the balance of payments and new expenditure commitments which are not fully backed by revenue estimates.
It said the emerging weaknesses in domestic economic fundamentals and changes in global economic landscape need to be addressed in the upcoming Budget 2014.
MIER noted that there should not be any further delay in the country's structural reform programmes.
"Monetary policy should be more active, implementing measures to smooth excessive exchange rate volatility and anchoring inflation expectations in the medium and long term.
"Spelled out policies, structural reform initiatives and programmes need to be implemented and not remain on shelf or on hold," said Zakariah.
The monetary policy space is presently being constrained by weakening domestic economic fundamentals, following lack of progress in fiscal consolidation process and structural reform programmes. Fiscal accountability and transparency need to be enhanced to ensure that public finances are managed in an efficient and prudence manner.
Zakariah said in the short term, the government needs to address its commitment on issues such as the goods and services tax (GST), as businesses feel uncertain about it.
"If we can move away the uncertainties, business can do their work properly," he said, adding that this can be alleviated by knowing when GST will be implemented as well as the GST rate. In the long term, he also said the reform of education is needed to provide enough skilled workers or personnel for the industry and economy, as well as the reform of the public sector account as it has been in deficit for a long time.
"For fiscal consolidation, political will and bold measures are required to maintain credibility and reputation such as curbing discretionary and populist-style spending as well as reviewing legal and institutional constraints," said Zakariah.
"The key priority is to manage external risks, and with macro-prudential measures to safeguard financial stability. Most importantly, have prudent macroeconomic policies," he added.
MIER is maintaining its 2013 gross domestic product growth forecast of 4.8% for this year, taking into account factors such as rising inflation and prospect of higher interest rate, amid improving global market environment.
The growth outlook for 2014 is projected to be between 5% to 5.5%, on account of expected fiscal strategies and measures to rein in budget deficit, generally tight financial conditions and enhanced downside risks.
Zakariah also said heavy reliance on private consumption is not sustainable in the medium and long term, especially for small open economies, like Malaysia which is quite susceptible to adverse global developments.
A consumption-driven economy will not only lead to rising inflation and demand for higher wages, but more importantly to the accumulation of household debt and adding risk to financial stability.
Driving export sales, promotions and greater exports diversification through enhanced market access are the necessary actions to ensure long-term sustainable economic growth, he said.
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