The economy is slowing. Businesses are suffering.
Foreign capital is fleeing. The stock market is reeling, and the ringgit is weakening.
Living cost is rising. Wealth is shrinking; and business, investor and consumer confidence is slipping.
Public anxieties are growing, as the novel coronavirus (Covid-19) is spreading, while politicians are still fighting.
As the country’s economy weakens in the face of multiple threats, emanating from external and domestic developments, new Prime Minister Tan Sri Muhyiddin Yassin has to move quickly to restore confidence among businesses and consumers in the country. There is no honeymoon period for him to settle into his new role.
According to economists, among the first few things Muhyiddin needs to do is to quickly establish political stability and the legitimacy of his new coalition government, called Perikatan Nasional (PN).
He must also hit the ground running by implementing sound policies and development reforms without any delay so as not to jeopardise the country’s economic growth, which has already slumped to a decade-low of 3.6% in the fourth quarter of last year.Trust and confidence
At present, Malaysia remains mired in political uncertainties, as Muhyiddin’s controversial rise to power means his leadership will not go unchallenged.
As it is, former premier Tun Dr Mahathir Mohamad and Pakatan Harapan (PH) have vowed to motion a vote of no confidence against him at the next parliament meeting, which has been postponed to May 18 from March 9. This raises investor concern about the stability of the new administration under Muhyiddin.
“It is hard to inspire confidence unless there is a stable government. So, there’s an immediate need for the new administration to establish its legitimacy, and hence, political stability in the country, to regain trust, ” says Sunway University Business School economics professor Yeah Kim Leng.
Meanwhile, all eyes are also on Muhyiddin’s cabinet line-up. He has yet to appoint any minister since being sworn in as Malaysia’s eighth premier six days ago.
Yeah notes running a government amid the current tough times, with no cabinet yet formed, is a concern.
“Muhyiddin has to quickly assemble his cabinet, and it is important to appoint those who are capable and with integrity so as to instil confidence in his administration, ” Yeah says, adding the country needs a clear view of the economic direction and strategies going forward.
Similarly, economist Lee Heng Guie stresses the formation of the cabinet, comprising members with credibility, competence and integrity, and focused on implementing economic, institutional and political reforms are crucial to restore public trust and confidence. “Any leadership succession or the changing of the political guard is considered important for the masses, businesses and investors because of its implications for change in public policies, ” Lee says. “We hope PN government will craft credible and implementable economic policies, taking into account the importance of continuity, which is vital for certainty, and to ease investors’ worry, ” the executive director of Socio-Economic Research Centre adds.
A one-man show at the moment, Muhyiddin has hinted on how he intends to steer his administration in his maiden speech as Prime Minister on Monday.
“People-related issues” would be the main focus. So, living cost, healthcare, and education are priorities. Some of the economic policies launched by the previous administration will continue. These include the Shared Prosperity Vision 2030 for the medium to long-term development of the economy. And to address immediate headwinds from the Covid-19 outbreak and elevated risk of a global recession, Muhyiddin has directed the government machinery to speed up the implementation of Budget 2020 as well as the recently announced RM20bil stimulus package.
“These policies must continue, and be implemented immediately and effectively, to cushion us against the ongoing disruptions in the economy. Bank Negara has already cut interest rates; this will complement the fiscal stimulus, ” Yeah says.
In a sign of further weakness in the economy, particularly in first half of 2020, Bank Negara over the week cut the benchmark interest rate for the second time this year, bringing it to nearly a decade-low at 2.5% from 2.75% previously. According to the latest official forecast, Malaysia’s economy is expected to grow between 3.2% and 4.2% this year. This is a revision from 4.8% under Budget 2020 as announced last October. In 2019, the country grew 4.3%.
In appealing for a chance to lead the nation, Muhyddin has said he wants to restore Malaysia to its former glory.
From businessman Syed Akbar Ali’s(pic) perspective, the country’s glory days were mostly in the 1990s due largely to robust oil revenue, plus good commodity prices.
This gave the then government the financial resources for infrastructural developments such as the first light rail transit line and the new federal administrative centre in Putrajaya. “Our manufacturing industry was also doing well then because China had not fully arrived yet, ” says Syed Akbar.
The former banker and economic consultant for the first (now defunct) National Economic Action Council, however, notes the collapse of oil prices in 2014, coupled with weak and volatile palm oil prices, have since had a large negative impact on the country’s economic well-being.
In addition, competition from China and Vietnam, among others, has also affected Malaysia’s low value added manufacturing, as companies left for other cheap-labour countries. “Hence, we really need to move up the ‘value added’ ladder and shift to high skill industry, ” Syed Akbar stresses.
Syed Akbar calls for the government to work towards a world class education system in order to rebuild national competitiveness.
“We focus a lot on tertiary education, which is good, but hardly 2% of the population goes to university. We need to also focus on secondary-school education. Every year, we have about 400,000 SPM school leavers who need entry-level jobs.
“They must be equipped with the relevant skills, and here is where our education system falls short, ” Syed Akbar points out. He stresses the need to “focus on this vast army of secondary school students who form the backbone of our economy”.
According to Syed Akbar, there are other strategies that could effectively grow the economy within a short timeframe, but these may be difficult to implement from the political point of view.
These include further liberalisation of the banking and financial system, and removal of monopolies and oligopolies.
“The banking and financial system should be fully liberalised as soon as possible so that there is better access to credit and finance. This will certainly boost our growth to higher levels, ” Syed Akbar says.
He notes the lack of financing and credit facilities at small-town and small-and-medium-enterprise (SME) levels has resulted in the prevalence of illegal moneylenders, or Ah Longs. “The last time Malaysia saw robust economic growth was before the banking system was consolidated, ” he says.
Up to the 1990s, there were at least 52 commercial banks, in addition to other merchant banks and finance companies, and even cooperatives in every small town and village in Malaysia. SMEs could easily access financing. But all this has disappeared. “This has become a huge mistake and millstone slowing down the economy, ” Syed Akbar argues.
He notes the huge Ah Long industry, which also funds the RM320bil underground economy in the country, bears testimony that there is a vacuum in banking and finance for SMEs and small-town economies.
“The government actually acknowledges this mistake because every year it allocates taxpayers funds in the budget to help SMEs financing SMEs should revert back to finance companies, credit and leasing companies and commercial banks, as they are experts at mobilising private-sector savings for lending, ” Syed Akbar says.
“The government should not waste taxpayers funds for this purpose, ” he adds.
That the huge underground economy does not pay tax is a huge loss to Government revenue.
“If the banking and financial sector is liberalised, much of this underground economy and its illegal financiers, may become legal businesses; thus expanding the tax base and increasing Government revenue, ” Syed Akbar explains.
That aside, he says, removing all government-appointed monopolies and oligopolies will help propel the country’s economy to a higher trajectory.
“Monopolies and oligopolies means less and unfair competition. Removing them will lead to more innovation, competition, better quality in the economy, more choices for the consumer, and lower prices. Competition will promote value added growth, ” Syed Akbar says.
At present, Malaysian consumers suffer relatively higher prices because of the lack of competition in the economy, he points out, noting that more free-market competition is needed in the power, water, highway, food commodities, automotive import and foreign labour sectors.
Meanwhile, Lee says the private sector will thrive when there is a competitive environment.
“If the government would just get out of the way by curtailing cronyism, corruption and rent seeking, and eliminate unnecessary and burdensome regulations, and remove other layering and interventions, there would be disruption or hindrance to private sector and businesses’ development, ” Lee says. In general, the government is not short of ideas on how to sustainably grow the country’s economy, he says.
“As technocrats and think tanks have regularly engaged with the private sector to discuss economic issues and challenges confronting the country, we believe that there are many ideas and initiatives that can be considered for implementation in the short to medium term.”
“No need to reinvent the wheel. Good policies must be continued and further enhanced to make it more impactful, existing policies must be reviewed, refined or get discarded and replaced by new ones that are deemed appropriate, ” he adds.
More importantly, sufficient public and industry engagement is a must before the implementation of public policies, including business and industry related so as to avoid policy flip-flops as it hurts businesses and worrying investors, Lee stresses.
According to Institute for Democracy and Economic Affairs CEO Ali Salman, the combined impact of rising external competition, technological disruption, and demand for sustainable products could challenge the adaptability of businesses as well as the country’s economic resilience in mid to long-term.
And policies designed to protect or favour certain segments will create barriers to competition and discourage investment in innovation and value-chain upgrading. This may also affect income growth potentials with certain parts of the population getting affected more than others, he says.
“Given our economy’s export-oriented nature and unique positioning as a regional hub for many multinational corporations (MNCs), it is important for the new administration to signal continuation of institutional reform and market liberalisation to boost competitiveness, ” Ali says.
“Malaysia is in a good position to capture some of these opportunities arising from US-China trade tensions, but it needs to communicate a clear economic and industrial plan, in addition to continuing institutional reform, to boost investor confidence, ” he adds.
GST to return?
With the collapse of the PH administration, so arises speculation that the goods and services tax (GST) will make a comeback under PN rule.
Such speculation is based on the notion that the Government needs to grow its revenue urgently amid a declining income trend. And what’s more, GST is perceived to be one of the trademark policies of the Barisan Nasional (BN) government, led by former Prime Minister Datuk Seri Najib Razak, and made up of political parties that have now returned to power under the new coalition.
GST was introduced at 6% on April 1,2015, by the BN administration, which regarded the system as the best method to widen revenue base. The narrower-based sales and services tax (SST) was thus removed. Under PH rule, however, SST was reintroduced at 6% three months after GST was “zerorised” on June 1,2018.
Technically speaking, GST was never “abolished”, as customs officials point out.
So, reintroducing it is not too difficult a thing to do.
Syed Akbar, however, argues such a move is a setback for the country.
“With GST, even schoolchildren are taxed. This is unfair. The crusade to tax even schoolchildren’s pocket money (through GST) is an admission that they have not been able to grow the economy. It is an admission of failure, ” Syed Akbar says. Refuting the notion that the government needs to increase income urgently, he stresses, the government should instead focus on controlling expenditure.
Citing the annual Auditor-General’s (AG) Reports, he notes there have been too many cases of wasteful spending at both the federal and state levels.
“Before considering any tax increase, the Government must at least prove to the people that all the wasteful spending and leakages, as highlighted in the AG Reports, have been permanently mended, ” he says.
If there’s a need to grow revenue, he argues, the Government should do it the right way: “grow the economy”.
“When the economy is liberalised, there will be more growth and job opportunities; value-added manufacturing and higher skills trades will result in a higher-income nation; corporate and income taxes will increase; and the tax base will automatically widen, ” he explains.
Syed Akbar is of the view that the government machinery was never set up to manage the GST properly.
“Under the Najib government, the red tape and procedures for GST were punitive. Businesses found the government too rigid; while GST collection was on pain of jail terms, refunds were slow and then (for quite a few) stopped altogether, ” he says.
Lee reckons the comeback of GST is not ruled out, as revenue enhancement would come in handy to fill up the government’s budget gap, which may have to be recalibrated based on lower crude oil prices compared to Budget 2020’s assumption of US$62 per barrel. However, he stresses, the timing must take into account the current weakening economic environment.
“Perhaps, it should be considered when conditions are more stable, ” Lee says.
“Should GST be re-introduced, the proposed rate must be set at fiscal-tenable level. Indications are any rate markedly below 6% is likely to be fiscal untenable; 4% is revenue neutrality, ” he adds.
For it to work in the Malaysian context, Lee says, the features of GST should be regressive to ease the burden on the low-income households.
“Make it simple: zero-rate for all essential goods and services; and a standard rate for others, with exemptions to certain critical services.
“It has to be easy to administer to reduce compliance cost; set a higher annual sales threshold so that small businesses will not be affected, and ensure a smooth rollout of a new return-filing system and quick processing of tax refunds, ” Lee proposes.
Bottom line: Malaysia needs deep economic, political and institutional reforms to move forward in a highly competitive and disruptive global environment. And this calls for strong political will.