World Economy

Malaysia’s Razak Vows Fiscal Reforms

Malaysia’s Razak Vows Fiscal ReformsMalaysia’s Razak Vows Fiscal Reforms

It has been a rather challenging year for the Malaysian economy. Political disruptions and economic shocks have rocked the nation.

Prime Minister Najib Razak has been strenuously committed to undertaking fiscal reform. He has repeatedly stressed the importance of reducing fiscal deficits. Najib intends to reduce annual deficits from an estimated 3.2% of GDP in 2015 to a surplus of 0.6% of GDP by 2020, Yahoo reported.

Despite difficult circumstances, the government has taken action to achieve a balanced budget by 2020.

Towards this end, a goods and services tax of 6% was introduced on April 1, 2015 amid considerable public dissatisfaction. The private sector, for its part, complained that there was insufficient time to understand the process and be adequately prepared.

The introduction of this tax could not have been better timed. It has helped raise revenues and has saved the government from an otherwise difficult position due to the massive decline in oil prices. Oil remains a crucial source of revenue in Malaysia, contributing almost 30% of government revenue.

The leaner government coffers have sped up the fiscal reform process. There has been a steady roll back of subsidies in recent times, starting with the rise in the electricity tariff in January 2014 and followed by the withdrawal of subsidies for petrol in October 2014. There were also toll hikes on highways in October 2015, with the increase being as high as 100% in many cases.

 No Time to Waste

Undoubtedly, there is little place for subsidies in Malaysia’s economy. But the timing of these reforms has been inappropriate for the average citizen, as the economy is swinging down.

Then again, from the government’s point of view there is little policy space to play around with or time to waste. The government has seen no choice but to carry out tough economic management—it must be executed now or Malaysia runs the risk of being downgraded by rating agencies.

The sharp downturn in oil prices has disrupted the government’s plans. The weak global economy and the threat of a rate hike in the US have added to concerns, all of which prompted capital outflows. It is unsurprising that the Malaysian ringgit has taken a dive against the US dollar given these circumstances.

 Outlook Dim?

The outlook for 2016 does not look too rosy. The price of oil remains a concern. It has settled below $38 per barrel. Who knows how it will turn next year.

The outlook for the global economy is not bright either. If the US economy does prove to be the one bright star globally, it will only bring darkness to the Malaysian economy as a US economic recovery is likely to be followed by interest rate hikes in the United States.

China, Malaysia’s top trade partner, is almost surely going to disappoint Malaysia with its growth figures. There are estimates that the Chinese economy may grow at about 6.2% next year, much lower than recent trends.