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Election Watch

How is the Economy Doing?

Source: The Sun
1st May 2013

There is much speculation and even confusion as to how the economy is doing. Is it strong or weak? Hence it is fortunate that both Bank Negara and the IMF have came out with sound reports on the Malaysian Economic performance and prospects.

Both reports have much in common as they traditionally consult each other on a frequent basis to ensure that their assessments of the economy are consistent and credible.

Thus Governor of Bank Negara Tan Sri Dr. Zeti Aziz has confidently said that the Malaysian Economy is well on track to achieve 5-6% this year. This is highly creditable considering the slow growth rates and the economic slide that is taking place in many countries. Bank Negara and IMF agree that the Malaysian economy is being strengthened by domestic demand, that is by more local private and government spending.

Private consumers could be spending more because of the "handouts" many of us have been receiving from the government such as BR1Ms. Furthermore, consumers tend to increase their spending when they think inflation and prices are rising. They feel that it is better to buy goods and services now before price hikes through likely inflation.

Government spending has also risen due to stepped up investment in infrastructure projects such as the MRT and LRT.

This is good counter cyclical strategy in the short term. But this expenditure has to generate income. It has to be productive and create employment and be viable. Otherwise more spending, mainly to boost the growth rates can become counterproductive in the longer term.

How long can we keep spending without weakening the structure of the economy? Fundamental issues like the national debt burden, and especially the budget deficit need to be always kept in mind always. 

The IMF has rated Malaysia on the IMF Index on Institutional Strength at 70 out of 100. This is comfortably higher than Indonesia, China and India. However, we have to compare our performance with other more advanced countries like Korea, Taiwan and Singapore.

Malaysia has scored relatively well in areas like strong political stability, better bureaucracy, fewer conflicts and less corruption. But crime is still high and our education system and corruption have not been improving sufficiently fast enough.

The IMF also stresses the need to cut down on subsidies. We have to be careful not to reduce genuine subsidies for the really poor. But, to continue subsidising the well-to-do is unfair and has to stop.

Bank Negara, like the IMF, refers to the importance of maintaining fiscal sustainability. This means that we have to curtail wastage, unnecessary expenditure, observe competitive tendering in the awarding of contracts. We must also raise our budget revenue through taxes that affect the rich more than the poor-such as the value added tax.

But all these prudent economic and fiscal measures that will strengthen the IMF's "Institutional Index" have been delayed. But they must be addressed as a matter of priority-right after the elections. If we don't take the necessary corrective advice from the IMF and Bank Negara, Malaysia will face problems now being faced in Europe and the U.S.

As of now, the economy is doing relatively well. But this healthy position can weaken and deteriorate, if we are slow to adopt sustainable structural adjustment to the economy in the near term.

The slide that began in Greece many years ago can also happen in Asia and Malaysia. So let us get our act together sooner rather than later.

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