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Budget 2018 vs World Bank

  • The World Bank is normally cautious, polite and diplomatic in its reports on national economies.

By Tan Sri Ramon Navaratnam

Will Budget 2018 address the economic concerns raised by the World Bank?

WB is normally cautious, polite and diplomatic in its reports on national economies. But, you have to read between the lines to seek out the messages WB wants to convey to governments and their peoples.

In its East Asia and Pacific Economic Update of October 3, WB presented a summary entitled "Balancing Act" on Malaysia.

It is well appreciated as truly, a difficult act to balance!

So, what are the main WB messages to Malaysia?

Firstly, the Malaysian economy has done well, with a growth of 5.2% this year and a slower growth of 5% and 4.8% in 2018 and 2019.

Hence, the national economy is weakening unless the Budget does more to strengthen it.

The slowdown is due to our risks as an open economy, as we are vulnerable to external demand. This means that our exports could decline and our imports could rise. Thus, our balance of payments current account surpluses could narrow.

Also, our exchange rate could decline further, causing our cost of living to rise!

But, WB characteristically does not specify the details, lest it is seen to be dampening our official optimism, as they see themselves as our guests in Malaysia!

Secondly, WB notes that private consumption -- that is what the rakyat spend on food, transport and shelter etc -- is large and has "expanded firmly". It is estimated at 6.6% in 2017 and another high of 6.5% in 2018.

However total investment is expected to grow at a slower pace of 6.1% this year and only 3.2% next year!

We have to remember that higher consumption can lead to less productive expenditure. And lower capital investment can lead to less infrastructure and lower capacity to generate production and income in the future.

What can or will the Budget do about this structural problem? WB has provided the problem and not the solution!

Thirdly, inflation rate rose to 4.1% in the first half of this year, and is likely to rise further in view of the relatively weak ringgit.

At the same time, prices of food rose by a high of 4.2% for the 12-month period ending July 2017, causing much hardship especially to the low income group.

However, WB does not give any solutions. Will Budget 2018 adopt the necessary measures to reduce food prices?

My proposal would be to liberalize the rules and regulations and reduce any protectionist policy, wide scale corruption and expenditure wastage that both suppress and restrict the supply of basic goods and services.

If this liberalization is not done soon enough, the rakyat will suffer even more from rising prices.

Fourthly, house prices have risen faster than our income growth, according to WB. This makes the basic need for housing to become more unaffordable to the lower income group.

Thus, WB rightly points out that higher house prices raise the cost of living, but again, it gives no solution, even briefly.

I would say that the solution is for the government to build and provide more incentives to the private sector to more rapidly expand the supply of affordable houses.

However, the long awaited mass production of more affordable houses through the purposeful adoption of Industrial Building System (IBS) has not moved faster.

IBS should now be implemented with a stronger political will. And if there are powerful vested interests that oppose the use of IBS, they should be strongly resisted by the government instead. This will be enthusiastically welcomed by the people, in the national and public interests.

This move will benefit the people and not some parties with narrow self-interests. I hope the Budget will provide the necessary push for IBS.

Fifthly, WB clearly states that the Malaysian economy continues to face uncertainties mainly from the external environment. But, WB has completely ignored the more serious threats from within our country, which we can control.

These are the extremism, racialism and religious bigotry.

Indeed they are the negative debilitating forces that can undermine national and international confidence in our country and its potential and future.

And WB politely keeps silent although they are aware from their global experience that domestic and foreign investment can be adversely affected by these negative internal forces.

Indeed these are also the push factors for the accelerating brain drain. Unfortunately no mention has been made by WB of these grave concerns in the inter-related political economy.

Will the Budget 2018 deal with these structural problems or sweep them nicely under the carpet?

Sixthly, WB surprisingly and glibly proposes reducing exemptions on GST.

Does WB not realize that the low income group is already experiencing considerable pain from rising prices?

How could it also suggest addressing the rise of civil servants' salaries and pensions to contain the government's operating expenditures. Instead, WB could have proposed raising productivity in the civil service by promoting more competition, incentives and meritocracy.

Will the Budget address these thorny issues or let the matter rest and fester?

Finally, WB does mention in passing the need to "accelerating structural reforms to improve both private sector productivity and public sector efficiency" to sustain our current growth momentum in the medium term

I agree entirely, but WB does not say how? By being over polite, WB is missing the whole purpose of its mission in Malaysia.

It has to be more direct and pointed in its remarks, however brief they may be. This is essential so that WB, where I once sat in its board, will not lose its high reputation.

Conclusion

WB has to better serve Malaysia and other developing countries.

More importantly, we hope that the coming tabling of Budget 2018 on October 27 will address the subtle concerns expressed by WB on the soft state and the future of our economy amidst domestic and global uncertainties.

We can face our challenges if we show stronger leadership and a collective national will to succeed.

(Tan Sri Ramon Navaratnam is the Chairman of ASLI Center for Public Policy Studies.)

 

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