The Malaysian economy has proved its resilience yet again, achieving a growth rate of 3.3 per cent in the third quarter of 2023. Though this was a reasonable rate given the rather tepid global environment, it was only marginally larger than the 2.9 per cent that was marked for the second quarter of 2023.
Malaysia’s focus extends beyond the pace of its growth. There has been disquiet on the economic front even as Prime Minister Anwar Ibrahim’s administration has tried to keep the coalition going. Amid this discontent, there have been occasional rumblings of attempts to dislodge the current government.
Since stepping into office in late 2022, Anwar has managed the national economic discourse, parrying concerns on inflation, the exchange rate, fiscal space, subsidy rationalisation, sources of tax revenue and identifying drivers of growth.
Malaysia’s rate of inflation has increased because of the war in Ukraine. This affected the price of fertilisers, animal feed and agricultural produce. The price of food imports, meat, chicken and eggs also went up, leading to inflationary pressures.
Over 2023, inflation moderated but elevated price levels did not return to those experienced before the COVID-19 pandemic. Malaysia has a high food import bill. The Malaysia Trade Statistic Review 2023 revealed that, in 2022, food imports were worth RM75.6 billion. Food security remains a problem.
Inflation eventually came down as the year progressed. The Consumer Price Index was 129.9 points in January 2023 and 130.9 points in October and November 2023. Both headline and core inflation declined in the third quarter to 2 and 2.5 per cent respectively.
Malaysia’s fiscal situation was the locus of debate in 2023. Concern over large government debts, rising operating expenditure, inadequate tax revenue and the continued burden of subsidies persist.
The federal government’s total debt and liabilities at the end of 2022 was about RM1.45 trillion, or 80.9 per cent of GDP, an amount that is not desirable. Government expenditure has been spiralling upwards, though more challenging has been payments for salaries and pensions. This demands tough measures which include a willingness to bite the bullet or the ease of mind to consign the problem to the next government.
The government is in a quandary as far as raising tax revenue is concerned. The campaign against the goods and services tax (GST) won the day in 2018. Rather than correcting the flaws in the system, the government has chosen to replace it with an inadequate substitute.
If tax revenue remains an issue, so will subsidies. While subsidy rationalisation has been identified as an action item, if the government has been slow to tread it is only because it realises that caution must be exercised. There are reasons for this. The top 20 per cent of the population might not deserve to benefit from petrol subsidies, but they may begrudge not being able to take advantage of them. While the government knows that subsidy rationalisation is imperative, finding the right mechanisms of operationalising it might be an even bigger challenge.
The government recently launched the Central Database Hub, or Padu. Padu is a centralised socioeconomic database containing comprehensive details on individuals — including demographics, health, education and household income — to efficiently deliver targeted subsidies.
Still, the government has not completely failed to act on subsidy rationalisation. In 2023, electricity subsidies were cut. The government also announced that diesel subsidies would be implemented in phases in 2024. While it remained silent on gasoline subsidies, price controls on chicken were lifted and those on eggs remained. One can expect some steps to be taken on fuel subsidies this year. Given that they amount to 2.9 per cent of GDP, removing subsidies on fuel would ease fiscal constraints.
Tax revenue, more specifically indirect tax revenue, is at the root of the problem. The government’s reluctance to reintroduce the GST is often explained away as a political problem. The government did not deny the efficacy of the GST, other than to say that previously it was accompanied by inadequate implementation.
The government has also shied away from experimenting with alternative tax systems. The Ministry of Finance would do well to conduct a comparative study of possible solutions and engage in public discussions accordingly. In any case, there is no doubt that indirect tax revenue must be raised.
The Malaysian ringgit fell as low as RM4.70 to the US dollar in December 2023. While the slide in domestic currencies was felt across many countries across the world, the ringgit performed especially poorly. This attracted criticism from some quarters.
The government has also announced its policy agenda through the Mid-Term Review of the 12th Malaysia Plan, New Industrial Master Plan 2030, the National Energy Transformation Roadmap and Madani Economy Framework. These plans lay a map for Malaysia’s development, where the emphasis will be on digitisation, climate change and Environmental, Social and Governance, creating new drivers of growth. Emphasis has, correctly, been placed on good governance and a corruption-free economy.
There are many challenges on the economic front. 2024 might be kinder than 2023 was, though not without some obstacles. Anti-corruption efforts will likely meet resistance and, despite the coalition’s two-thirds majority in parliament, one could expect continual attempts at disruption. Clearly outlined priorities and policy firmness will count throughout 2024. The government should spur itself into choosing the road less taken. That will require boldness and resolve.
Shankaran Nambiar is Head of Research and Senior Research Fellow at the Malaysian Institute of Economic Research.
This article is part of an EAF special feature series on 2023 in review and the year ahead.